China's steel production boom has had the additional impact of making a great contribution to the prosperity of the global dry bulk shipping market. The low shipping freight charges of previous years have since seen continuous increase and now stand at new record highs. As a result, the shipping enterprises have earned unforeseen profits.
However, although China's iron ore trade volume accounts for 46 percent of the global figure and 50 percent of this trade is realized by sea, Chinese shipping companies only account for four percent of the global market. This small market share restricts local Chinese shipping enterprises in their bid to gain a greater share of the profits. More importantly, this lack of global market share brings risks both for China's national economy and its domestic steel industry.
The ocean-going ships used for iron ore transportation are different from normal bulk ships. Iron ore ships on average have deadweight tonnages of more than 150 or 200 thousand tons. So far, there are around 725 ships in the world able to carry such tonnages and China owns 30 of them. The China Iron & Steel Association (CISA) has publicly expressed its concerns about the current situation. If the overseas shipping companies refuse to ship iron ore to China for any reason, China's steel industry will inevitably face serious risks. In other words, due to China's shortage of shipping capacity, the destiny of the country's steel industry is not completely in its own hands.
The CISA recently began to encourage Chinese steelmakers to increase collaboration both among themselves and with the shipping enterprises, especially with a view to long-term cooperation.
First of all, the CISA has proposed that the Chinese steel producers forms themselves into groups based in five geographical areas: the northeast, north, east, central-west south, and Shangdong-and-Shangxi. On a voluntary basis, the biggest steelmaker in each area will act as the sole ocean shipping agent in order to arrange and deal with all shipping business for the other steelmakers in its area. The purpose of such a move is to centralize price-determination in the ocean shipping business and to avoid irregular prices in the shipping market. Angang, Shougang, Baosteel, Wuhan Steel and Jigang have been chosen as the respective representatives of the five regions in question.
In fact, China's big steelmakers began to organize coordination teams to prepare for this ocean shipping agent system from 2006 onwards. Not surprisingly, all the steelmakers involved have shown great enthusiasm for the system given the huge price pressure they are under due to the high cost of imported iron ore.
Secondly, all domestic steelmakers have been urged to improve their ratio of long-term shipping agreements to prompt deliveries, in order to control and reduce ocean shipping costs. As a matter of fact, most of China's big steelmakers have done well in this respect, with their long-term shipping agreements accounting for around 50 to 80 percent of their total shipping business. As an example, in October Wuhan Steel signed a new long-term charter contract with China Shipping Corporation for two bulk ships of 300,000 dwt and three bulk ships of 230,000 dwt.
Finally, the CISA has invited Chinese steelmakers to make combined investments in the construction of iron ore ships in cooperation with local shipping enterprises, in order to increase the global capacity share of Chinese shipping.