Tonnage Titans – 6. China Merchants Energy Shipping

Xie Chin Lin.

CMES CEO Xie Chun Lin. Credit: Capital Link

The history and evolution of China Merchants Energy Shipping (CMES) is tied with the story of its parent, state-owned China Merchants Group.

CMES’s origins can be traced back to the founding of China Merchants Group by Li Hongzhang. As the pioneer and one of the leaders of China’s Self-Strengthening Movement, he set up the country’s first merchant fleet in December 1872, which later became China Merchants Group after it diversified into finance and real estate.

Similar to its parent, the role of CMES is not just to do business and make profit, but to take responsibility for leading the country into reform and revolution.

The history of CMES dates back to 1980 when China Merchants Group launched a bulk carrier-owning unit, Hong Kong Ming Wah Shipping.

Later in that decade, China Merchants Group formed its first tanker fleet after acquiring five Aframaxes and four product tankers from Hong Kong’s Tung Chao Yung family.

CMES evolved its business in 2013 when it decided to consolidate its tanker and bulk carrier businesses into a bigger platfrom, which was backed by several government-backed investors, including COSCO, China Merchants Group, Sinopec Group, Sinochem Group, and CNOOC Group.

CMES is currently led by Captain Xie Chun Lin, who has served as chief executive officer since 2012. Xie is a shipping veteran with more than 30 years of experience in the shipping industry. Before his top role at CMES, he held several senior management positions at China Shipping Group, which merged with China Ocean Shipping Group in 2015.

According to data from IHS Markit, CMES’s current total tonnage is 15,618,427 gt, with the company’s tanker fleet accounting for 8,342,677 gt and its bulk carrier fleet accounting for 7,275,750 gt.

The company also boasts a significant orderbook, with 5,337,673 gt currently awaiting delivery.

A strengthened tanker fleet has boosted the group’s oil shipping volume. CMES moved about 63 million tonnes of oil in 2017, a year-on-year growth of 5%. It also saw its total distance travelled during its oil trades increase by 3.3% to 461.14 billion tonne-nautical miles.

However, the company saw the freight rate in the oil shipping market continue to fall as supply outstripped demand as new orders continued to be delivered. Weak tanker rates have dragged down CMES’s strength in the first quarter of 2018, when the company saw its net profit plummet by 84% to CNY47.2 million (USD7.4 million).

CMES explained its strategy in its annual report, highlighting its core principle to maintain competitiveness by exploiting economies of scale and keeping closer ties with its suppliers. The group will also continue to explore business opportunities for timecharters and contract-of-affreightment (COA) partnerships. 

The COA signed by CMES and its oil suppliers, such as BP, Shell, and PetroChina, is a win-win situation. CMES has a big transportation cost advantage with its massive tanker fleet so it can offer lower transportation costs. It also benefits from the low risk of partnering with major oil suppliers that have huge cash flow; a low-risk and long-term COA with a single big contract value is always the most favourable partnership for CMES.

It also has partnerships with cargo owners, including Brazilian mining company Vale, which date back to July 2015 when Vale sold four very large ore carriers to CMES. Soon afterwards, CMES set up a subsidiary named China VLOC to specialise in shipping Brazilian iron ore to China.

China is the world’s largest iron ore importer, so Vale relies on the Chinese market, as competition with its Australian counterparts is intense. Co-operation between CMES and Vale is a classic deal that serves both national economic interests and policy goals.