The Trump administration has created chaos in the shipping market by proposing tariffs on China-built ships, which could disrupt global trade. The proposed policy by the US Trade Representative (USTR) aims to curb China’s dominance in shipbuilding by introducing hefty fees on vessels linked to Chinese operators or shipyards. If the proposed policy is implemented, the affected vessels with any linkage with the Chinese shipyards or operators will become unattractive even for US trade because of the high fee, creating a two-tier market, Drewry said.
While this hefty fee will apply to all the ships of the operators/owners having any China-built vessel in the fleet or orderbook, tonnage availability of tonnage outside the radar of the proposed policy will be limited. This will underpin the freight rates for the US trade even if the charterers use vessels without any linkage with Chinese shipyards or operators.
Summary of the proposed policy
The proposed policy by USTR aims to levy the following fines on China-built/operated ships, along with all ships built outside China, if the operator or owner has any China-built vessel in its fleet or on orderbook and if a vessel visits any US port.
Impact on oil tankers
Based on Drewry’s estimates, only about a third of the oil tankers (36% crude tankers and 35% product tankers) will be outside the purview of the proposed US port fee. The remaining tankers will have to pay a hefty fee if they are operated by a non-Chinese operator when visiting any US port.
On the other hand, China-operated vessels will be redundant for the US trade as the operator will have to pay an astronomically high fee of $1000 per net tonne of the vessel. Even the smallest product tanker will have to pay staggering fees, close to $10 million, which can go up to $105.3 million for a VLCC per port call.
Using any tanker under the proposed policy for US trade will lead to a surge in freight costs. Similarly, freight rates will also rise for vessels, which are unaffected by this policy because of the limited availability of such vessels. Overall, the proposed policy will make crude or product exports from the US or imports into the US costlier because of increased freight costs.
Although the fee for vessel operators outside China is based on the per vessel call irrespective of the vessel size, the impact on freight rates of bigger vessels will be significantly lower than smaller vessels. Let us take an example of a VLCC loading from the Middle East and discharging in the US. If we assume all the additional costs of the US port fee will be transferred to charterers, the freight cost will jump by 14% to 41% from the current levels of $13 per tonne if vessels of non-Chinese operators with at least one China-built vessel are used. Meanwhile, for an MR carrying diesel from the USG to Northwest Europe, freight rates will inflate 57% to 172% from the current $23.6 per tonne.
Comparing the fee, in terms of cargo cost per barrel, VLCCs carrying crude (1.77 million barrels) from AG to USG on vessels operated by non-Chinese entities will add $0.3 to $0.8 to each barrel of crude transported. Similarly, if diesel is shipped from USG to Northwest Europe on MRs (0.28 million barrels), the proposed fee will add $1.8 to $5.4 to the cost of each barrel of diesel.
Broader implications
It is still unclear if the proposed policy will be implemented and how it will work. However, it raises concerns for the shipping industry, prompting some changes if the policy comes into effect.
- Freight rates for the US trade will rise: Although the proposed fee will inflate freight rates for vessels under the purview of the policy that are used for the US trade, vessels that are not affected by this policy will become attractive for the US trade. As only about one-third of the crude and product tanker fleet will be unaffected, higher demand for such vessels will increase freight rates.
- A likely change in trade patterns: Higher freight rates for the US trade will make US imports of crude and refined products costly, inflating oil prices in the US. On the other hand, robust rates might hurt the attractiveness of the US crude and product exports. Refined product exports, in particular, will be dented as the proposed fee will significantly inflate freight rates for small product tankers for US exports. The attractiveness of the Middle Eastern diesel in Europe will rise at the expense of the US diesel. Although the dominance of the US products in the Latin American market will continue, some uptick in gasoline imports from Europe at the expense of the US cannot be ruled out.
- Cautious ordering by shipowners: Shipowners’ preference for shipyards could change in the long run if the proposed policy is implemented. Nevertheless, the ongoing dominance of Chinese shipyards will persist, considering there are limited options. Meanwhile, emerging shipbuilding markets such as Vietnam and India might benefit in the long run.
- Share of vessel eligible for refund remains limited: If any US-built vessel enters a US port, the operator can claim a refund of $1.00 million. However, the tanker fleet has less than 1% US-built ships, of which most of them are US-owned. Thus, the refund policy will not benefit ship operators.