China Watch: Not a Merry Time for Maritime

TAIPEI, Taiwan (TheStreet) -- The South China Sea spans 3.5 million square kilometers from Singapore to Taiwan, rimmed by many of the core countries on the world's most populous continent. No surprise that half the world's marine shipping traffic passes through it.

A 40-year-old sovereignty dispute over the sea has kicked up such a storm this year that just two weeks ago this column highlighted the dangers to offshore oil drillers.

The six claimants failed to reach a deal on how to avoid naval clashes. China founded a city on the Paracel Islands, south of its mainland and east of Vietnam, which claims the same archipelago and has gone head to head over sea sovereignty twice since the 1980s with its mighty neighbor to the north. In April, a standoff between China and the Philippines grew extra tense as the United States backed old friend Manila over fellow superpower Beijing.

Stuck in the middle: Tankers and container ships that do business estimated at $5 trillion a year. They move goods between the Pacific Ocean on the east side of the Sea to ports on the other side along the Persian Gulf or the Indian Ocean.

Those shippers, it turns out, are in trouble -- but not from the South China Sea dispute.

According to the U.S.-based public policy organization, GlobalSecurity.org, five times more tanker traffic goes from the Strait of Malacca into the South China Sea than through the Panama Canal. Malacca is already infamous for pirate attacks against passing ships. Almost all of that traffic must pass near the Spratly Islands, one of the most hotly contested regions ocean area.

But shippers need not stop or reroute cargoes, say those close to the industry. Fight as they may, countries that claim all or part of that ocean depend on those shipments, which are mainly raw materials. China, the most aggressive claimant lately, is particularly hungry for those resources as its economy grows despite talk of a slowdown.

"Although there is a lot of back and forth on this territorial dispute between China and the Southeast Asian countries, particularly Vietnam and Philippines, there has been no disruption to the trade lanes through this area, mainly because it will affect China directly, as most of its trade happens through these trade lanes," explains Capt. Rohit Bhatia, managing director of Wade Maritime Consultants in India.

"It is not in China's interest to disrupt traffic and cause diversions," he says.

Brunei, Malaysia and Taiwan also claim all or part of the sea.

China is hardly the only party with something to lose from a threat to shipping. Most commercial vessels in the South China Sea take raw materials to East Asia, with Malacca-Spratly traffic carrying largely crude oil, liquefied natural gas and iron ore, GlobalSecurity.org says. Japan, South Korea and Taiwan are the major takers of liquefied natural gas transported through the South China Sea.

Chen Yi-Lee, marine transport analyst with SinoPac Securities in Taipei, says keeping ship traffic safe is a matter of logic for all six claimants. "They won't bother commercial activities that would affect themselves," she says.

Still, the question is whether a naval clash, possibly set off by competing offshore oil rigs or ever-aggressive fishing vessels, might accidentally net an innocent container ship or whether a captain miscalculates and strays too close to a particularly sensitive sea region such as the Paracel or Spratly islands.

A few shippers have rerouted vessels along the east coast of the Philippines to keep safe, but most have stuck to their usual lanes. Vessels from Taiwan scoot through unscathed partly by flying a disinterested flag, that of Panama for example, which also allows them to hire foreign deckhands.

The more aggressive shippers include China Cosco Holdings Co. Ltd. (1919.HK). Its total transportation volume was 5.2 million tons in the first half of 2012, up 23.5% year-on-year.

Evergreen Marine (2603.TW), the world's fourth-largest marine shipper, has made no changes. "Our crew will stay alert when sailing through this region," says Evergreen publicist John Chen in Taipei. "Unless the disputes escalate into military activities, there is no need to reroute the service strings."

But Pacific Basin Shipping (2343.HK), a major dry bulk mover for Asia, declined to comment on the movements of its 210 vessels, which must move about the South China Sea from its home base of Hong Kong.

The likes of American President Lines, part of Neptune Orient Lines (NO3.SI) and the world No. 7 shipper, and Maersk Line (MAERSK-B.CO) should also be sheltered from the dispute as they pass ships through the South China Sea, leaving their share prices untouched.

The real danger to marine shippers lies in the battered global economy rather than any threat of conflict over a tract of ocean in Southeast Asia.

Over the past two years, Cosco's share prices have fallen a steep 63%. Pacific Basin shares are down 42% and Evergreen has lost 33% over the same period. Neptune Orient is down 46% and Maersk off 16%.

And over the past two years, sandwiched between the 2008-2009 global financial crisis and the August 2011 relapse, marine shippers have faced a cut in demand from Europe and the United States. Ships are in oversupply. They have paid higher prices for fuel because of rising crude oil prices.

Financing and refinancing are tougher now as European banks, the main lenders to shipping firms, pull back because of ratings downgrades. The shippers can't pass those costs on to customers unless the world economy improves.

Capt. Bhatia calls these problems "detrimental to the prospects of the shipping industry in general."

At the time of publication, Jennings held no positions in stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.