URSABLOG: There May Be Trouble Ahead…

A recent report in The Economist asked the question why China was stockpiling commodities – from oil to grain to iron ore and a lot more in between – and whether this would continue. It seems that China is preparing for the worst, although I am not really sure if it hopes for the best, at least as far as we in the west are concerned, from a geopolitical point of view at least.

As The Economist suggests:

America could start by restricting its own food exports to China, which have rebounded since Mr Trump’s departure from the White House, and lean on other big suppliers such as Argentina and Brazil to do likewise. It could try to influence countries that sell metals to China, including Australia and Chile. And most of China’s commodity imports are shipped through a few straits and canals that America could seek to block for Chinese vessels by, say, posting military ships nearby.

This is pretty heavy stuff. And what is China doing about it?

Since 2020 China’s crude-storage capacity has increased from 1.7bn to 2bn barrels. The location of many such sites is secret, but satellite imagery suggests that known ones have grown fast since 2022, says Emma Li of Vortexa, a data firm. Similarly, the capacity of underground gas caves grew six-fold between 2010 and 2020, to 15bn cubic metres (bcm); the target is to reach 55bcm by next year. China is also building a dozen or so tanks to hold liquefied gas along its coast. JPMorgan Chase, a bank, forecasts that total gas-storage capacity will hit 85bcm by 2030.

China isn’t being entirely open about all of this, however it is estimated by the US Department of Agriculture that China holds or will shortly hold around 50% of the world’s stocks of grain.

At first glance, it seems to suggest that China is preparing itself for actions by the United Staes and its allies due to the possible imminent return of Donald Trump to the Whitehouse. I honestly don’t think that this is the only reason, and we have to look at longer term trends, both in macro-economics, and domestic and geopolitics, to get nearer to the truth.

China’s rise since the fall of the Gang of Four and the appointment of Deng Xiaoping in 1976 has been one of amazing growth, both in economic growth and in steadily increasing – and relentless - geopolitical power. Despite engagement from the West in the perhaps naive hope that economic growth – combined with an integration into an increasingly sophisticated digital network – would bring democratic reforms and political opening up, the Party has remained in control, through Tiananmen Square and various internal power struggles at the higher reaches of the Party thereafter. Xi Jinping is not simply a sinister individual face of a new type of strongman, but the embodiment of the Party and what it wants to do, which is to keep itself relevant, and therefore the most dominant power in the land. Control is everything, and for every new hope of a political engagement for closer alignment with the west, China counteracts, or simply acts in the interests of the Party to retain its dominance.

The internet and the advent of social media led to the great firewall and the banning of certain apps and the promotion of homegrown others. (Indeed social media in China is really social: the scorecards kept on your knowledge of Xi Jinping thought and records of your apparently anti-social behaviour will dictate your access to social services and your freedom to travel). This does not mean that China wants isolation in a North Korean style. It is too populous, too rich and too powerful, not to be able to, or want to, engage with the world. Rather it aspires to be a great power and compete in multi-polar world, not be a bystander – or a mute acceptor of western liberal institutions and submissive to an international rules-based order. The Party is right, and it will not simply live peacefully in a world where its point of view is not respected. It is competing in a multi-polar world, and wants to be respected as a worthy player.

China’s stockpiling of commodities goes way back, to the end of the Cold War in fact, just as the Party had reasserted its control after Tiananmen Square. It is worth remembering that Deng Xiaoping was not only supportive of the crackdown, but justified it forcefully. At the same time he also reaffirmed that economic reforms would continue because economic growth – guided by the Party – would show the people that Party could be trusted with their lives and livelihoods. The economic growth China has experienced from 1989 to the current day is unsurpassed by any economy anywhere in the world in recent times, and with it rapid urbanisation, a massive lifting of the general population out of poverty, and a huge economic footprint across all sectors around the world. In this, at least, the policies the Party has taken have been successful.

China’s “strategic” stockpiles started with grain and defence-related minerals, but then as the economy grew, they added crude oil and petroleum products, and industrial metals, and later LNG. Although Trump’s last presidency, the pandemic (and the tit-for-tat tariff slapping with Australia who had the temerity to ask for an independent enquiry into the origin of the virus) and the consequent ‘supply chain bottlenecks’, and then both the war in Ukraine and now the problems in the Red Sea and the Gulf of Aden (not to mention the threats to Israel and Lebanon as the crisis escalates) have been suggested as reasons why China needs to stockpile, does this mean that China fears a greater escalation of tensions and is stocking up its larder to deal with a more drawn out and serious confrontation?

It's hard to say. Stocks of wheat and maize are thought to be enough to cover a year of Chinese domestic demand. Reserves of copper, nickel and other metals have been built to cover a year's worth of demand, but the amounts of LNG and oil in storage cover weeks rather than months. Is China preparing itself for a hawkish US presidency, or a more protracted and serious conflict? Or both? The Economist also followed this line of thought, quoting Gabriel Collins, a former analyst at the Pentagon:

“When you juxtapose [the stockpiling] against China’s military build-up, it starts to be very concerning.”

I think that this exposes the gulf between the west's and China’s rhythm of thinking. The west thinks in quarters, years, parliamentary and presidential terms, and in cases of forward strategic planning suffers, as can be seen by the race to catch up in defence – particularly in Europe – following the invasion of Ukraine. The peace dividend from the end of the Cold War was not invested in the future defence of Europe because they could not foresee an imminent threat, i.e. within the coming electoral cycle.

China suffers in different ways. Long sensitive to the ‘century of humiliation’ at the hands of the great powers – the west, of course but also Japan and Russia too – it aspires greatness again, and this is in the very DNA of the CCP. When seen in this context stockpiling over many years for whatever the future can bring – an unexpected occupant of the White House for example – seems wise. Maintaining price stability – and the common prosperity of the people – is of paramount importance in maintaining the relevance, and therefore the power, of the Party. However not backing down on its ambitions to reabsorb Taiwan into the CPP should not be seen as an isolated case; it is all part of the same thing. 2050 is tomorrow.

For shipping of course, this is all good news. Attentive readers will note that none of the recent reasons given for China’s stockpiling – Trump, COVID, Ukraine, the Middle East – have been damaging for the balance sheets of any shipping company, in fact quite the opposite. And more demand for commodities – for whatever reason – by volume simply increases tonne-mile demand, especially when it has to go the long way around. The idea that a truly global and open market is good for shipping misses the point, just as the view that a truly global, unfettered tariff-free trading environment is good for the world, and its citizens, does not take into account many of the problems that follow in its wake.

So should shipping companies feel comfortable with this unstable and volatile new world we are sailing towards? I think comfort and shipping are two words that don’t really belong in the same sentence. There will always be disturbance, disruption and dissonance even as the supply and demand cycles grind out their value adding and value destroying paths. But this should not mean we should hope for outright conflict and war. Damage to human lives, as well as the ships themselves, will follow, and it is devastating and brutal. In a world of ever changing and competing value systems, of shifting geopolitical and macroeconomic tectonic plates, the Safety of Life at Sea – a constant in my long career in shipping – should never lose its relevance.

Simon Ward

www.ursashipbrokers.gr