China’s Shipbuilders Seek New Inroads in Arctic Shipping

With the Arctic Ocean becoming increasingly more navigable as a result of global warming, the prospects of hydrocarbons, mineral resources, and transarctic shipping are drawing more actors to the far north. Despite forecasts of an “ice-free” Arctic, however, icebreakers, along with ice-strengthened and winterized merchant ships, remain vital to realizing these opportunities safely and effectively.

Judging from the Marintec maritime trade fair held in Shanghai in December, China’s state-owned shipbuilders are positioning themselves to meet this demand.

China’s New Ice-Capable LNG Carriers

At the fair, subsidiaries of the newly-merged China State Shipbuilding Corporation (CSSC) debuted two ship designs earmarked for operations in polar conditions. Hudong-Zhonghua Shipyard, a major shipyard based in Shanghai, displayed a model of its ice-capable liquefied natural gas (LNG) carrier design. The 300-meter long and 49.8-meter wide ship has a capacity of 175,000 cubic meters (cbm); a double-acting hull, meaning it can break ice going both fore and astern; and a trio of Azimuth propulsion units – i.e., externally-mounted, swiveling propellers – to ensure maneuverability in the ice-infested waters that characterize the Arctic. It is designed to meet the requirements for an Arc7 ice class-notation, following the Russian classification system, which means that it can operate independently in moderate ice conditions. The proposed vessel would be able to break ice up with 2.1 meters thick and hold a speed of around 5.5 knots in 1.5 meters thick ice.

The design adheres closely to the “Yamalmax” standard developed by Finnish engineering company Aker Arctic for the 15 ice-breaking LNG carriers built by the South Korean Daewoo shipyard. These vessels, the last of which entered service last November, now service the Russian Yamal LNG project and carry LNG to terminals in Europe and East Asia. Aker Arctic was likewise instrumental in developing the design presented by Hudong-Zhonghua. The company provided ice basin facilities for model testing – a crucial infrastructure for developing polar-capable ships as it allows for the testing of hull configurations in different ice conditions. Hudong-Zhonghua also contracted the Russian Krylov Research Center to help optimize the design before the second round of tests at Aker Arctic’s facilities. In December 2018, the design received approval in principle by DNV GL and Lloyd’s Register.

Hudong-Zhonghua is currently the only Chinese shipbuilder constructing large-scale LNG carriers. It recently handed over the second of four conventional 174,000 cbm carriers that will handle transshipment operations from Novatek’s Yamal LNG project. The Arc7 design, however, marks the company’s first foray into polar shipbuilding. But the shipyard is facing fierce competition from its South Korean peers: of the 35 building orders for LNG carriers put down globally in the first 10 months of 2019, South Korean shipyards captured 32. Another case in point is the fact that Daewoo Shipbuilding was the sole builder of ice-capable gas carriers for the Yamal LNG project. By itself a bitter pill to swallow, it was accentuated by the fact that, in the context of the Yamal project, Chinese fabrication yards contributed up to 85 percent of the modules for the liquefaction trains. The Guangzhou Shipyard International, also a CSSC subsidiary, delivered ice-class heavy-lift vessels for transporting these modules to their destination in the Russian Arctic. More significantly, the China Development Bank and the Silk Road Fund contributed funding, with the latter taking a 9.9 percent stake in the project. China National Petroleum Company (CNPC) took a 20 percent stake. For the leaders of both countries, the project has been an economic as much as a geopolitical success. Yet China’s shipbuilding sector was not able to take full advantage of the opportunity.

Enter Novatek’s second LNG project in the Arctic. Up to 15 ice-breaking tanker newbuildings will be required to service the project. However, in late 2018, it was revealed that Novatek had entered into an agreement with the Zvezda Shipbuilding Complex, the resurrected shipyard in the Russian Far East. The latter would build all 15 vessels, helped along by state subsidies. Samsung Heavy Industries, another Korean shipbuilding major, has been brought on as a design partner. One Chinese commentator remarked at the time that Russia appeared to have learned “the secrets to China’s economic development” by leveraging its market to absorb advanced technologies from abroad. The author concluded that with Russia making moves to enter the LNG carrier market, China’s own prospects looked increasingly bleak.

Financing for the construction of the first vessel was secured in December, with the Russian bank VEB stating that it has already approved financing for the remaining 14 vessels. But Novatek has recently indicated that it intends to seek government approval to take two-thirds of these orders to foreign shipyards due to concerns about Zvezda’s ability to deliver on schedule. If approved, this would mean tenders for 10 orders worth a total of $3 billion that Hudong-Zhonghua is positioned to bid on.

A representative from Hudong-Zhonghua was confident that it stood a solid chance against the much more experienced South Korean yards, thanks in part to supportive industrial policies and financial guarantees from state-owned banks. The representative also noted that the same was true for Arctic-related investments. See, for example, the Import-Export Bank of China, which has supported COSCO by financing its most recent ice-strengthened newbuildings and supporting its transarctic sailings. According to a Chinese industry outlet, this impression was apparently echoed by an unnamed South Korean source, who posited that Hudong-Zhonghua possessed a cost advantage in the competition for the orders.

China’s Ministry of Industry and Information Technology (MIIT) is eager to see its shipyards break into higher-complexity segments and move up the value chain. Hudong-Zhonghua is spearheading this development and aims to double its annual output of LNG carriers from six to 12 by 2025. To this end, state-owned banks have been recruited to facilitate the export-sale of high-end vessels such as LNG carriers. And, as China continues its coal-to-gas shift, Beijing will see itself increasingly dependent on Chinese-flagged, and, preferably, Chinese-built, LNG carriers to guarantee its energy security.

The question now is whether Samsung Heavy Industries won’t end up with the whole build order after all, with Russia likely to forego technological transfer in favor of on-time delivery. That is at least what one Chinese analyst recently predicted. “Why won’t they come and build in China,” a Chinese commentator indignantly asked. “We buy so much oil from them.”

A New Heavy Icebreaker?

China’s shipbuilders are also making progress on more specialized polar vessels. At the trade fair, MARIC, China’s largest ship research institute, revealed the model of a heavy polar icebreaker. The model detailed a 26,000-ton vessel, able to break ice 3 meters thick ice at a speed of 2 knots, with a double-acting hull and two Azimuth thrusters. It is designed to handle several different tasks, capable of supporting marine research and conducting search and rescue missions, along with more specialized ice-breaking tasks, such as ice-management and escort operations. It is equipped with a helipad and a hangar for two helicopters.

While no specifications were given, the ship’s capacity to embark a crew of up to 180 people speaks to the relative size of the vessel. MARIC confidently described the vessel as “one of the strongest icebreakers in the world” – save, of course, for the fact that it has yet to be built. On paper, though, such a description is not that far off: in terms of displacement, the ship is comparable to current icebreaker newbuildings such as the Nuyina, Australia’s newest Antarctic research vessel. It would also be slightly larger, and, in terms of ice-breaking ability, more powerful than the Canadian Coast Guard’s planned John G. Diefenbaker. Similarly, the United States Coast Guard’s Polar Security Cutter icebreaker is likely to be built with a 23,000-ton displacement and with the ability to go through ice up to 2.5 meters thick. Designed for a Polar Class 2, the Chinese icebreaker will be able to operate in polar waters year-round in all but the harshest ice conditions. This would at least make it one of the most capable non-nuclear icebreakers to be put into service. The model marks the first derivation of the Xuelong 2 design – the 13,000-ton polar research vessel developed by Aker Arctic and MARIC, which is currently concluding its maiden voyage to the Antarctic. This design, then, represents the first in-house polar icebreaker design by a Chinese shipbuilder.

Wu Gang, the chief naval architect of both projects, has mentioned on several occasions that the design of a heavy polar icebreaker was been in the works. In October, he stated that the MIIT had tasked the institute with developing the design for a heavy icebreaker. On the exhibition floor last month, representatives from the institute explained that they had been asked by the ministry to provide ideas for a polar icebreaker and air the design to potential buyers. It was mentioned that COSCO had shown interest at an earlier stage but this was apparently no longer the case. Yet local industry media speculate that the ship might start construction already in 2021, however, without providing any information as to why this would be the case. Another representative at the fair conceded that the market for heavy polar icebreakers remained rather small, and, if the vessel were to be built, it would most likely be as a result of government procurement.

Developing polar-going vessels has been a stated policy objective since 2016, beginning with the 13th Five Year Plan. Late last year, the National Development and Reform Commission issued an updated “industrial structuring guidance catalog” encouraging investment in specific industrial sectors. Within the shipping sector, icebreakers, polar cruise ships, polar cargo carriers, “polar multipurpose vessels,” and survey vessels earmarked for the polar regions were listed. Additionally, the newest outline for the country’s transportation sector included polar shipping among its development goals. This signals that polar shipbuilding is likely to persist into the coming 14th Five Year Plan.

The question, then, remains how to read China’s growing investment in polar infrastructure. With its Polar Silk Road, Beijing is displaying its eagerness to engage economically with Arctic states and to integrate the Arctic region into its larger geoeconomic vision of the Belt and Road. And for its shipbuilders, polar shipping remains a niche but high-value market. Better, perhaps, to also have the technology to capitalize on it.