CHINA'S ECONOMIC TRANSFORMATION HAS PROFOUNDLY AFFECTED THE WORLD'S SHIPPING INDUSTRY. THE REASON, SIMPLY PUT, IS VOLUME.

While economic observers tend to dwell on measures of value - such as GDP, trade surpluses and deficits, and prices and costs - shipping is about volume and distance, i.e., ton-miles. China still lags behind the developed countries in many measures of wealth. But in terms of the volumes of raw materials going into China, and the volumes of manufactured goods coming out, China is a global juggernaut.

China is now the world's largest consumer of steel: 285 million tons in 2004, or 30 per cent of the world's total, and more than double the amount consumed by the US. China is also the number one consumer of aluminum, copper, platinum, zinc and iron.

China is the world's largest consumer of grain - 382 million tons in 2004 - and meat - 63 million tons last year. The US, by comparison, consumed 278 million tons of grain and 37 million tons of meat.

China is now the second largest consumer of oil in the world at 6.5 million barrels per day. While well behind the US rate of 20.4 million barrels a day, China's consumption has doubled over the past ten years, compared to a 15 per cent increase in the US.

China burned 800 million tons of coal in 2004, 100 million tons more than the next biggest user on the list, the US.

In the use of fertilisers, China is now by far the world leader at 41 million tons in 2004, more than double the amount used in the US.

China's economy - already the world's sixth largest - expanded at the robust pace of 9.5 per cent in 2004, its highest rate in eight years. Granted, China's population is five times that of the US. Yet per capita comparisons only serve to highlight China's huge potential for future growth.

The bottom line: in 2004, China's foreign trade broke through to US$1.1 trillion in a 36 per cent year-on-year increase. China now ranks third in the world in both export and import volumes. And almost all of that trade moves by ship.

China's growth a global force in shipping
The enormous volumes of imported raw materials and manufactured exports surging into and out of China have reshaped the shipping industry.

 China now ranks first in the world in port throughput at four billion tons in 2004, having surpassed the US in 2003. Container throughput reached 61.5 million TEU (twenty-foot equivalent units), an increase of 26 per cent over the year before. China now accounts for approximately 25 per cent of total container trade worldwide and roughly 60 per cent of total TEU on Pacific, Asian and European routes.

In 2004, China invested $3.3 billion in port development, an increase of 30 per cent over the previous year. Nearly 70 new berths were added to more than 170 new berths that were built the previous year. Yet, despite the intensive levels of port development, industry observers say that the overall throughput of ports in China remains inadequate, with projections indicating that China's freight and container throughput will grow to 4.6 billion tons and 75 million TEU in 2005.

Earlier this year Shanghai surpassed Rotterdam as the port with the world's largest throughput.

The good news for SNTG is that China is also swallowing large volumes of chemicals. According to Richardson Lawrie Associates, China imported approximately 1.9 million tons of speciality chemicals in 2004, a total that was exceeded only by volumes to the Northern Europe and North Pacific regions. Imports of commodity chemicals to China totalled 4.7 million tons, well behind the North Pacific at 8.7 million tons and the US at 7.6 million tons. Forecasts, however, put Chinese commodity imports at more than 9.0 million tons by 2008, then to be exceeded - and only modestly so - by the North Pacific region.

From any perspective, the numbers are staggering. The question for SNTG - and it's a big question - is how to approach the opportunity. Fortunately, we already have significant experience and a significant presence in the region. In fact, SNTG has been actively pursuing growth opportunities in China for some time.

SNTG: actions and opportunities
Stolt-Nielsen has been doing business in China for years, in both parcel tankers and tank containers. We established a representative office there in 1994 and have been steadily building up the business ever since.

We have recently announced two new joint ventures that will significantly expand our presence in China. Shanghai Sinochem-Stolt Shipping Ltd will operate parcel tankers in the Chinese cabotage market to meet the rapidly rising demand for the distribution of liquid chemicals in that country. The joint venture has already secured three strategic contracts with multinational chemical companies. Shanghai Sinochem-Stolt Shipping will operate a fleet of coastal chemical tankers, consisting of a combination of coated and stainless ships. In addition, the joint venture has eight Chinese-flagged coastal chemical ships under construction - four all stainless steel and four coated tankers. The ships are being built in Chinese yards, with deliveries scheduled to commence in March 2006.

We also established a new joint venture called Shanghai Stolt-Kingman Tank Containers Transportation Ltd, which will provide integrated multimodal tank container services to China's bulk liquid chemical and food industries. And we are in the process of relocating and substantially upgrading Stolt Tank Containers' Shanghai depot, which operates in tandem with our other China depot in Tianjin.

The use of tank containers in China has accelerated significantly in the past five years. STC's monthly export volumes out of China are strong and we're seeing considerable domestic use, too. Investment in new chemical production facilities in China has also increased sharply. The plants will primarily serve the domestic market, which is another reason we made the investment.

Not surprisingly, the demands of our Asia Pacific trade routes have put significant pressure on SNTG's deepsea fleet. Our recently announced newbuildings - two 43,000 dwt parcel tankers to be delivered in late 2007 and early 2008 - will be ideally suited to this trade. As we noted in our announcement, "the new ships will complement the highend sophisticated ships SNTG built in the late 1990s and provide flexibility to pursue growth opportunities in the chemical markets".

As with any boom - and China is no exception - the question is always: "How big and for how long?" As one observer said: "Is the boom destined to change the world or is it a bubble heading for a pin?"

There is no easy answer to the question. From SNTG's perspective, however, we know at least two things with some assurance.

First, the US Gulf is the world's number one source of speciality chemicals, followed by Northern Europe. And there is only one way for those chemicals to get to China. The growing volumes, combined with the substantial distances involved, make this a truly significant trade. As long as China's consumption of speciality chemicals continues to grow, SNTG is well positioned to benefit.

Second, there is little likelihood of an overbuilding of parcel tankers in the near term. As we have already said in recent issues of Stolten, most yards are already committed to building other types of ships and only a small minority is even capable of building sophisticated parcel tankers.

The question for our clouded crystal ball, then, becomes: "Whither China?" Numerous business and economic analysts seem eager to forecast the first big speed-bump in China's economic future. Many assert that the country's current growth rates (official rates in the nine per cent range are widely considered to be understated) are not sustainable, if only due to capacity limits dictated by China's own infrastructure.

Yet some claim that with judicious government intervention, China's overheated economy can be cooled down without bringing about a hard landing. Growth did indeed appear to be decelerating in 2004 but recent data showed a sharp and unexpected increase of nearly 17 per cent in China's industrial output in the first two months of 2005.

The country's banking system and its enormous portfolio of bad loans also raise eyebrows. And while overinvestment is a major worry, others hold that observers underestimate China's capacity for sustained growth and that the speedbumps, if they come at all, will be just that - bumps. Then there are the geopolitical scenarios, which are far beyond the scope of this article. As managers of a shipping company, we must leave it to the economists and analysts of the world to ponder China's future.

But if there is one firm takeaway from all the analysis - both optimistic and pessimistic - it is this: that China, after decades of isolation, is destined to play a very important, if not central, role on the world stage of the 21st century.

There is no doubt that China will be an increasingly major factor in SNTG's strategic planning process for the foreseeable future.

Otto H. Fritzner is CEO of Stolt-Nielsen Transportation Group.