China and the Arctic | March 12, 2015 Written by Frédéric Lasserre. The commercial and strategic implications of climate change and the melting of the sea ice in the Arctic have drawn attention not only to Arctic states, but also to some other countries that have no territorial access to the region, such as China, South Korea, and Japan. Reasoning on the new climatological conditions that accelerate the melting of the sea ice, several observers pinpointed promising geostrategic opportunities for countries bordering the region, anticipating that the creation of a new trade route from north to east could lead to significant commercial profits and increase access to natural resources for economic growth purposes, because such a route would be shorter between the Atlantic and the Pacific, and challenge existing routes via the Suez or Panama Canals. Interest in the region does not stop at circumpolar states. Other countries see a number of geostrategic opportunities and stakes involved in accessing the Arctic. China, which lacks a legal basis to articulate claims over sea zones in the region, has nonetheless been increasingly present on the diplomatic, scientific and economic scenes. Discussions over potential natural resource reserves in the area and the opening of new trade routes have led to speculation over the intentions of regional and world powers, with their economies increasingly bound by energy security issues. China is often described as being very interested in both Arctic mineral resources and the opening of Arctic shipping routes, but in this characterization there is a hint of a perceived threat, as commentators are often stressing that China’s appetite may lead Beijing into considering the Northwest Passage an international strait and resources as open up for grabs. A number of Chinese scientists thus describe China as “near Arctic” , as if trying to justify the growing interest they think is legitimate for China in this part of the world. For several years, media stories have announced an Arctic maritime traffic boom. With little economic analysis in support, such predictions have been little more than speculation. Some commentators have expressed the view that the Northwest Passage, toll free, will witness an expansion in traffic greater than the Northern Sea Route (NSR), part of the Northeast Passage running along the Russian coast. However, it now appears that the NSR is developing faster. A commercial agreement on long-term cooperation on Arctic shipping along the NSR between the Russian shipping company Sovcomflot and the China National Petroleum Corporation (CNPC) was signed in November 2010. In 2011 and 2012, bulk ships transported iron ore loaded in Murmansk or in Kirkenes (Norway) to Chinese ports along the NSR, and tankers and LNG carriers also delivered oil or gas between Vitino and China. Map of the Arctic region showing the Northern Sea Route, in the context of the Northeast Passage, and Northwest Passage. Image Credit: Arctic Council (public domain)/Wikimedia Commons Efforts by the Russian authorities to develop traffic along the NSR appear to have begun to bear fruits. There were 4 transits in 2010, but then 34 in 2011, 46 in 2012, and 71 in 2013. Traffic dropped to merely 31 transits in 2014, with only 6 foreign ships and only one foreign cargo ship (a Danish ship). These figures are far from those of the Suez or Panama Canals, but they pointed to a definite growth, fueled by the export of natural resources from the Arctic to Asian markets (China, Japan, South Korea) up until 2014 where traffic dropped dramatically. The major driver of the recent rapid development of NSR traffic is the export of resources from the Norwegian and Russian Arctic regions, and not transit shipping. The NSR appears to be a niche market that provides an opportunity for a market share increase in the bulk and tanker business, but only for innovators and risk-takers such as shipping firms partnering with energy companies with close connections to the Russian State. However, Chinese shipping companies do not appear to rush to this new Arctic market: the traffic is in the hands of Russian or European shipping firms, a fact that seems to confirm a first assessment of the interest of Asian shipping companies, from China in particular. Japan’s Sanko Steamship did send a ship in 2011, but the company went bankrupt in 2012; gradually recovering, it sees no market in the Arctic any more. Cosco sent a ship (the Yongsheng) in 2013 but did not repeat the experience. South Korea’s Hyundai Merchant Marine (HMM) said it would send a cargo ship in 2014, but eventually did not proceed. During a series of direct interviews conducted from September 2013 until December 2014 with 38 Chinese shipping and forwarding companies (31 answers), it appeared few expressed a real interest in Arctic shipping (Table 1). Only four, Cosco, China Shipping Development, China LNG CLSICO and Tong Li, answered they considered developing Arctic shipping. Cosco, a major shipping group, reckoned the profitability of Arctic routes was questionable. China Shipping Development and China LNG CLSICO are interested in gas projects in the Yamal peninsula, projects that are very dependent upon gas prices and feasibility of such endeavors. This is destinational traffic (transporting Arctic resources from Siberia to China) and not transit. Table 1. Overview of responses according to company’s main sector of activity, China Container and bulk Container Bulk Multipurpose Charterer/forwarder Total Yes 2 2 4 No 3 3 9 7 5 27 Question: “Are you considering developing operations in the Arctic?”Survey conducted September 2013-December 2014 with 38 companies/ 31 answers. Among the elements of explanation answering companies gave to justify their lack of interest or involvement, figured the following factors: High investment cost required for the purchase of ice-strengthened ships Market constraints like just-in-time and ship size that limit economies of scale Arctic market too small for profitable routes that enable quick return on investment on ice-strengthened ships Physical risks and insurance costs The Chinese government multiplied declarations regarding Arctic resources rather than Arctic shipping. The government and Chinese shipping firms thus seem more interested in access to Arctic natural resources, an access the Arctic shipping routes may provide, rather than transit shipping. From this point of view, Chinese shipping and chartering firms reason on a similar way as other globalized shipping firms from Europe, North America or Asia (Lasserre and Pelletier 2011). This survey showed that transit did not appear attractive to the vast majority of companies because of associated costs, risks, uncertainties regarding on-time delivery. Destinational traffic lured a larger share of shipping companies operating in the bulk and tanker segment, as well as companies in the general cargo segment for the servicing of local communities in Canada, Alaska and Greenland. Table 2. Overview of responses according to shipping company’s main sector of activity Sector of Activity Total Container RoRo Container and Bulk Bulk General Cargo Special Project Yes 2 9 5 1 17 No 35 2 5 25 4 71 Maybe 3 1 6 10 Total 38 2 8 40 9 1 98 Question: “Are you considering developing operations in the Arctic?”Survey conducted Feb. 2008-March 2010 with 142 companies/98 answers. Table 3. Overview of responses according to shipping company’s home region Home Region Total Europe Asia North America Yes 10 7 17 No 32 25 14 71 Maybe 5 3 2 10 Total 47 28 23 98 Source: Lasserre and Pelletier, “Polar Super Seaways? Maritime Transport in the Arctic,” pp. 1465-1473. Conclusion It remains to be seen to what extent Cosco’s experiment in 2013 is going to be assessed as fruitful and to what extent other Chinese shipping companies will develop the view that Arctic shipping can bring them interesting market opportunities. For now, it seems this potential is barely considered as most surveyed transport firms appear not to be interested in Arctic shipping. Arctic shipping is viewed as potential, because of shorter distances and fuel savings; but when it comes to developing actual service, most Chinese shipping firms presently balk at the risks and required investment. It thus seems that either there is a wide discrepancy in analysis between shipping firms (business circles) and government circles regarding the interest of Arctic shipping; or that Arctic shipping is not at the core of the interest the Chinese government nurtures towards the Arctic: natural resources and voicing its views in diplomatic institutions like the Arctic Council would then appear to be Beijing’s priorities. Frédéric Lasserre is Professor in the Department of Geography of Laval University in Quebec. Image Credit: CC by destination arctic circle/Flickr. Notes  Scott Borgerson, “Arctic Meltdown: The Economic and Security Implications of Global Warming,” Foreign Affairs, Vol. 87, No. 2, 2008, pp. 63-77; Joseph Spears, “China and the Arctic: The Awakening Snow Dragon,” China Brief, 9(6), 2009, 1-13.  Rainwater, S. (2012). Race to the North: China’s Arctic Strategy and Its Implications’. Naval War College Review, 66(2), 62-82; IISS (2014). « China’s strategic Arctic interests ». Strategic Comments, 20:2, i-ii.  Lee Sung-Woo,“Potential Arctic Shipping – Change, Benefit, Risk, and Cooperation,” Proceedings of the 2012 North Pacific Arctic Conference, Honolulu, August 8-10, 2012.  Alexeeva O. and F. Lasserre, “The Snow Dragon : China’s strategies in the Arctic », China Perspectives, 3, CEFC, Hongkong, 61-68.  Lasserre F. and JF. Pelletier, “Polar Super Seaways? Maritime Transport in the Arctic,” Journal of Transport Geography, 19(6), pp. 1465-1473. The Arctic: China’s Third Silk Road China and the Arctic: Where’s the Great Power Competition?