China: Is Control Of The Bunker Trade A Solution To Its "Malacca Dilemma"?

By Economic Warfare Institute Blog (Exclusive) | by Ganesh Sahathevan
Wednesday, August 31st, 2011 @ 10:10PM

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The Malacca Strait is the shortest route between the Indian and Pacific oceans. It is bound by Malaysia to its east, Indonesia to its west. At its northern entrance are the maritime borders of Burma, Thailand and Malaysia. At the southern end are the maritime borders of Malaysia, Indonesia and Singapore.

Some 25% of global trade passes through this sea-lane. Oil from the Persian Gulf and Africa, which accounts for about 60% of the Peoples Republic of China’s consumption, is shipped via the Malacca or Lombok/Makassar straits in Indonesia. In November 2003 President Hu Jintao declared that “certain major powers” were bent on controlling the Malacca Strait, and called for the adoption of new strategies to mitigate the perceived threat. Thereafter, the Chinese press devoted considerable attention to the country’s “Malacca dilemma,” leading one newspaper to declare: “It is no exaggeration to say that whoever controls the Strait of Malacca will also have a stranglehold on the energy route of China” (China Youth Daily, June 15, 2004)[i].

China has consequently sought to assume control, or at least extend its influence over the Strait. Its primary modus operandi has been via offers of “assistance” to the littoral states, Malaysia and Indonesia. An example of this method was published recently in the Chinese government controlled English language publication, “Global Times”:

At present, the only cooperative mechanism joined by China
in the Strait is the Information Sharing Centre in Singapore.
Both Malaysia and Indonesia refused to participate in the
anti-pirate mechanisms shared by Asia’s 16 countries.
In the future, we could even establish more comprehensive
anti-piracy measures led by China, thus China could gain
the upper hand to master the issues in the Strait[ii].

Indonesian and Malaysian reticence is understandable given China’s growing assertiveness in the South China Sea, where it continues to challenge these two countries as well as others that border the South China Sea for economic rights, which include rights to oil and gas. While it is unlikely that China will seek armed confrontation, China’s growing confidence in its economic strength could lead it to seek a commercial solution to its “Malacca dilemma”.

China is short of fuel it needs to drive its factories and has been prepared to pay above market for energy resources or potential resources wherever these can be found. Despite this, it has declared a desire to dominate the world market for marine fuel, or bunker[iii]. While such a desire may be commercially incongruous with its own needs for fuel, control of the market for bunker could have a number of strategic advantages. One only needs to consider the influence tiny Singapore has gained by being, amongst other things, the world’s largest bunker port by volume.

Singapore’s strategic location and position in the world bunker trade has won it the defensive shield of the US Navy whose ships call at its port regularly. Consequently Singapore is probably the United State’s staunchest ally in South East Asia and hence any diminution in its importance will also mean a diminution in US influence in the region. This in turn could affect the present balance of power in the South China Sea and the Strait, which probably favors the United States.

It is in this context, and with the understanding that major Chinese companies are either owned, controlled or under the significant influence of the Communist Party of China, that one might view a recent announcement by Brightoil Petroleum Holdings, a Hong Kong-based marine-fuel supplier, as of political rather than purely economic significance.

Brightoil declared it intended to capture 30% of the Singapore bunker market, and is in the process of investing heavily to do so. Meanwhile, Chinese companies already dominate the marine fuel market in Cambodia (map at http://www.vacationstogo.com/images/ports/maps/1661_w.gif). Combined with the Chinese ports China could provide a multi point bunker fuel facility, thereby avoiding the congestion and related costs currently suffered at Singapore.

Margins in the bunker market are thin, and to win market share Chinese suppliers need only to under price. This they can do given their lines of credit from state owned banks.

The bunker market in the Strait is by and large unregulated. For instance, 90% of the bunker trade at Port Klang, the largest port on the Strait, is handled by a privately held ethnic Chinese family company, Ban Hoe Leong Marine Sdn Bhd (BHL)[iv]. Despite its virtual monopoly the company has very little in land based installations, and its operations are believed to be mostly just outside Malaysian waters. Indonesian authorities are not known for their vigilance and hence the company can operate without regulatory hindrance.

It is not inconceivable that BHL could work with Chinese suppliers who would guarantee it a supply of bunker at below market rates, thus cementing its and Chinese dominance over the bunker trade in the Strait. Such an arrangement would enable China to more completely control the bunker trade in the South China Sea. Singapore, and thus the United States would see their influence over regional trade diminished almost as an afterthought of the Chinese effort to control the market.

It follows that once the supply of marine fuel is monopolized or at least significantly controlled China would have greater influence over trade and shipping in the Strait. This influence can then be used to project its influence over that area in a variety of ways. For instance, it could get shipping companies to request marine escort services of ostensibly private Chinese private naval companies. The Strait and the Sea are prone to privacy, and there is already demand for such services from private contractors. It would be relatively easy for a Chinese Government linked company to provide these services at a reduced cost, while more powerfully armed. These would provide cover for naval reconnaissance, as well as have military assets in the Strait at a state of perpetual readiness. It would be difficult then for any other power to match China’s influence. The Malacca dilemma would have been solved.

*Ganesh Sahathevan, a researcher and writer based in Sydney, Australia, specializes in South East Asian economics and politics, and is a Fellow at the Economic Warfare Institute (EWI).

NOTES

[i] Ian Storey; China’s “Malacca Dilemma”
Publication: China Brief Volume: 6 Issue: 8
April 12, 2006
http://www.jamestown.org/programs/chinabrief/single/?tx_ttnews%5Btt_news%5D=31575&tx_ttnews%5BbackPid%5D=196&no_cache=1

[ii] Xue Li,China can help guard lifeline through Strait of Malacca
Source: Global Times
21:12 June 09 2011
http://opinion.globaltimes.cn/commentary/2011-06/663682.html

[iii] ENTER THE DRAGON: Chinese bunker market takes off
http://www.petrospot.com/_pdfs/articles/bs/v7i5.pdf

[iv] Bunkerworld, 20 November 2006


Categories: ACD/EWI Blog, Articles and Presentations on Economic Warfare, China

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