A landmark ruling by an international arbitration court against China's claims over a major part of South China Sea is likely to escalate diplomatic tensions between Beijing and other regional claimants such as the Philippines and Vietnam over the waterway.
The Hague Tribunal's ruling last week that China had violated the sovereign rights of the Philippines by interfering in oil and gas exploration activity in the latter's exclusive economic zone is expected to keep energy, commodities and freight markets in Asia on the edge, mainly because of Beijing's stubborn reaction that the verdict was unacceptable.
Vietnam claims sovereignty over both the Spratly and Paracel Islands and defends its exclusive economic zone and continental shelf as set in the United Nations Convention on the Law of the Sea, or UNCLOS.
While Vietnam currently controls part of the islands in the Spratlys along with China and the Philippines, the country lost control of the Paracel to China after a clash in 1974.
A third of global crude oil and more than 50% of the world's LNG trade pass through the South China Sea, making it one of the most crucial transit routes in the world.
While market participants do not see any immediate impact on trade flows, they are expected to keep a close eye on geopolitical developments.
The following are some key factors that make the South China Sea a crucial link for commodity flows in the Asia-Pacific region.
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OIL AND GAS
The South China Sea is believed to hold vast amounts of undiscovered oil and gas reserves.
Chinese state-owned China National Offshore Oil Corp. has estimated that the entire South China Sea holds undiscovered resources to the tune of 125 billion barrels of oil and 500 Tcf of natural gas.
But the US Geological Survey has estimated that about 12 billion barrels of oil and 160 Tcf of natural gas might exist as undiscovered resources in the South China Sea, excluding the Gulf of Thailand and other adjacent areas. About one-fifth of these resources may be found in contested areas, particularly in the Reed Bank at the northeast end of the Spratly Islands.
Disputes between China and the Philippines over oil and gas resources are mainly in the Reed Bank, which is about 80 km (50 miles) offshore the Philippine island of Palawan and is believed to contain vast amounts of natural gas reserves.
The Paracel Island area may also contain significant natural gas hydrate resources.
While test drills have been promising, commercial development of natural gas hydrates in the South China Sea is many years away because of technological challenges, according to the US Energy Information Administration.
A significant amount of crude oil passing through the Strait of Malacca goes to terminals in Singapore and Malaysia. But after processing, this crude oil is shipped out again to Asian markets through the South China Sea as refined petroleum products, such as motor gasoline and jet fuel, according to the EIA.
The rest of the crude oil passes through the South China Sea to China and Japan, the two largest energy consumers in Asia.
The Strait of Malacca, located between Indonesia, Malaysia, and Singapore, links the Indian Ocean to the South China Sea and the Pacific Ocean.
EIA says crude oil flows in the South China Sea also comes from intra-regional trade, particularly from Malaysian, Indonesian, and Australian crude oil exports.
Intra-regional trade is distributed evenly among Singapore, South Korea, Japan, and China, with smaller amounts going to other Southeast Asian countries.
LNG, COAL, IRON ORE
The South China Sea is a major transit route for LNG. According to latest numbers on the EIA website, about 6 Tcf equivalent of LNG, or more than half of global LNG trade, passed through the South China Sea in 2011.
Half of this amount continued on to Japan, with the rest of it going to South Korea, China, Taiwan, and other regional countries. Almost 75% of all LNG exports to the region came from Qatar, Malaysia, Indonesia, and Australia.
With growing demand for natural gas in East Asia, the South China Sea's share of global LNG trade will likely increase in the coming years, according to the EIA.
Even large quantities of coal from Australia and Indonesia, the world's two largest coal exporters, pass through the South China Sea to markets around the world, especially to China, Japan, and India.
These coal shipments include both steam coal used for generating electricity and process heat as well as metallurgical coal that is a key ingredient in primary steel production, EIA said.
From Indonesia, plentiful volumes of coal from the East Kalimantan region move to China via the South China Sea. In addition, a lot of iron ore shipments from Brazil and South Africa use the South China Sea route for transit to key destinations such as China.
SHIPPING AND FREIGHT
The South China Sea is the second-most used sea lane in the world. In terms of world annual merchant fleet tonnage, over 50% passes through the Strait of Malacca, the Sunda Strait, and the Lombok Strait, with the bulk of that continuing on to the South China Sea.
The United Nations Conference on Trade and Development Review of Maritime Transport 2011 estimated 8.4 billion mt of total world maritime trade through the South China Sea in 2010.
Almost 117,000 vessels with a total deadweight of 4.7 billion mt passed through the Strait of Malacca in 2004.
Out of 607,000 global ocean going vessel movements, or 15% of the world's total, 32% were container vessels, 25% were tanker vessels, 15% were cargo vessels, and 15% were bulk carriers, with the remainder LNG and other ships, EIA says. More recent data was not available.
South China Sea is a transit point for much of the grain cargoes -- such as wheat, corn and barley -- from the Black Sea region and Australia flowing to China, Japan and South Korea.
Thailand's seaborne sugar exports to China and North Asia also transit through the South China Sea, as do palm oil cargoes from Malaysia and Indonesia to key Asian consumers, such as China. Also South China Sea comes into play for cargo flows of ethanol from the US heading for China and then heading southwards to the Philippines.
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