The South Korean shipbuilding industry is in shock after it has lost the world’s largest container ship deals to Chinese companies. It is a symbolic event that shows the two countries’ intense competition across all of industries, marking the 25th anniversary of their diplomatic relations.
According to shipbuilding industry sources on August 20, France’s CMA CGM recently signed a letter of intent (LOI) with two Chinese shipyards – Hudong-Zhonghua Shipyard and Shanghai Waigaoqiao Shipbuilding – to build nine 22,000 TEU container ships. South Korea’s big three shipbuilders – Hyundai Heavy Industries, Samsung Heavy Industries and Daewoo Shipbuilding & Marine Engineering – participated in the bid. Hyundai Heavy competed for the deal until the last minute but Chinese shipbuilders won the contract.
The deal for nine ships total US$1.44 billion (1.6 trillion won). An official from the shipbuilding industry said, “South Korean companies had swept large container ship deals in the global market but they now feel embarrassment that not only the market of low-end ships but also ultra large and high value added ships are being eaten into by China.”
The deal is to build nine ultra large container ships which have dual-fuel propulsion systems that can operate on either liquefied natural gas or fuel oil. With stricter international regulations on the emission from ships, including sulfur oxides, domestic shipbuilders expected to win new orders of ultra large and eco-friendly high value added ships. However, they unexpectedly lost to Chinese companies. The shipbuilding industry, which is already suffering from a lack of business, raises concerns that they can keep falling behind Chinese firms in the future. A LOI is a document outlining an agreement between two or more parties before the agreement is finalized. However, South Korean companies has a very small chance of winning a partial order out of the nine.
Domestic shipbuilders won the deal of 2.83 million CGT in the first half of this year but fell behind China with 133 ships or 2.9 million CGT. An official from the shipbuilding industry said, “In short, even foreign container shippers have admitted that Chinese shipyards’ technology and price competitiveness have caught up with Korea. South Korean shipbuilders used to rank first to seventh in the top 10 list. However, only big three made the top 10 list now with many Chinese and Japanese firms included.”
Contracting at Chinese yards fell significantly in 2015, but the impact has varied greatly across different types of yards. Many larger, state-backed builders have continued to secure a steady volume of orders, supported by domestic, state-backed owners. Meanwhile, the share of contracting at independent yards has dropped largely, with many of these builders facing difficulties due to a lack of new orders.
State Yards Taking The Lead?
Shipyards in China are segmented in Clarksons Research data into a number of 'administration types' according to ownership. 'State-backed' builders include the yards owned by shipbuilding groups CSSC and CSIC, as well as national government yards controlled by state-owned groups such as COSCO Shipping. Other yards can be categorized as independent, foreign owned (FO), joint venture (JV) or local government. The share of contracting accounted for by 'state-backed' yards in China fell significantly from 73% in 2001 to 27% in 2009, in CGT terms. Privately owned builders expanded rapidly in this period to take the majority of orders, encouraged by a state-led drive to expand shipbuilding. However, this trend has been reversed since 2010, with many independent yards now facing difficulties due to the decline in bulker ordering. State owners have supported the shipbuilding industry primarily through ordering at 'state-backed' yards, which took 59% of total orders at Chinese yards in 2015, in CGT terms. The government's 'White List', which includes most CSSC and CSIC yards, has also broadly benefited state builders.
A Helping Hand
The share of contracting at state-owned groups CSSC and CSIC hit 40% in 2015 in CGT terms. Although the total volume of orders at CSSC/CSIC yards fell year-on-year, their share of total contracting at Chinese yards increased, driven primarily by orders from state shipping companies. 69% of total orders placed at CSSC/CSIC yards in numerical terms were from domestic owners, compared to 18% of orders at independent yards. This activity has been supported by the 'scrap and build' subsidy, which has incentivised Chinese owners to place new orders at home. The share of total orders accounted for by national government yards also rose last year to 19% in CGT terms.
Fighting for Orders
Although the government has used the 'White List' to offer some support to independent builders, which made up 8 of the 11 builders added in 2015, the decline in ordering has had a severe impact on many smaller yards. Ordering at independent yards decreased in 2015 by 53% on an annual basis in CGT terms. Although some independent yards have been highly successful in competing for contracts, with Jiangsu New Yangzijiang winning a reported 50 orders in 2015, many smaller yards have faced difficulties. Just 24 independent Chinese yards took an order in 2015, down from 61 in 2014.
Having fallen during the shipbuilding boom, the proportion of orders placed at 'state-backed' yards in China has risen sharply since 2010, with Chinese state owners providing significant support. With contracting activity weak and many independent yards facing difficulties, it appears likely that this trend will continue.
For those brave enough to seek out bargains, the January sales at Chinese shipyards offer incredible deals. Ordering as the Baltic Dry Index looks set to crash below the 400-mark is, of course, not for the faint hearted, but prices on offer right now are perhaps at once-in-a-generation lows.
Liu Xunxiang, general manager of the China Newbuilding Price Index Company, said that his index hit a record low last month and the outlook for 2016 is not at all optimistic.
The CNPI, founded in 2011, tracks Chinese newbuild prices from 18 shipbrokers around the world.
The last time prices had dropped to a very low level on the CNPI was back at the end of 2012, but the drop was slow and the recovery solid afterwards, Liu recounts.
"This time the recession might take even longer," Liu says.
Dry bulk vessels are suffering the worst, he says, falling in tandem with the BDI's record plunge.
"40% of Chinese shipyards' bulker deliveries were delayed in 2015, and that percentage might be increased in 2016," Liu says.
Containership and tanker prices are unlikely to see much of an uptick in prices at Chinese yards this year either, Liu reckons. However, he reckons the depreciation of the renminbi and IMO's Tier III emission standards might help stabilise prices later in the year.
Commenting on the pricing outlook, Martin Rowe from Clarkson's Hong Kong office, said, "The bulker newbuild market will be very difficult for Chinese shipyards in 2016. A lot of owners are looking to sell their vessels to be delivered in 2016 and those that have already been delivered in 2015. Of course, the selling prices would be much lower than the newbuild prices offered by the shipyards."
Feeder containerships are looking positive at the moment, Rowe reckons, although this is not necessarily reflected in the charter rates.
"It might be smart to order now, but there's not enough equity in the market," Rowe concludes.
The Chinese shipbuilders seem to have been the preferred choice of global owners when it comes to ordering new ships in November, leaving South Korean competitors far behind.
According to Clarksons data, cited by Yonhap news agency, the November order book of Chinese shipbuilders comprised of 1.46 million compensated gross tons (CGTs), accounting for 80 percent of the total orders placed in November worldwide.
On the other hand, South Korean shipbuilders had the lowest order intake in November in the last six years, having received a total of 79,834 CGTs.
However, looking at the figures for 11 months of this year, South Korean builders still hold the lead with 9.92 million CGTs. Chinese counterparts have secured a firm second place with 8.82 million CGTs, followed by Japan with 6.77 million CGTs.
The data comes on the back of pilling losses recorded by South Korean top three shipbuilders, Hyundai Heavy Industries (HHI), Samsung Heavy Industry (SHI) and Daewoo Shipbuilding and Marine Engineering (DSME).
China's newbuilding orders tumbled 62.1 percent year-on-year to 20.38 million dwt in the first ten months of this year, according to data released by China Association of the National Shipbuilding Industry (CANSI).
In addition, the nation's orderbook in the shipbuilding industry had hit 132.01 million dwt as of the end of October, a drop of 14 percent from a year earlier. The shipbuilding completions increased 15.4 percent YoY to 32.87 million dwt during the January to October period.
Chinese shipyards' new orders slumped 69.4% year on year (YoY) to 14.0 million dwt in the first seven months of 2015, according to the China Association of the National Shipbuilding Industry (CANSI).
While the yards' completed tonnage climbed 9.8% to 22.7 million dwt over the period, their orderbook slipped 10.9% YoY to 136.7 million dwt.
Export orders, contributing 85% of the yards' new orders, tumbled 72.2% YoY to 11.9 million dwt.
Yet the 88 shipbuilding and relevant companies surveyed by CANSI reported a combined 3.7% YoY rise in operating revenues to CNY164.5bn(US$25.7bn), although their aggregate gross profit dropped 17.7% to CNY3.4bn.
The industrial output values of these companies increased 4.5% YoY to CNY240.0bn, with a rise for shipbuilders of 4.2%, an increase for marine-equipment makers of 2.3%, and a decline for ship repairers of 10.6% YoY.
China's shipbuilders had ended 2014 with a YoY fall of 14.2% in awarded orders after buyers started cutting back on spending on new ships from late last year.
The State Council recently issued a plan to accelerate restructuring and technological upgrading within China's shipbuilding industry. In 2010, China led the world in terms of shipbuilding volume. But the same cannot be said about the country's ship construction technology or the competitive strengths of its shipyards. Over the years, Chinese shipbuilding has expanded too quickly through repeated investment and the industry is now waterlogged with excessive capacity. This is true across the nautical construction sector - makers of low-end bulk carriers and high-end tankers all face similar predicaments.
A persistent downturn in the global shipping market hasn't helped matters either. With few signs of relief on the horizon, it is critical to establish a stable, sustainable and orderly ship making environment. After all, Chinese shipyards are major buyers of industrial products such as steel, iron and heavy machinery. They also supply vital assets to several of the country's largest industries, including offshore oil and gas producers.
The prolonged slump in China's shipbuilding sector has prompted Beijing to unveil a three-year plan aimed at reviving the country's shipbuilders.
The 2013-2015 plan, revealed by the State Council, has outlined key areas of focus that would raise the efficiency of the sector and position it as a global competitive industry.
The plan is expected to witness the advancement of technology in the shipbuilding sector, an expansion into offshore shipbuilding and equipment construction, a strict control on adding new yard capacity, a quicker phasing out of old vessels, the enhancement of corporate management and services, and the capturing of a larger global market share.
“Due to the global financial crisis, the international shipping market has been experiencing a downturn, leading to a severe drop in new vessel orders and a plunge in newbuilding prices. As a result, China's yard overcapacity has exacerbated and the industry's development prospects are now facing unprecedented challenges,” said a statement from the State Council.
In the first half of this year, Chinese shipbuilders received 22.9m dwt of new orders, a jump of 113.2% year-on-year, according to data from China Association of the National Shipbuilding Industry (Cansi). However the combined profit of 80 major shipyards plunged 53.6% year-on-year to RMB3.58bn ($584.06m).
China Rongsheng Heavy Industries, China's leading privately-owned shipbuilder, has recently appealed for cash from the government as it suffered heavy losses due to a sharp decline in newbuilding orders and prices.
China had more than 3,000 yard enterprises including about 400 larger yards at the start of 2010. By 2011 when the shipbuilding recession hit home, throngs of small to medium sized private enterprises shut down or filed for bankruptcy. Today, there are roughly 1,600 yards scattered across the country, and 50% of them are predicted to go bust over the next one-and-a-half years.
Mainland shipbuilders are struggling as a global vessel glut makes it harder to win orders, raising fears a third of the nation's yards may have to close.
During the 2007 shipping boom, mainland shipyards required down payments of as much as 60 per cent of a vessel's value.
Now, they have had to cut the amount to as little as 2 per cent, resulting in an advantage to state-owned companies that can tap the government's cash.
With flagging demand and Beijing taking measures to rein in lending, privately owned yards are getting squeezed by state-owned rivals that enjoy greater access to financing.
China Rongsheng Heavy Industries, the largest shipbuilder by order book outside state control, said this month it was seeking government support after failing to win any orders for new vessels this year.
"The payment terms mean shipyards have to burn their own money to build ships, which brings them extraordinary cash-flow pressure," said Lawrence Li, a Shanghai-based analyst at UOB Kay Hian. "Only state-owned yards that are able to secure funding can offer such aggressive down-payment terms."
State-backed companies grabbed 74 per cent of orders for new vessels on the mainland, the world's biggest shipbuilding country, in the first half of this year, according to UOB Kay Hian data. That compares with 52 per cent in all of last year.
Dalian Shipbuilding Industry, a unit of state-owned China Shipbuilding Industry, won an order this month to build seven ships that can carry 8,800 containers each. The buyer, a unit of state-run China International Marine Containers, agreed to pay 2 per cent of the total amount of US$595 million as a first instalment and the rest on delivery.
New orders for commercial vessels at Dalian Shipbuilding's parent, which also built the country's first aircraft carrier, surged more than fivefold in contract value in the first half, the company said in a statement last week on the website of the China Association of the National Shipbuilding Industry.
The ability to get financing had become one of the most critical issues for yards trying to win orders, said Bao Zhangjing, a deputy director of the China Shipbuilding Industry Economy Research Centre.
"The market is going to be more dominated by fewer players given the current situation," Bao said. "Those with competitiveness will have opportunities. State-owned companies and some local firms are doing relatively better."
Of the 1,591 shipyards in the country in 2011, 70 were state-owned, according to the latest available data from the shipbuilders group.
Rongsheng and other shipbuilders are struggling as a global vessel glut makes orders more difficult to win and pushes down prices.
A third of the shipyards in the country might be shut in about five years as they failed to win orders "for a very long period of time", the shipbuilders group said on July 4.
A clampdown on excessive short-term borrowing sent the mainland's overnight repurchase rate to a record 13.91 per cent last month, forcing at least 22 companies, including China Development Bank, a backer of the shipping industry, to cancel or delay bond sales.
Wang Jinlian, the secretary general of the shipbuilding group, said yards generally had tight liquidity, and low down payments worsened the situation.
Yards received down payments averaging 40 per cent in 2007, Wang said.
Buyers now pay about 5 to 10 per cent on average, he said, characterising 2 per cent as "abnormally" low.
Chinese yards had an order book of 218 million dwt in 2008, overtaking South Korea as the world's largest shipbuilding nation, according to Clarkson, the world's biggest shipbroker.
China’s State Council issued a three-year plan to upgrade and restructure its troubled shipbuilding industry through 2015, a further move to stabilize economic growth through reform, the official Xinhua News Agency reported.
The sector faces “unprecedented, severe challenges” as a lack of new orders, due to weakness in the global shipping market, has exacerbated overcapacity in the industry, Xinhua said today, citing a government document. At the same time, companies should be confident as “the potential in the domestic market remains relatively large.”
China, the world’s biggest shipbuilding nation, may see a third of its more than 1,600 yards shut down in about five years, according to Wang Jinlian, head of the industry association. The sector is among those including iron and steel, cement, electrolytic aluminum and flat glass that must accelerate the phasing out of overcapacity, according to a July 24 statement from the Ministry of Industry and Information Technology.
China Rongsheng Heavy Industries Group Holdings Ltd. (1101), the largest shipbuilder outside state control by order book, warned last month it made a net loss in the first half and said it was seeking financial support from the government and shareholders after a plunge in orders strained cash flow. The company said July 31 it agreed to issue convertible bonds to raise a net HK$1.38 billion ($178 million) for working capital and to support the development of its offshore engineering business.
The main focus of the State Council plan will be on accelerating innovation, strictly controlling new capacity, promoting high-end products and stabilizing the industry’s international market share with greater funding support, Xinhua said. Local authorities and agencies should formulate supporting policies and ensure the timely completion of targets, Xinhua said, without providing any specific goals or a timetable.
The new program is in line with a 2009 blueprint that focused on efforts to revitalize the shipbuilding industry for the three years through 2011, according to Xinhua. Under the government’s current five-year economic plan that runs through 2015, targets for the sector include upgrading shipbuilding standards and developing higher value-added products.
The combined profits of 80 major shipbuilders monitored by the Chinese Association of the National Shipbuilding Industry fell 54 percent in the first half of the year to 3.58 billion yuan ($584 million), the China Daily reported on July 24.
About 464 shipyards in China won 18.7 million deadweight tons of orders worth $14.3 billion last year, the lowest since 2004, according to Clarkson Plc (CKN), the world’s biggest shipbroker. That compares with contracts for 14.6 million tons worth $29.6 billion received by 88 yards in South Korea, the world’s second-biggest shipbuilding nation.