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.
Restructuring of Chinese shipbuilding industry might be a good news to Korean shipbuilders.
Jung Woo-Chang, analyst from Mirae Asset Securities of Korea said that Chinese financial institutions required compatriot shipbuilders to increase down payment by reforming Heavy-tail payment term. The analyst explained, “This is part of measures released by the Chinese government in order to proceed with restructuring and M&A for industries struggling due to overcapacity in facility.”
Recently, Chinese banks have been asking domestic shipbuilders to develop the ratio of down payment from the current 1-5% to 15-30%, which is 10-15% higher than industrial average. Jung prospected, “This measure of Chinese financial industry seems to be positive to Korean shipbuilding industry with an expectation that Korean shipbuilders might see improvement in financial structure amid easing overall competition in commercial vessel market and Koreans keeping expanding their down payment ratio from the current 10-20%.”
In addition, the analyst said that recently Clarkson's newbuilding price index recorded 128 point, keeping the uptrend seen in the first week of July and added, “Newbuilding price recovery is seen to continue throughout the second half of this year as Korean shipbuilders turn to carrying out a selective newbuilding contracting activity in line with orderbook recovery.”
Moreover, new order momentum in commercial ship market is also expected to persist in the second half. As the uncertainty of macro economy, such as Eurozone and etc., is somewhat easing, overcapacity situation seen in commercial ship market is likely to gradually improve from the second half, with new order momentum staying still, the analyst forecasted.
In the first half of 2013, global shipping and shipbuilding market had continued depression despite recovery of newbuilding orders. China’s shipbuilding and allied industries saw both leading shipbuilding indexes and economy indicator go downwards and shipbuilders came to confront crisis under difficulties in construction, delivery, new order, financing and profit making. Needless to say, international competition got fiercer.
According to the latest report from the China Association of the National Shipbuilding Industry (CANSI), under this circumstance, China’s new government is aggressively providing lots of support and this aid is seen to be playing a critical role in the growth of Chinese shipbuilding and allied industries, corporates’ restructuring, business upgrade and so on.
Together with a recovery trend of newbuilding market seen in the first half of this year, Chinese shipbuilding industry also showed relatively good performance. Several leading builders turned out to have found a breakthrough of recession in sectors like LNG carrier, large containership and energy-saving, eco-friendly vessel through pushing forward with changes in business structure.
In addition, offshore market was continuously welcomed during the same period and China is said to have succeeded in improving its market share through putting efforts into enhancing competitiveness in offshore facility sector.
According to tentative data of CANSI, China gained orders for 24 units of drilling platform worth around $5.5bn in total in the first half of the year, which accounts for 54.2% and 41.2%, each in terms of number and value.
Under crisis situations, Chinese shipbuilders tried to reduce risk factors by turning their eyes to non-shipbuilding sectors and several leading large companies conducted M&A aggressively.
However, despite these efforts, the new order increase is not contributing to market recovery and Chinese shipbuilding industry is still having shocking problems, such as deteriorated situation that companies are confronting due to a rise in ship construction cost, financial crisis followed by financial institutions’ credit contraction policy in their shipbuilding sector, depreciation of yen and won with appreciation of yuan and so on.
The margin of newbuilding price is still difficult to improve on the grounds that securing liquidity is very tough due to heavy-tail payment, debt crisis and etc. and China is at a disadvantage in newbuilding competition because of unfavorable currency situation.
Other than these problems, restructuring issue, lacking technology skills and etc. are emerging as Chinese shipbuilding industry’s existing problems, according to CANSI.
The Chinese Association of the National Shipbuilding Industry reported sinking profits in the first half of this year.
Profits of 80 major shipbuilders monitored by the association totaled 3.58 billion yuan ($580 million), a 54 percent drop from the same period a year earlier.
A total of 20.6 million deadweight tons (DWT) of new vessels have been completed for both domestic and international shipowners in the first half. This represents a 36 percent decrease from the previous year.
However, shipyards received new orders of 22.9 million DWT, a 113 percent growth from the first half of 2012.
The nation's shipbuilding capacity accounted for 39.1 percent of the global industry, according to Clarkson Research Studies, British analysts of the shipping industry.
New orders accounted for 44.2 percent, and existing orders for 43.1 percent, of the industry worldwide.
Due to falling demand, many foreign shipowners are also delaying delivery and payment dates on new ship orders. Chinese shipyards are also confronting the problems of limited cash flow, lower freight rates and tight liquidity.
Amid recession in global shipbuilding industry in the first half of 2013, Chinese shipbuilding industry made an achievement of a new order surge by more than 110%.
According to a report of the China Association of the National Shipbuilding Industry (CANSI), Chinese yards delivered a total of 20.60m dwt vessels in the first half of the year with a year-on-year decline of 36%, while inking new contracts for 22.90m dwt, which represents a 113.2% surge.
As of the end of June, Chinese shipbuilding industry was standing on 108.98m dwt amount of orderbook, down by 13.4%, but up by 1.9% from the end of 2012.
According to Clarkson survey, Chinese yards’ delivery, order intake and orderbook account for 39.1%, 44.2% and 43.1%, respectively, in the global market.
In the year to June, Chinese yards delivered 17.28m dwt ships for export, decreased by 34.4% from the same period a year ago, however orders for exporting ship increased by 163.3% to 21.04m dwt in total, according to CANSI.
As of the end of June, ships for export were seen to stand on 95.14m dwt amount of orderbook, down by 11.3% from a year ago.
Ships for export account for 83.9%, 91.9% and 87.3% of delivery, order intake and orderbook of Chinese shipbuilding industry, respectively.
During the period from January to June, 2013, the complete industrial gross production value of the China’s 80 shipbuilding and its related companies was CNY 171.9bn (around above $28bn) decreased by 16.6% from a year ago.
According to a report of the China Association of the National Shipbuilding Industry (CANSI), shipbuilding sector dropped by 31.2% to CNY 88bn while ship equipment showed a 27.3% drop to CNY 12bn and ship repair also declined by 8.5% to CNY 5.46bn.
During the same period, the complete export trading value of the 80 companies came to CNY 78.4bn with a 24.7% decline comparing with the same time period a year ago, of which, shipbuilding decreased by 26.5% to CNY 71.1bn while ship equipment showed a 20.7% decrease to CNY 2.32bn and ship repair also declined by 20.9% to CNY 3.4bn.
In the year to June, the operating revenue of those 80 companies was CNY 120.3bn with a year-on-year decline of 18.5% while total profit was recorded to be CNY 3.58bn, also showing a 53.6% decrease in comparison to the same time period of last year.
China’s newbuilding order intakes in June, 2013, recorded 92 vessels, declined by 26.98% comparing with the previous month in numerical terms.
According to data from China Water Transport, Chinese shipbuilding industry won newbuilding contracts for a total of 31 bulkers during last month and they are; nine very large ore carriers (VLOC), one capesize, two panamaxes, 25 handymaxes, three handysizes and etc., with agreements contracted for four product carriers and two panamax containerships.
Along with this, China gained orders for other type of vessels, which can break down as; one liquefied natural gas carrier, six woodchip carriers, two PCTCs, three fishing boats, four heavylift carriers, three drilling barges, two drilling rigs, two drilling platforms and other 32 vessels.
Meanwhile, newbuilding prices started to show an upward turn in June.
China Water Transport said that the average newbuilding prices of VLCC, suezmax, aframax tanker and MR PC were, respectively, $85.03m, $53.01m, $44.77m and $31.83m in June and those of VLCC and aframax tanker grew by 0.45% and 0.27%, each, with the rest of others staying still. In June, the average newbuilding prices of capesize, panamax, handymax, handysize bulker came to $45.13m $24.51m, $23.56m and $20.24m, each, increasing by 0.42%, 0%, 0.73% and 1.14% from the previous month.
Amid global newbuilding orders going upwards, Chinese shipbuilding is suggested that it is early to expect market recovery despite increases in order intakes.
Recently, China’s National Business Daily pointed out that although newbuilding contracts have increased year to date somewhat more than last year’s, ship values keep staying at a historic low that yards are still under pressure because the ratio of advance payment made by owners declined by 20-30%. Apart from “Bankruptcy Boom” of small and medium sized yards, several large builders are also confronting financial problems, the news reported.
Zhang Guangqin, Chairman of the China Association of the National Shipbuilding Industry (CANSI) said through an interview on June 18 that the new order increase does not always mean a market improvement. The current state of offshore sector is relatively favorable but demand high technical skills, while newbuillding prices are too low.
As shipbuilders face with decreasing contracts in traditional business with declining profits, transforming a business into offshore area is regarded as an essential, however, Zhang said that builders need to take it slow rather than signing deals blindedly considering low prices of recent offshore platforms.
An analyst in Chinese Investment industry said, “Offshore is believed to be a yardstick of economic development from now on. The area is excessively booming now with advances of not a few shipbuilders however the offshore area requires high technical skills which hinder entrances of most companies. Even a company successfully enters into the area, a new problem is likely to appear, how to be more competitive.”
A professional in Chinese industry said that offshore sector has a high entry barrier of technology. He pointed out that Chinese builders are usually winning and building offshore supply vessels, particularly jack-up rigs, but this is a different issue from deep-sea drilling platforms which require more complicated construction processes.
In the year to May, the industrial gross production value, economic effect and total ship export of China’s 80 shipbuilding and its related companies which are subject to be monitored were seen to go downwards and production management condition also got worse.
According to a recent report of the China Association of the National Shipbuilding Industry (CANSI), vessel delivery made by those 39 companies amounted to a combined 14.64m dwt, down by 26.7% comparing with the same time period a year ago. Newbuilding order intakes increased by 62.2% to 12.78m dwt while their orderbooks by the end of May declined by 20.9% to 95.38m dwt.
As for export ship, 39 major shipbuilders delivered a total of 12.06m dwt in the first five months, showing a 27.8% decline from a year ago. Also, the order intakes of ships for export totaled 11.45m dwt, increasing sharply by 103% while orderbook declined by 22.1% to 80.21m dwt.
Meanwhile, the complete industrial gross production value of the China’s 80 shipbuilding and its related companies was CNY 135.7bn (around above $22bn) decreasing by 17.5% from a year ago, of which shipbuilding sector dropped by 31.6% to CNY 69.6bn while ship equipment showed a 31.5% drop to CNY 9.49bn and ship repair also declined by 9.2% to CNY 4.84bn.
During the same period, the complete export trading value of the 80 companies came to CNY 64.4bn with a 24.4% decline comparing with the same time period a year ago, of which, shipbuilding had 25.4% decreased to CNY 59bn while ship equipment showed a 35% decrease to CNY 2.16bn and ship repair also declined by 19.8% to CNY 2.84bn.
In the year to May, the operating revenue of those 80 companies was CNY 84.1bn with a year-on-year decline of 22.4% while total profit was recorded to be CNY 2.47bn, also showing a 59.3% decrease in comparison to the same time period of last year.