Amid the doldrums in the shipbuilding industry, Chinese yards are struggling to survive. Jinhai Heavy Industry (JHI), an affiliate shipyard of China's transport giant HNA Group, is eyeing a major transformation. The yard has been stung by many cancellations.
According to Li Weijian, president of JHI, the shipyard has been making efforts to optimise its assets through streamlining its businesses and enhancing its technical level.
JHI has spun off and integrated several departments of the shipyard in the areas of design, sales and production, to make them run as independent subsidiaries to increase operation efficiency.
"The move has made our operation network more clear," Li says.
"I think currently the major problem in the domestic shipbuilding industry is not overcapacity but lack of efficiency. It might not be obvious in the good times, but when the market got worse, the drawbacks in production have been enlarged by the capital leverage," Li says.
According to Li, JHI is transforming the shipyard from traditional heavy industry to a precision industry firm in terms of both production and technology in order to get more high-value added orders.
Currently JHI has on hand orders for 62 vessels, with high-value added vessel types – including mega containerships, VLCCs and offshore platforms – accounting for more than 90% of the orders.
The shipyard has also used some idle capacity to develop its ship repair business. JHI established a dedicated ship repair subsidiary in 2015 and is now looking to develop a ship repair base in Zhoushan.
"Zhoushan has all the conditions needed to become the world's largest ship repair base," Li said.
"In these challenging times, the shipbuilding industry needs a re-balance between supply and demand. We as a shipyard need to join the revolution in both production and technology, so we can recover fast when the next round of opportunities come," Li concludes.
Chinese shipyards' new orders are expected to plunge at least 58% year on year (YoY) from 60 million dwt in 2014 to 20-25 million dwt in 2015, according to China National Association of Shipbuilding Industry (CANSI).
The significant decline in new orders would be due to the persistent overcapacity and conflicts between supply and demand in the international shipping market, CANSI said in a report.
CANSI predicted that the orderbook at Chinese yards will also slide to 130 million dwt at the end of December 2015.
Also, for the first six months in 2015, the top 10 yards in China grabbed 75.4% of all new orders placed in China, up nearly 20 percentage points from the full year of 2014. The new orders slumped 72.6% YoY to 11.19 million dwt during the same period.
The new orders for sea-going vessels totalled 4.13 million compensated gross tonnage (cgt) during the same period, down 66.5% YoY from 2014.
The orderbook of the Chinese shipbuilders fell 9.2% YoY to 138.07 million dwt at the end of June. The orderbook of sea-going vessels totalled 43.30 million cgt at the end of the June, of which 95% were exports.
The plunge in new orders came after Chinese shipbuilders ended 2014 with a 14.2% YoY fall in awarded orders, as buyers cut back on spending on new ships since late 2014.
Also, the completed tonnage at the Chinese yards grew 6.3% YoY to 18.53 million dwt over the same period. Among the total completed tonnage, sea-going vessels amounted to 6.37 million cgt.
88 Chinese shipbuilding companies under the watch of China Association of The National Shipbuilding Industry (CANSI) recorded a profit of CNY2.06bn (US$330m) for the first five months of 2015, a rise of 17% year on year (YoY).
The shipyards registered a combined revenue of CNY102bn during the same period, up 4.4% YoY, while their total industrial output was up 5.5% YoY at CNY163bn.
New orders placed at Chinese yards slumped 76.8% YoY in the first quarter of 2015 because of the sluggish shipping and offshore market, while the yards' profit fell 87.8% YoY to CNY170m, data released by CANSI showed.
The profit drop continued in April and the yards' profit totalled CNY1.85bn during the January-April period, a drop of 18.9% YoY, although their revenue increased by 5.3% YoY to CNY87.6bn.
The major problem the shipbuilding sector is currently facing is the oversupply of shipping capacity in the market, decreasing the trade volume of newbuildings, as well as the low prices of newbuildings, a ship analyst said.
Beijing released the "Made in China 2025" plan in May to strengthen China's manufacturing capabilities, including ocean engineering equipment and high-technology ships, which is aimed at helping the shipbuilding industry, according to the analyst.
The Ministry of Industry and Information Technology also pointed out that the demand for new ships will change in the future. There will be less demand for regular ships such as bulk carriers, and more demand for high-technology ships and offshore facilities. Cost-effective and environment-friendly ships will also be favoured by the market, stated the ministry.
China's vessel exports rose 31.2% year on year (YoY) to US$10.4bn during the first four months of 2015, show Chinese customs statistics.
Exports are forecast to drop YoY later this year as new orders placed in Chinese shipyards have been decreasing since late 2014, according to China Association of the National Shipbuilding Industry (CANSI).
In April, exports fell 3.9% to US$2.1bn from March.
Bulk carriers, tankers, and container vessels combined, accounted for 53.5% of total exports in the first four months. However, exports of these ship types plummeted compared with the same period a year ago.
Exports of floating or semi-submersible drilling rigs and production platforms totalled US$930m, up 410.8% YoY, accounting for 9% of total vessel exports.
During the first four months, exports to Asia rose 52.6% YoY to US$6.6bn, accounting for 64% of total exports. Exports to Hong Kong, Singapore, and Myanmar also rose to US$2.5bn, US$2.2bn, and US$690m respectively.
Chinese shipyard Jiangsu Hongqiang Marine Heavy Industry Co., Ltd. (Hongqiang Heavy Industry) delivered a 15,000dwt bulk carrier to its ship owner on May 10, according to a domestic shipping news portal.
The bulker, classed by CCS, measures 149.80m in length overall, 22.30m in width moulded, and 10.5m in depth moulded, the report added.
Hongqiang Heavy Industry is an enterprise which focuses on offshore engineering and shipbuilding.
Chinese shipyards marked a sharp decline in newbuilding orders in the first quarter of this year, showed the latest data released by China Association of the National Shipbuilding Industry (CANSI).
The country's shipbuilders received newbuilding orders amounting to 5.99 million dwt, down 76.8 percent from a year earlier during the first three months.
The overall tonnage, however, hit 9.47 million dwt, an increase of 27.5% year-on-year. Out of the overall tonnage, some 8.54 million was intended for exports, according to CANSI's data.
The yards' newbuild orderbook stood at 144.93 million dwt by the end of March, down 2.5% when compared to the same period last year.
The country's 88 key shipbuilders posted a joint revenue of CNY64.67bn (around US$26.4bn) in the first quarter of 2015, an increase of 8.9%. The yards recorded a total profit of CNY170m, down 87.8 percent.
The figures are indicative of an ongoing restructuring process within the country as shipbuilders struggle to rationalize overcapacity.
There may be only 20 to 30 active shipyards left in China in the next few years after restructurings and consolidations, reported a domestic shipping news portal, citing Ren Yuanlin, executive chairman of the country's leading privately-run shipbuilder Yangzijiang Shipbuilding (Holdings) Ltd..
Ren said that China's relatively weak shipyards including state-owned ones will be merged by stronger ones in the future, which is determined by the market force and welcomed by the Chinese government.
Yangzijiang Shipbuilding will seek opportunities for mergers and acquisitions, Ren added.
Chinese shipyards are dominating the world’s shipbuilding industry with a market share of 41% and hand-held orders of about 156.20 million dwt, according to a domestic news report, citing Clarkson data.
An increasing number of Chinese shipbuilders are shifting their focus to the offshore engineering segment to alleviate the side effects from a drop in demands for traditional commercial vessels.
However, there are industry insiders expressing their concerns about Chinese yards’over-enthusiasm about the offshore engineering field, saying that with the falling of oil prices, demands in the sector will become diminished quickly, the report added.
China’s shipbuilders saw a surge in orders for new ships in the first half of the year, but this has not yet led to their improved profitability.
Shipbuilders received orders to build some 40.8 million deadweight tons (DWT) worth of new vessels in the first six months, up 78.2 percent compared to the same period last year, data from China Association of the National Shipbuilding Industry show.
However, midyear reports from five companies listed in Shanghai and Hong Kong showed they still faced declining profits.
China CSSC Holdings Ltd. received orders for 36 ships in the first half of 2014, up 11 percent, its midyear report shows, but its gross profit margin was 8.4 percent, down 3 percentage points.
China Shipbuilding Industry Co. Ltd. received orders for vessels worth 12 billion yuan, 157 percent more than for the same period last year, but its net profit was 1.339 billion yuan, down 20 percent.
The gross profit margin of Sainty Marine Corp. Ltd. was 9.8 percent in the first half, down 5 percentage points compared with a year earlier. The figure for Guangzhou Shipyard International Co. Ltd. was only 0.23 percent. It had net profits of 41.92 million yuan, a 42.4 percent decline.
China Rongsheng Heavy Industries Group Holdings Ltd. received orders for six ships in the first six months of the year, after receiving none in the same period last year. However, it suffered a loss of 3.061 billion yuan in the first half, 1.8 billion yuan more than it lost a year ago.
Shipbuilders have lowered prices to attract buyers, said Lu Jiandong, vice president of Zhejiang Zhenghe Shipbuilding Co. Ltd. Should they raise prices, they will not get so many orders.
A source from a private shipbuilder said companies were taking orders that would return little profit or even incur a loss just to keep operations going.
“Shipbuilding companies still face difficulties to get full payment for low-priced orders,” he said. “Buyers ask companies to complete a ship on time, otherwise buyers may not pay or only pay a little.”
Analyst Tan Naifen, from the shipbuilding association, said buyers made small down payments and builders had to raise funds themselves, which was difficult.
South Korea may have the reputation as the world’s largest manufacturer of offshore engineering equipment, but its earning ability is no longer as strong as it used to be.
Supported by accumulated technical know-how, lower production costs and the government’s strong desire to secure more offshore oil, Chinese shipbuilders are launching a strong challenge to their next-door rivals.
Zhang Guangqin, president of the China Association of the National Shipbuilding Industry, said even though offshore engineering equipment such as drilling platforms, wind power devices, maritime crane ships and dredgers are more expensive and complex to build, the burgeoning global demand for energy resources is expected to keep orders flowing.
Offshore engineering products are essentially functional vessels and oil drilling platforms that can operate in deep water.
Offshore gas and oil companies use these vessels to process the natural gas and crude pumped up from the ocean floor. In some cases, they are also used in the extraction process.
“While the global shipping industry is unlikely to see an upturn within a short period, demand for offshore energy vessels has surged in recent years,” Zhang said.
COSCO (Nantong) Shipyards Co, a unit of COSCO Shipyard Group Co Ltd, which is a subsidiary of China Ocean Shipping (Group) Co, is one of the Chinese shipbuilders that has shifted from its core business of shipbuilding and ship maintenance to offshore engineering products.
Shipbuilding and maintenance now account for just 5 percent of the annual sales at COSCO (Nantong) Shipyards.
In contrast, the company has invested more than 200 million yuan ($32.5 million) a year to attract foreign professionals and boost technological and innovative expertise in offshore engineering.
Ni Tao, managing director of COSCO (Nantong) Shipyards, said China will take over the crown from South Korea in the next five years with this dramatic change occurring faster than the global leader expected.
“As China and many nations’ energy future will depend on deep water oil and gas, this industry won’t face a slowdown in the next several decades. Deep water fields yet to be discovered and developed are expected to be the main sources of conventional energy,” Ni said.
International Maritime Associates Inc, a Washington DC-based consultancy that specializes in strategic planning for companies in the offshore industry, estimated the world’s ocean oil reserves are between 140 billion and 200 billion metric tons. About 109 offshore oil and gas projects are being planned at an investment of $189 billion in the next five years.
COSCO (Nantong) Shipyards will deliver eight offshore engineering products, including wind turbine installation vessels, jack-up and floating oil drilling platforms to Norway, Britain, the Netherlands and Denmark this year.
The company’s sales revenue reached 8 billion yuan in 2013, increasing 25 percent from a year earlier.
To further diversify its business scale, Ni said the company will cooperate with the China Export and Credit Insurance Corp to build a semi-submersible oil drilling platform for hire at a daily rental fee of $500,000. Certain energy companies are still having trouble gaining the funding to own such a vessel outright.
China’s offshore engineering products amounted to $18 billion in 2013, up 16 percent year-on-year and accounting for 29.5 percent of the global market, according to data from the Ministry of Industry and Information Technology.
With Singapore’s global market share dropping to 23 percent last year, it was the first time China surpassed its Southeast Asian competitor. South Korea was still on top with 42 percent of the global market.
According to CANSI, more than 55 Chinese shipyards have begun to produce different types of maritime engineering vessels or equipment, from low-end offshore support vessels to $600 million oil rigs for both domestic and international buyers, including China National Offshore Oil Corp, China Huaneng Group, Exxon Mobil Corp and Royal Dutch Shell Plc.
Sinopacific Offshore and Engineering Co, another Qidong-based maritime product manufacturer, secured two orders in the past three months to build liquefied ethylene gas carriers for two Norwegian companies—Ocean Yield ASA and Odfjell Gas Shipowning AS. Three of the ships have a capacity of 36,000 cubic meters and four have a capacity of 22,000 cu m. They are scheduled for delivery between 2016 and 2017, respectively.
Sinopacific also signed a subcontract with South Korea’s Hyundai Heavy Industries Co earlier this year to manufacture modules for the Moho Nord field project developed by Total SA, a French oil and gas company, in the Republic of Congo.
Liang Xiaolei, chairman of Sinopacific, said as China has abundant offshore oil reserves, the orders from the domestic market will rise and Chinese energy companies will be more inclined to place orders from domestic players as their product price, maintenance costs and other after-sales services are all cheaper than South Korean and other foreign companies.
Chinese shipyards ask 12 percent of the total cost to secure an order for jack-up oil rigs or large-scale crane vessels. The best South Korea and Singapore can offer is between 30 and 35 percent. Chinese companies also offer a better price between 25 and 30 percent cheaper than both of these rivals.
“Though many global oil companies still favor South Korea or Singapore, the biggest challenge is that they don’t have enough coastal land, manufacturing facilities and workers, as well as working schedules for new orders to hold back China’s expansion,” said Liang.
In comparison with South Korea and Singapore’s land constrained manufacturing facilities, their earliest available working schedules are in 2017. However, large Chinese shipyards can pick up work as early as 2015.
Dong Liwan, a professor at Shanghai Maritime University, said South Korean companies will have a hard time competing with Chinese shipyards.
“Apparently, Chinese shipyards are not focusing on short-term profit,” he said. “They are seeking to shift the market to China because most of the companies are State-owned enterprises and have flexible access to commercial and policy banks for loan.”