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.
“New orders are now like poison for shipyards - the more you take, the sooner you die” Peng Changqing, leader of Nantong COSCO KHI Ship Engineering Co., Ltd. (NACKS) said.
According to Jiangsu Economic and Information Technology Commission (JSEIC), if no more new orders feed the shipyards under current capacity, most small and medium shipyards are likely to shut down. JSEIC made such “warning” analysis according to the H1 statistics of Jiangsu shpbuilding industry.
In the first six months, Jiangsu shipyards’s newbuilding output volume and order backlog fell by 32.9% and 17.5% separately while new orders increased by 189.7%. However, the new order spree does not mean overall bull market for all shipyards. Of the listed 66 shipyards, only 23 builder secured new orders. Two out of the 13 key shipyards wins “zero order” in the period.
Short-handed new orders, global shipping recession, low ship price, growing “picky” owners and lasting weak financing support have driven more and more shipyards to the edge of the cliff.
According to Peng, “only 100 out of the 3000 shipyards can survive in the battle and most of them are face lack of capital currently .”
The “price war” for the rare new orders makes more shipbuilding enterprises confront losses.
The Ministry of Finance plans to implement new policies to improve the competitiveness of several industries including shipbuilding, machinery and textiles.
The policy will support shipbuilding companies by increasing ship export tax rebates, which will reduce costs for companies and help accelerate the transformation of the industry, the ministry said.
In the first half of 2013, China received new shipbuilding orders of 22.9m dwt, a year-on-year growth of 113.2%, and completed ship exports of 17.28m dwt, down 34.4% year-on-year.
Banks have tightened lending to Chinese shipyards, putting more pressure on an industry that is already suffering from sluggish demand and a supply glut, as Beijing tries to cut excess capacity across a range of sectors.
The financing squeeze is set to hit less established yards, but could strengthen bigger players such as Yangzijiang Shipbuilding Holdings (YAZG.SI) and South Korean rivals.
Some banks have started asking for more prudent ship construction contracts before they grant loans and have withdrawn loan approval rights given previously to branches, industry and banking sources told Reuters.
They are asking the yards to get clients to put upfront payments of at least 15 percent now in order to get loans, said an executive at a large Chinese shipyard, who did not want to be identified as he was not authorized to speak to the media. Some yards had offered generous terms to shippers, requiring payments upfront of as low as 1 percent.
In some cases the banks are also cutting credit lines and moving to recover outstanding loans, said the China Association of the National Shipbuilding Industry.
"As the shipbuilding market remains depressed, banks and other financial institutions have listed shipbuilding as a key industry for credit control," the association said in a comment on its website posted on July 18. (www.cansi.org.cn)
An executive at a private shipyard in eastern China said banks had demanded yards charge as much as 30 percent in upfront payments from their clients. State-owned shipbuilders, though, could get easier credit terms, the executive added.
The bank measures come as China's cabinet said this month it would cut off credit to force consolidation in industries plagued with overcapacity. This was shortly after China Rongsheng Heavy Industries Group (1101.HK), the country's largest private shipbuilder, fell into financial turmoil.
Beijing did not specify then the industries it had in mind, though in 2009 it named nine, including shipbuilding. Industry sources said neither the banking regulator nor any central government agency had issued new rules on tightening lending to shipyards or other industries.
China rivals South Korea as the world's top shipbuilder, though the ships built in China are mostly of lower value and less complex technologically. This has forced Chinese yards to compete on price and financing terms for orders that have slowed to a trickle since the global financial crisis.
At the end of May, the orderbook of Chinese yards stood at $68.5 billion, second to South Korea's $102.5 billion, even though China's orderbook in tonnage terms exceeded South Korea's, data from Clarkson Research Services Limited showed.
"The goal is to gradually cut down the credit but not to kill all of them at one go," said a banking source, who did not want to be named due to the sensitivity of the matter. "As the economy is not doing well, banks aren't willing to lend as much anyway."
The size of outstanding loans at shipyards is unclear, but many banks are involved in handing out these loans, including top commercial banks such as Industrial and Commercial Bank of China (ICBC) (601398.SS), China Construction Bank (601939.SS), Agricultural Bank of China (601288.SS), Bank of China Ltd (601988.SS) and Bank of Communications (601328.SS).
ICBC declined to comment on lending to shipyards when contacted by Reuters. Other banks could not be reached immediately.
DELAYED PAYMENTS TO STAFF, SUPPLIERS
Total profit from the 1,647 Chinese shipyards whose core business revenue exceeded 20 million yuan slumped 29.1 percent on the year to 28.8 billion yuan ($4.69 billion) in the first 11 months of 2012, according to industry association data.
"Affected by banks' restriction on loans, shipyards are facing tight working capital and difficulty in purchasing raw materials and equipment, which results in increasing phenomenon of delayed payment to suppliers and staff," the association said.
But the Export-Import Bank of China, a policy bank and an active player in shipping finance, said it had not changed its criteria for funding ship construction recently.
"We will continue to support qualified clients," said Chen Bin, deputy general manager of the bank's transport finance department.
Ex-Im Bank had about $13 billion in outstanding shipping loans in May, up 30 percent from the end of 2011, Chen said earlier this year.
Despite China Rongsheng's troubles, large and financially sound yards in China, as well as yards with a good track record outside China, are expected to benefit, analysts said.
"It depends on the conditions at your shipyard. Well-run companies don't have any problem," said Ren Yuanlin, chairman of Yangzijiang Shipbuilding, when asked if the company has facing tightening credit.
Singapore-listed Yangzijiang has won new orders worth $1 billion so far this year.
China Association of National Shipbuilding Industry ( CANSI) predicts global newbuilding demand in 2013 will be more than 80m dwt. The three major types of ship will account for around 70% of total trading volume, LNG and LPG ship accounting for 10%, luxury yacht, offshore equipment and other special ships account for the remaining 20%.
With the appreciation of yuan, and the depreciation of Japanese yen and Korean won, the price advantage of Chinese shipyards is likely to losen gradually, which will bring vigorous competition to Chinese shipbuilders, the association said in a report.
During the 2007 shipping boom, China’s shipyards charged down payments of as much as 60 percent of a vessel’s value. Now, shipbuilders are cutting those payments to as little as 2 percent, giving an advantage to state-owned companies that can tap the government’s cash.
With flagging demand pushing shipyards to compete by cutting down payments and China taking measures to rein in lending, the nation’s privately owned yards are getting squeezed by state-owned rivals that enjoy greater access to financing. China Rongsheng Heavy Industries Group Holdings Ltd. (1101), the largest shipbuilder outside state control by order book, said this month it’s seeking government support after failing to win any new vessel orders 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 Holdings Ltd. (UOBK) “Only state-owned yards that are able to secure funding can offer such aggressive down-payment terms.”
State-backed companies grabbed 74 percent of new vessel orders in China, the world’s biggest shipbuilding nation, in the first half of this year, according to data compiled by UOB-Kay Hian. That compares with 52 percent in all of 2012.
Dalian Shipbuilding Industry Co., a unit of state-owned China Shipbuilding Industry Corp., 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 (Group) Co., agreed to pay 2 percent of the total amount of $595 million as a first installment and the rest upon delivery.
New orders for commercial vessels at Dalian’s parent, which also built the nation’s first aircraft carrier, surged more than fivefold in the first half in terms of contract value, the company said in a statement posted last week on the website of China Association of the National Shipbuilding Industry.
China Shipbuilding Industry and China State Shipbuilding Corp., the two biggest yards owned by the government, didn’t reply to e-mailed and faxed questions from Bloomberg News.
The ability to get financing has become one of the most critical issues for yards to win orders, said Bao Zhangjing, deputy director of the China Shipbuilding Industry Economy Research Center.
“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 about 1,591 shipyards in China in 2011, 70 were state-owned, according to the latest available data from the shipbuilders group.
Rongsheng and other shipmakers are struggling as a global vessel glut makes orders more difficult to win and pushes down prices. A third of the shipyards in China, the world’s biggest shipbuilding nation, may be shut in about five years as they failed to win orders “for a very long period of time,” the shipbuilders group said July 4.
A clampdown on excessive short-term borrowing sent China’s overnight repurchase rate to a record 13.91 percent last month, forcing at least 22 companies including China Development Bank Corp., a backer of the shipping industry, to cancel or delay bond sales. Premier Li Keqiang said this month that China will seek to keep economic growth above an unspecified lower limit without indicating any immediate plans to boost credit even as the pace of expansion slows, while the State Council pledged to maintain its “prudent” monetary-policy stance.
Shipyards generally have tight liquidity, and low down payments have worsened the situation, said Wang Jinlian, secretary general of the shipbuilding group. Yards received down payments averaging 40 percent in 2007, with 60 percent being the high mark, Wang said.
Buyers now pay about 5 percent to 10 percent on average, he said, characterizing 2 percent as “abnormally” low.
“We urge financial institutions to help key enterprises like Rongsheng,” Wang said.
Rongsheng has plunged 28 percent in Hong Kong trading since saying it was seeking government support on July 5. Trading of the shares was suspended July 4 after the Wall Street Journal said the company recently eliminated about 8,000 jobs. The shipyard, which has forecast a loss in the first half, said it’s restructuring its workforce and is in talks with financial institutions about renewing credit facilities.
Rongsheng’s down-payment requirements are “competitive” in the market, the company said in an e-mailed statement to Bloomberg News, declining to disclose the terms. While it hasn’t landed any new ship orders this year, it secured contracts to build offshore equipment, the company said.
Rongsheng shares rose 1.3 percent to 76 Hong Kong cents at close of trading. The city’s benchmark Hang Seng Index gained 0.3 percent.
Yangzijiang, Hyundai Heavy
Some private shipyards in China continue to win contracts. Yangzijiang Shipbuilding Holdings Ltd. (YZJ), the nation’s second-biggest private yard, said in a July 4 statement it has won $1.01 billion of shipbuilding orders in the first half.
Demand is picking up for South Korean yards as well, said Park Moo Hyun, an analyst at E*Trade Securities Korea in Seoul. Hyundai Heavy Industries Co., the world’s biggest shipbuilder, said this month it plans to raise prices in the second half.
“The big Korean shipyards have already achieved more than 60 percent of their order targets for this year,” Park said. “This is enabling them to get better payment terms.”
Global ship orders surged from about 2007 because of speculation fueled by China’s demand for raw materials. The government also provided low-cost financing for new vessels to help support shipyards, leading to a global increase in orders.
‘Sake of Workers’
Chinese yards had an order book of 218 million deadweight tons in 2008, overtaking South Korea as the world’s largest shipbuilding nation, according to Clarkson Plc, the world’s biggest shipbroker. China held an order book of 109 million deadweight tons at the end of June, 13.4 percent lower than a year earlier, according to the Ministry of Industry and Information Technology.
Lianyungang Wuzhou Shipbuilding Heavy Industry Co., based in eastern China’s Jiangsu province, has reduced the number of workers by half from last year to about 1,000, Chairman Ye Yunzhu said. The privately held yard is maintaining production by accepting orders to build vessels with a price tag of about 10 million yuan ($1.6 million), he said in a phone interview. It used to build vessels priced at more than 100 million yuan.
“We are only maintaining basic production for the sake of workers,” Ye said. “We can’t make money at the moment, therefore our focus is to avoid losing money.”
A flood of orders for new vessels and slower Chinese growth in demand for commodities could derail a recovery in dry bulk shipping, industry leaders warn, keeping freight rates low and threatening a further shake-out among shipping firms.
As dry cargo shipping rates recover from 14-year lows touched in March, shipowners have splurged on a raft of new orders, taking advantage of cheaper prices, more fuel efficient designs and money from private equity funds looking for a new home.
The rise in capacity comes at a time of slowing economic growth in China, which has raised fears that its vast appetite for imported raw materials such as iron ore and coal may start to wane.
"The ordering wave is indeed worrying," said Henning Oldendorff, chairman of Oldendorff Carriers, one of the world's largest dry cargo operators with about 400 owned and chartered ships.
"If it coincides with a China slowdown and possible recession in the global steel industry, then freight rates could potentially stay low for many years to come," Oldendorff told Reuters.
He estimated some 35 million dwt (deadweight tonnes) of new capacity was ordered during the first half of 2013, well above the 22 million dwt ordered during the whole 2012.
More than 50 per cent of recently ordered tonnage was contracted at just a handful of Chinese shipyards, figures from Norwegian shipbroker Fearnleys showed.
The moves come as average spot charter rates for large Capesize ships, capable of hauling more than 150,000 tonnes of iron ore or coal, have risen from the March lows to better than break-even at around $13,000 per day, according to Clarkson Research Services.
The operating cost of a Capesize vessel is around $7,000 a day, with the shipping company paying finance costs on top of that.
The current rate is double the average for the year and despite jitters over China's growth outlook has been driven by China's strong steel sector, where steel output climbed 8 percent in the five months to May, according to official data.
But consultants Drewry Maritime Services believes the dry bulk shipping recovery may be shortlived and could replicate the rollercoaster ride in freight rates after 2009.
Capesize charter rates rocketed to more than $80,000 per day in mid-2009, fuelled by stronger-than forecast demand from China, compared with $10,000 per day at the start of the year.
But an influx of new tonnage, which outpaced the actual growth in cargo volumes, saw average rates plummet over the following three years to fall below operating costs.
Rates hit just $1,700 per day in late March this year, the lowest in 14 years, according to Clarkson data, sparking a series of shipping company failures including STX Pan Ocean, South Korea's fourth largest ship operator, which is undergoing a court-approved restructuring.
For the dry bulk sector now, "the risks outweigh the upside potential", said Drewry group managing director Arjun Batra.
The over-ordering of bulk carriers and a commodities growth slowdown could delay a recovery in rates from next year to 2016, he said.
Oldendorff said a replay of the last four years could have more severe consequences because the current recovery would be shortlived, leaving less time for shipowners to rebuild cash reserves.
"There will be more failures in the next few years in the bulker field," he warned.
But fears of a downturn in Chinese commodities growth may have been overdone, said Jeffrey Landsberg, president of Commodore Research & Consultancy, a New York-based commodities advisory group.
"Chinese demand for imported dry bulk commodities will remain strong over the long term," Landsberg told Reuters.
The biggest threat - and the key factor to watch - will be vessel oversupply, Landsberg said, especially if new vessel ordering remains as strong as it was during the first six months of this year.
Singapore's Keppel Corp Ltd and Sembcorp Marine Ltd, the world's top offshore rig-makers, stand to be among the winners from Beijing's moves to tighten credit amid a downturn at China's shipyards.
The two companies have been under mounting pressure from Chinese yards offering generous payment terms, price discounts and help with financing.
That may be changing after Beijing pledged to cut credit to industries plagued with overcapacity, and China Rongsheng Heavy Industries Group, the country's largest private shipbuilder, fell into financial trouble.
"Something like this will absolutely make everyone double-check and say, 'Am I really sure I want to order from anywhere but the best yard?'" said Jon Windham, Barclays head of Asia industrials equity research.
Keppel reports quarterly results on Thursday, while Sembcorp Marine reports on Aug. 1.
A number of Chinese shipyards have tried their hand at offshore equipment manufacturing as their traditional shipbuilding businesses have slowed, and are on their way to win more orders for jackup rigs than Singapore's yards for a second year in a row. Rongsheng mainly builds dry bulk carriers and only set up its offshore rig arm in 2012.
Rongsheng could now become the biggest casualty of a local shipbuilding industry suffering from overcapacity and shrinking orders amid a global shipping downturn. New ship orders for Chinese builders fell by about half last year.
Within hours of Rongsheng's appeal for help from the Chinese government, Beijing this month vowed to harness its financial sector to help bring about an orderly closure of some factories in industries plagued by overcapacity.
The crunch at Chinese shipyards will strengthen the negotiating positions of Keppel Corp and Sembcorp Marine with customers who quote Chinese yards' terms to negotiate for better prices.
"The troubles in China's shipbuilding industry won't necessarily translate into higher margins or more order wins for Singapore's two yards since they have always been selective with the contracts they bid for," said Kristy Fong, investment manager at Aberdeen Asset Management Asia Ltd.
"But they will lead to fewer speculative orders and better quality orders for the industry in general," said Fong, whose company is Keppel's second-largest shareholder with a 5.36 percent stake, after Temasek Holdings Pte. Ltd.
Keppel delivered five rigs in the first quarter of the year, and seven in the second quarter, out of a record number of 20 rigs it plans to deliver for 2013. Nine of the rigs were delivered ahead of schedule, company data showed.
The quickened pace in rig delivery is expected to bring higher margins, analysts said. In the last quarter the company's operating margin stood at 14.4 percent, down from 18.8 percent in 2012.
On the global orderbook for mobile drilling units, which include jackups, semi-submersibles, drillships, drilling barges and tenders, China led with a total of 56 units on order, followed by South Korea's 55 and Singapore's 42 as of early June, data from Clarkson Research Services showed.
The Chinese government is seen to announce new and stronger support measures for shipbuilding industry soon.
The Economic Information of China reported on July 3 that a ‘Three-Year Plan to Strengthen China’s Shipbuilding Industry’ is in the final stage of mediation, jointly provided by the three Chinese government agencies, the National Development and Reform Commission, the Ministry of Finance and the Ministry of Industry and Information Technology.
The Chinese government has prepared new support measures, requested by the China Association of the National Shipbuilding Industry (CANSI) and etc. from last year however the body postponed an official announcement facing a criticism that it supports insolvent state-owned companies.
The core of the measures this time is that the government would encourage replacing old vessels aged more than 15 years and offer 20% of subsidy out of the national treasury for the vessels built at domestic yards.
Chinese shipbuilders are giving a welcome to the government’s such move, expecting it would help ease struggling yards’ financial crunch.
Some say, however, restructuring caused by the natural market force might be interrupted due to the governmental supports, which could have a negative impact on the whole industry.
China may see a third of its shipyards shut down in three to five years, an industry group said, Bloomberg reported.
The yards in peril of closure have failed to get any orders “for a very long period of time,” Wang Jinlian, secretary general of the China Association of National Shipbuilding Industry, said in an interview with Bloomberg last week.
They may end operations in three to five years if the “gloomy market persists.”
“Currently financial institutions themselves may have tight liquidity, so they are reluctant to lend money to companies in this sector,” Wang said.