South Korean shipyards have been grabbing orders by virtue of low prices since last year. In this context, Chinese peers have been losing their long-time price advantage, dragged by the weight of their empty vessels.
Generally speaking, the difference in lightweight between the two countries ranges from 5 percent to 10 percent. If the total lightweight reduces by 5 percent, Chinese shipyards can cut back on the costs of materials and processing by as high as CNY5 billion annually, according to an analysis. It is worth noting that they recorded less than CNY5 billion in operating profit last year.
Why Chinese shipyards cannot reduce the lightship weight? To answer this question, we need to see the practices of their South Korean counterparts first. The latters constantly optimize a ship's structure, which has become a routine of their designers. For example, Daewoo Shipbuilding & Marine Engineering, one of Korea's top three yards, set a goal in 2004 of a 10 percent reduction in VLCC's structural weight and a 20 percent decrease in the number of structural parts. What's more, at the end of 2016, the shipbuilding giant made a further improvement, and a VLCC's lightweight dropped by a further 2 percent.
The two major reasons of the failure of Chinese shipyards to realize a better lightweight are as follows. Firstly, the design capability is basically in the hands of design institutes which lacks the full knowledge of shipbuilders' production characteristics. Secondly, shipyards have not enough experience in structural optimization. Therefore, it is advisable for them to collaborate with their overseas peers to improve the capabilities amid climbing prices of raw materials.
Chinese shipbuilders have beaten their Korean counterparts this year having snapped up the biggest share of orders, totaling in 290 vessels, data from VesselsValue shows.
The country’s orderbook has hit USD 10.2 billion mark.
South Korean builders are lagging behind considerably behind their Chinese competitors having collected orders for 170 ships. However, the ships ordered at Korean yards have attracted an investment of USD 11.8 billion, due to the fact that the Big Three builders- DSME, HHI, and SHI- specialize in constructing more technologically advanced ships.
Korean shipbuilders have held the top spot on the global shipbuilding scene for years, in particular during the 2011-2015 period.
Attractive pricing has been one of the key strategic advantages employed by the Chinese shipbuilders, who have also made strides in acquiring the required know-how for the construction of ultra-large containerships.
A testament to this is CMA CGM’s decision to order nine 22,000 TEU giants at China’s Hudong-Zhonghua Shipbuilding and Shanghai Waigaoqiao Shipbuilding (SWS), which raised many eyebrows in the market, including that of the Korean yards.
What is more, these will be the largest containerships to be powered by liquefied natural gas, a major technological undertaking for Chinese shipbuilders as well.
Japan has secured the third place in the ranking, having received newbuildings orders for 97 ships, worth USD 2.6 billion.
The Philippine and Vietnamese shipbuilders are ranked as the fourth and fifth shipbuilding nations respectively based on their newbuilding tally for this year.
Owners have placed orders for a total of 27 ships with Philippine shipyards, while their Vietnamese counterparts won orders for 13 ships, totaling in USD 370 million, according to VesselsValue.
China received the largest number of shipbuilding deals during the first three quarters of 2017.
Data from UK consulting film Clarksons shows that Chinese shipyards agreed contracts totalling 5.09m Compensated Gross Tonnage (CGT) between January and September.
South Korea's 4.05m CGT placed it in second place, with Japan (1.47m CGT) a distant third. The combined global total during the first three quarters soared to 15.93m CGT, compared to 9.79m CGT in 2016.
In August, the China State Shipbuilding Corporation signed a US$1.44bn deal with French containership giant CMA CGM to build six of the world's largest container ships (22,000 Twenty-foot Equivalent Units).
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.