Chinese shipyards are offering to sell vessels at discounts of more than 20 percent as builders look to protect market share from higher quality Asian rivals and stay afloat amid a wave of consolidation, industry sources said.
Rock bottom freight rates, slowing economic growth and an oversupply of ships have forced maritime firms to cancel or delay hundreds of new orders, leaving yards especially in China with unwanted vessels for sale.
As many as half of China's 1,600 shipbuilding companies are expected to go bankrupt or be acquired by larger rivals in the next two to three years and pressure is growing to move inventory, according to senior Chinese industry executives.
"We do routinely see a 5-10 percent discount for Chinese ships. So I'm not surprised if that gap widened to 20 percent," said Alex Adamou, analyst at London-based broker firm Seasure Shipping.
"The fact is that Japanese and South Korean yards are longer established and intend to have better technology, and therefore able to build higher quality vessels."
South Korea surpassed China last year as the industry's most sought after shipbuilder, as owners preferred more advanced and fuel-efficient vessels to the "cookie-cutter" dry bulk carriers and tankers that Chinese builders are known for.
SALE NOTED LAST WEEK
China's Jinhai Heavy Industry resold a 79,000 deadweight-tonne panamax ship at around $23.5 million in the last week, brokers said, more than 20 percent lower than the $30-31 million Japanese shipyards are offering for similar vessels, and less than $26 million from South Korean builders.
But overall sales by Chinese yards have been difficult as struggling shipowners seek quality vessels to offset rising maintenance and fuel costs. The benchmark Baltic Exchange's dry freight index has fallen more than 45 percent so far this year.
"In general, the older designs of Chinese-built vessels use more steel and are deeper than Japanese vessels, leading to higher fuel consumption," said Frode Morkedal, analyst with broker firm RS Platou Markets.
Only the largest Chinese shipyards such as China Shipbuilding Industry Corp, China Rongsheng Heavy Industries and Yangzijiang Shipbuilding, are expected to survive this round of consolidation.
South Korea's Daewoo Shipbuilding & Marine Engineering , Hyundai Heavy Industries and Samsung Heavy Industries have benefited from the industry's move away from China's cheaper vessels.
Shipowners can now buy a Chinese-built bulk carrier for 20% less than a comparable vessel from South Korean or Japanese yards, RS Platou Markets says.
The widening disparity is linked to both the perceived build quality and the relative fuel performance, analysts from the Norwegian finance house say.
RS Platou Markets notes a panamax resale from Jinhai Heavy Industry is being circulated at $23.5m. This compares with between $30m and $31m being demanded for similar tonnage by Japanese yards.
“Recent sales indicate that the usual discount Chinese built vessels are sold for is widening to as much as 20% compared with Japanese or Korean built vessels,” RS Platou Markets said.
A typical panamax built in China uses around 35 tons on bunkers per day, up to 10 tons more than a modern Korean or Japanese vessel at design speed, the analysts suggest.
On the 8th TradeWinds Shipping China, insiders points out that the LNG supply in China is likely to see shortage due to the lack of relevant infrastructure. Chinese government is encouraging domestic shipowners into the LNG transport market for about 65 LNG carriers are predicted to be demanded by 2015. Chinese shipyards are to embrace great opportunities.
Statistics show that about 77 LNG carriers are on orderbook globally and 43 are speculative orders with no confirmed terminal clients. The application of LNG in China is likely to bring about great opportunities globally.
It is predicted 31,000,000 CBM LNG is to be consumed by 2015 in China. Great numbers of fixed or floating storage units are to be constructed to store the big volume. As for LNG-fueled ships, DNV forecasts new orders for the ship type are to be as many as 500 vessels by 2015 and up to 1,000 by 2020.
Some expert predicts that 10 LNG terminals will be built in three years in China, one of which is to be FSRU. FSRU, which could realize “ship-to-ship” LNG transport and distribute the regasified LNG to land by pipelines, can be converted from LNG carriers currently to save time and cost. Global shipyards and owners are all active in LNG carrier conversion and CNOOC has put such conversion on its schedule to cope with the growing LNG demand in China.
Currently, the LNG supply is mainly based on pipelines in China and the nation is trying to make breakthrough in relevant technologies such as LNG carrier transport.
At the same time, Chinese government is supposed to make more endeavors in river safety management while developing LNG carriers and LNG-fueled ships.
China's newbuilding delivery is expected to slightly increase in the second quarter, while its major shipbuilding indexes for Q1 all dropped year-on-year.
According to China Association of the National Shipbuilding Industry (CANSI), Chinese shipyards' newbuilding contract and delivery for the first three months of 2012 stood at 5.59m dwt and 11.21m dwt, down by 49.7% and 22.5% compared to the same period last year. Its orderbook, at the end of March, decreased by 25.3% to 141.94m dwt year-on-year.
As IMO adopted Performance Standards for Protective Coatings (PSPC), to be enforced from July 1, newbuilding delivery seems to reach its peak in May and June. China's delivery would increase in Q2, accordingly.
As a number of newbuilding contracts have been disclosed in recent two weeks, market is likely to get better, in spite of low price.
China Newbuilding Price Index (CNPI) recently increased by 0.7% to 899p, while dry bulk vessel price index CNDPI, tanker index CNTPI and container index CNCPI declined by 0.7%, 0.5% and 0.9% to 874p, 942p and 949p, respectively.
The contracting boom (2006-08) led to an expansion of shipbuilding capacity as new yards opened and existing capacity grew. However, the low contracting environment since 2008 has put increasing pressure on yards to fill this capacity. As China is home to 35% of the world’s yards it is interesting to see how recent contracting activity has affected yards here. Graph of the Week In 2012 ytd just 23 Chinese yards out of 197 yards with an active orderbook have secured a contract. The Graph of the Month shows the percentage of Chinese yards by administration type which have last received a contract in each year. As the graph shows, no contracts have been placed in 2012 at any yard within the state-run CSIC group, nor at any joint venture yard.
LOCALising the problem
However, more pertinent is the fact that 32% (52) of the 163 active local yards in China have not taken a contract since 2009 or earlier, whilst 59% (96) of local yards in China have not taken a contract since 2010. New local yards, in particular, have relied on bulker orders. A revival in bulk contracting in 2010 helped some yards fill berths, but the majority of local yards have struggled to attract orders since the downturn, with the number of bulker contracts falling 64% y-o-y in 2011. The situation has been exacerbated by the difficulty these yards have had in competing for business in the more specialised vessel sectors currently favoured by investors. Top tier local yards, such as Jiangsu Rongsheng, are the notable exceptions.
Stating the obvious
All state yards with an active orderbook (18) have taken a contract since 2010. State yards have enjoyed a greater degree of government assistance in recent years with easier access to finance. This has protected state yards to a greater degree from the vulnerable position which smaller yards have been placed in by the current lack of contracting.
Overall, 28% of Chinese yards have not received a contract since 2009 (see pie graph). This may seem a large number of yards which, one may argue, could potentially face closure. Even if this worst-case scenario were to develop though, it would have minimal effect on capacity. This is because the majority are small local yards which currently represent less than 5% of the Chinese orderbook.
The remaining yards have all received a contract since 2010, but 44 of these yards still have an orderbook that is composed entirely of bulkers. This is a relatively risky position to be in, considering that only 82 bulker contracts have been placed globally in 2012. The remaining yards (98) have some form of diversification of product type. 20 of these yards have a containership on order, 18 have a tanker on order and 8 are building gas vessels. No Chinese yard is building all three types and 46 yards are only building “other” vessel types like small general cargo ships or tugs.
Clearly, a significant number of Chinese yards face a difficult situation. Almost a third of yards last took a contract in 2009, and many others have an undiversified product mix reliant on an oversupplied bulk market. State and ‘top-tier’ local yards look to be protected from the contracting drought, but for others, real challenges lie ahead.
Chinese shipbuilders are in the throes of change into high-value sectors, such as LNG carrier, offshore-related vessels, etc.
According to Economic Research Center of China Shipbuilding Industry Corporation (CSIC), in Q1, only 3.8m-cgt newbuildings were contracted in the world, down by 58.9% year-on-year.
Also, International Bank for Reconstruction and Development reported that the amount of global shipbuilders' damages would reach $50bn in 2012.
In the present, China's shipbuilding industry specialists said that global shipbuilding industry will go through the most difficult time this year. And China is no exception.
Meanwhile, South Korean shipyards contracted 1.93m cgt and keep its global top with over 50% of market share. However, China only contracted 1.05m cgt.
Korean shipbuilders booked orders for high-value vessels, including product carrier, LNG carrier, etc., and offshore facilities, such as FPSO, drillship, etc., as well as bulker, tanker. On the other hand, China mainly inked orders for bulker, small sized tanker, etc.
Chinese shipyards should make a change into high-value sectors and diversify portfolios by developing new ships, high-end technology, etc.
The Chinese shipbuilding industry, the world’s biggest, is focusing on quality over productivity and overcoming deficiencies, including worker training, retention and research and design, Lloyd’s Register said.
Following are comments from Tom Boardley, marine director of Lloyd’s Register, a London-based classification society that monitors compliance with structural rules for building ships. The company is the world’s second-largest society, covering 18 percent of the global fleet, and it employs 372 people in China, working at 40 of the country’s 200 main yards, he said, speaking at the China Money & Ships conference in London today.
“We know that the yards have had severe difficulties recruiting, not so much recruiting but in retaining qualified management and workers,” he said, adding that China’s economy has been booming.
“As soon as they’re well trained they go back home for Chinese New Year or holidays and they then discover they can get a job there. There’s been a huge turnover in staff. But hopefully with things slowing down, we’re hoping that will change.
‘‘For a lot, productivity came first and quality a little bit later. But certainly all major shipyards have quality as a major part of their program and we’ve seen them take huge strides.
‘‘They were originally offering standard designs and quick delivery and a good price and that’s what the owner wanted. Now everyone is looking for the best design, an eco-friendly design and what we’re seeing now is Chinese yards are showing a huge amount of flexibility and user friendliness in terms of being able to offer new designs to shipowners in order to make sure they can secure orders.
‘‘Subcontractor turnover has reduced and that’s been a major problem for yards, which are now investing in training and development.
‘‘With the financial slowdown, a lot of the yards have slowed down their productivity in order to try to improve quality. Clearly the potential downside is that people are cutting corners, trying to use cheaper components, trying to use subcontractors and to be realistic this is a potential downside. ‘‘Obviously it’s caveat emptor (buyer beware) to the buyer.
‘‘One of the biggest issues, and no surprise to ship owners, is the quality of welding in China. It is a constant battle because the training isn’t particularly good and a lot of people claim to have welding qualifications that when tested prove to be somewhat lacking.
‘‘I know a lot of the shipyards now are very rigorous in making sure that welders are welding to the standards that are required.’’
Chinese shipbuilding companies saw sharp declines in output and new orders in the first quarter, as the industry rolled on the choppy seas of global and domestic slowdowns.
Chinese shipbuilding companies saw sharp declines in output and new orders in the first quarter, as the industry rolled on the choppy seas of global and domestic slowdowns.
New shipbuilding orders fell 48.7 percent year on year to 5.59 million deadweight tonnes (DWT) during the first three months, according to a report released Monday by the National Development and Reform Commission (NDRC), China's top economic planner.
Ship owners around the world tend not to expand their fleets when global demand for goods and services remains sluggish.
For China's ship manufacturers, completed shipbuilding volume also fell 22.5 percent year on year to 11.21 million DWT in the first quarter, with incomplete orders declining 25.3 percent year on year to 141.94 million DWT by the end of March, according to NDRC data.
In the January-March period, the industrial output of China's large shipbuilders totaled 181.3 billion yuan (28.87 billion U.S. dollars), up 7.3 percent from a year ago, marking the fifth consecutive month of deceleration.
Due to slack external demand, ships delivered overseas tumbled 22.3 percent annually to 9.47 million DWT, with the export shipment falling 8.3 percent annually to 64.3 billion yuan.
The NDRC said severe challenges for the country's shipbuilding industry loom ahead, as insufficient external demand, shrinking orders and increasing defaults on contracts will continue to squeeze the sector's profitability.
According to the NDRC, combined profits of shipbuilding companies stood at 4.45 billion yuan in the first two months, up a meager 0.8 percent from a year ago.
Welder Zhang fires up his blow torch and looks up at the towering, 8,800-tonnes oil tanker that is likely to be his last job at China's privately owned Qiligang Shipbuilding Co.
Barring a miracle, the 50-year-old will soon join the thousands of unemployed shipbuilders who have fallen victim to the end of China's maritime boom and the long-awaited consolidation of its more than 1,600 shipbuilding companies.
Four years into one of the worst downturns to afflict the global shipping industry, hundreds of small to mid-sized shipyards are teetering on the brink of bankruptcy as foreign orders dwindle and domestic lenders slash credit.
"The building of this ship is almost done, and we don't expect to have any new jobs soon," said Zhang, who asked to be identified by one name.
"We used to work 30 days a month, but now we work only 10 to 20 days because not many ships are being built. Many workers have moved on to other jobs."
Qiligang Shipbuilding is one of several troubled firms in the eastern coastal Zhejiang province, the world's largest manufacturing base for small to medium-sized dry docks.
According to local media, around 80 percent of shipyards in Zhejiang have either suspended production or are operating at half their capacity.
"The grass is growing high in many yards that have closed due to a lack of orders," said Zhang Shouguo, secretary general of industry group the China Shipowners' Association.
"This is just the beginning of the woes for shipbuilders and the worst has yet to come."
To survive and keep some of the sector's 400,000 workers employed, shipyards must turn to less lucrative businesses such as leasing vessels, real estate or, in the worst case, tearing apart the ships they once used to build, industry experts say.
"Shipbuilding is a very cyclical industry and those who can maintain strength, complete structural restructuring and transform will be a major force after the recovery," said Zhang Yao, spokesman for Singapore-listed Yangzijiang Shipbuilding (YAZG.SI), one of China's largest vessel building firms.
"For others without flexibility to deal with the market changes, dormancy may be their best choice. Eventually more than 30 percent of existing shipbuilders will disappear."
His forecast is relatively optimistic compared to the view of other industry officials. The head of the government's China State Shipbuilding Corporation, Tan Zuojun, told local media in February he believed 50 percent of domestic shipyards would go bankrupt in the next two to three years.
The shipping industry has yet to recover from being mauled by the 2008 global financial crisis, which triggered what the International Monetary Fund called the "Great Trade Collapse".
The Baltic Dry Index, the benchmark for the freight market and an indicator of global economic activity, plummeted more than 94 percent in 2008 from a record high of 11,793 points. This week, it was trading above 1,100.
During a maritime recession, shipbuilding is usually the first and hardest hit sector as global ship owners delay or cancel orders for new vessels to save capital reserves.
But in China, the world's biggest shipbuilder by volume, government intervention helped the industry defy the norm.
Debt-laden shipyards that otherwise should have gone bust were allowed to stay afloat thanks to easy credit, which stemmed from government efforts to bolster foreign exchange reserves to protect the economy from the crisis.
Lending to the overall shipping industry shot up more than 500 percent year-on-year to nearly $4 billion in 2008, according to loan market information service Thomson Reuters LPC.
"When Chinese shipyards have new orders, the buyers must bring foreign currency into China since the shipping contracts are in U.S. dollars," said Lam Pak Ho, Hong Kong-based senior manager at Bank of China.
The huge expansion in Chinese shipyards, which currently hold about half the world's new ship orders, helped create a glut of low-tech vessels that has kept freight rates low and prolonged the agony for ship owners across the globe.
As these foreign firm struggle, orders have declined and financing has become problematic, prompting Beijing to turn its back on what has now become an unprofitable business.
Credit has also dried up as the government tries to cool the economy, falling more than 87 percent from 2008 to around $501 million last year.
New orders to Chinese shipyards tumbled 52 percent last year to 36.22 million deadweight tonnes, the China Association of National Shipbuilding Industry says. This year, new orders are down about 40 percent year-on-year in January-February.
SURVIVAL OF THE FITTEST
Only the largest Chinese shipyards such as China Shipbuilding Industry Corp (601989.SS), China Rongsheng Heavy Industries (1101.HK) and Yangzijiang Shipbuilding, are expected to survive this round of consolidation.
In the government's five-year economic forecast, China's 10 largest shipbuilders are expected to hold at least 70 percent of the domestic market by the end of 2015, compared to less than 50 percent in 2010.
A short drive from the Qiligang Shipbuilding yard in Zhejiang, two unfinished oil tankers stand in the once bustling dry dock owned by struggling Dongfang Shipbuilding (DFSB.L).
The shipyard, which had employed more than 600 workers just over a year ago, could become another scrap yard if the company fails to find a more profitable way to survive. China is one of the world's leading ship recycling nations.
"At the end of this year, you could see many shipyards turn into scrap yards," said Venkatesh Narayanaswamy, the former chairman of Dongfang Shipbuilding. "This would be the worst case scenario, because the profit margins are much lower."
Chinese shipyards are rushing to re-sell newbuildings of which the original contracts have been canceled and the deliveries are impending.
Clarkson Hellas said that Chinese yards struggle to manage newbuilding resales of its increasing volume of prompt new tonnage.
Jiangsu Rongsheng Heavy Industries has currently committed to resale of its cancelled one capesize bulker, while Jinhai Heavy Industry is known to already have traded off or being in progress for its seven capesizes and two kamsarmaxes, at most.
The bulker newbuildings are under construction and set for delivery within months.
As Chinese shipyards are hurrying to promote newbuilding resales of drawing near to delivery, this is dampening values down to levels that seem to entice interest from cash rich shipowners.