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Shipbuilding industry to see blue in three years

By Tu Lei (chinadaily.com.cn)
Updated: 2008-11-28 18:03

After two or three years' blowout, the Chinese shipbuilding industry will face a real test in 2011-2012, and the situation will be worse during the financial crisis, said a report from today's Shanghai Securities News.

Related publication: Related readings:  Shipping industry runs into troubled waters  Time to change in the global shipping market  Storm hits shipping industry

Shipbuilders in China are still busy because most orders are due to finish by 2011. Are they heading for a problem?

Figures from China Association of the National Shipbuilding Industry show in the past three quarters of this year shipbuilders finished 16.82 million deadweight tonnages (DWT), up 40 percent year on year, with new orders of 57.17 million DWT, down 11 percent year on year, and the ongoing orders of 210.84 million DWT, up 63 percent year on year, accounting for 25.6 percent, 38.8 percent and 35.4 percent of global market respectively, said Clarkson, the world's leading integrated shipping services group.

But ship builders still can not sleep well despite these orders. Experts familiar with the matter said gloomy demand, cancellation of orders, and difficulty in raising funds are the potential problems for the industry.

The Baltic Dry Index on November 25 dropped to 824 points, down by 92.6 percent compared with a former record of 11,067 points in May of this year. Recent figures show there are 180 capesize ships casting anchors due to no transportation deals, and the rent was reduced to $5,000 per day from $180,000.

The negative impact has already emerged in the second-hand ship market. "The quoted price has dropped by 50 percent in three weeks," said a senior ship broker to the Shanghai Securities News. A ship's dealt price was $28 million, far lower than the quoted $60 million.

Brokers said biggest problem for ship owners is having no goods to transport. And the order cancellations will be worse if second-hand ship prices keep dropping.

In fact, global market has seen cancellations already. The listed New York Shipping & Trading Ltd declared recently it cancelled six new cargo ships orders worth $530 million. And London's Hellenic Carriers Ltd dismissed a bulk carrier order worthy $69.7 million. Clarkson's figures show 94 ship orders were cancelled in the first eight months of this year, accounting for 1.2 percent of orders.

In addition, the banks are crunching loans, and taking a cautionary attitude towards the shipbuilding industry, which means some builders have difficulty raising funds.

Officials from the Exit & Export-Import Bank of China said shipbuilders and shipping firms are transferring from sellers' market to buyers, which makes the banks reevaluate the credits.

Survivor will be the King

Except for the above mentioned problems, more risks will be seen in three or four years, and those survivors will be the leaders.

According to a report from China International Capital Corporation Ltd, global orders totaled 2.48 million DWT in the first ten months of this year, the lowest since 2006, and orders dropped by 88.2 percent year on year, or by 65.1 percent month-on-month, dropping the fastest since the start of this year. New orders between January to October in 2008 totaled 144.65 million DWT, down 33.8 percent year on year.

The China Association of the National Shipbuilding Industry said most ship builders said it has grown difficult to get more orders since August.

Zhu Nujing, consultant from the association, predicted global ships need 60-70 million DWT by 2010, and the building ability will be 200 million tons. China itself has 60-70 million DWT building ability. "The competition will be fierce," said He.

Among the competition, small and medium ship builders will be the victims, and those new small and medium non-stated builders, who depend on bank loans for infrastructure constructions, will see a crisis on loans return as well.

Zhu added some new ship builders are conducting technology renovation, or finish renovations by 2009 or 2010, and those firms will be in difficulty if the market keeps falling.

However, the large ship builders are still optimistic towards the future. Tan Zuojun, general manager from China State Shipbuilding Corporation, is still confident of surviving the winter.

"The cold winter will make the resource closer for large builders," said Hong Liang, vice-president from Jiangsu Rongsheng Heavy Industries Group Co Ltd, adding the wash out of bulk and container markets will put the market in strong need.

Policies needed

Facing potential difficulties, parties have noticed the risks, and governments are conducting research on ship builders.

On November 15, Premier Wen Jiabao visited CSSC Guangzhou Longxue Shipbuilding Co Ltd, and one week later visited Shanghai Waigaoqiao Shipbuilding Co Ltd. And officials from East China's Jiangsu Province were also doing research at Jiangsu Rongsheng Heavy Industries Group Co Ltd.

The association's Zhu Nujing said in recent years, some provinces are still building more factories. "The result will be hard to imagine," said Zhu. He called on local governments to adjust investments according to market environments.

And the association also suggests the government should improve enterprises' operation environment, take care of chain industries development trends, support good performers on policies, and encourage advanced technologies, mergers and acquisitions.

Besides self-improvement, shipbuilders are also searching for government policy support. Hong Liang expects the government may allow ship mortgage businesses, increase tariff rebates and release forward settlement and sale of foreign exchange businesses to avoid the yuan appreciation risk.