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FEATURE: China’s shipbuilders in rough water-Part 1

China’s shipbuilding industry hasn’t fared well at all so far in 2019, with the few key indicators declining on year amid the several crosscurrents that have been impacting its performance. Dry bulk freight carriers, the model that China has been with the great expertise in building, have been with more than sufficient capacities, while for high-end vessels such as oil and gas tankers that are in hot demand now in the global freight market, Chinese shipbuilders are not as competitive as its South Korean counterparties.

The challenging business environment, thus, has brought forward the consolidation among Chinese shipyards with the hope that being bigger in size will make it easier to weather the stormy weather, and the latest merger case in China’s shipbuilding industry has been China Shipbuilding Industry Corporation (CSIC) and China State Shipbuilding Corporation (CSSC) on November 26, which, as a result, has generated the world’s largest shipbuilder.

New ship orders on the decline

The Chinese shipbuilders have struggled to secure new vessel orders this year, with those they received over January-October reaching an equivalent of just 21.2 million deadweight tonnes (dwt), or down by a massive 25.6% on year, according to statistics from China Association of the National Shipbuilding Industry (CANSI), among which 93% were from overseas.

At the same time, backlog with Chinese shipbuilders totalled 78.9 million dwt, representing a decline of 7.7% on year, indicating that they may not have sufficient orders to keep them going for another two or three years amid the deliveries and the shrinking in new orders.

“The decline in new vessel orders is not the only worry that harasses the domestic shipbuilders, on top of this, many of them can’t maintain their profit levels as dry bulk carriers will not lead to fat margins compared with those high-value added vessels such as liquified natural gas carriers, large-sized oil carriers and ultra-large container vessels,” an official from a shipbuilding equipment supply company in South China’s Guangdong province said.

A Singapore-based freight market analyst believed that the softening in the global shipbuilding market is mainly due to oversupply especially for dry bulk carriers. “Currently, the large-sized dry bulk ships over 200,000 dwt are still in oversupply, so it is unavoidable to see some stalling in demand,” he said.

Iron ore has been a core dry bulk commodity in the global seaborne trade, and China, the world’s largest iron ore importer, saw its iron ore import volumed decline since 2018, down 1% on year for 2018 to 1.06 billion tonnes and it declined further by 1.6% on year in the first ten months to 877.2 million tonnes.

Other than lower orders, Chinese shipbuilders are being caught in between as shipbuilding costs have not eased as much accordingly, with the 20mm ship plate hovering high at Yuan 4,198/tonne ($596/t) including the 13%VAT as of December 6, though down 6.3% on year.

Only those shipyards targeting at high-end ships or are engaged in military projects may not feel the punch from the back and front yet, he repeated.

A Shanghai-based industry analyst agreed, noting that the South Korean shipbuilders, being more skilled and competitive in producing such high-end vessels than the Chinese yards, have been enjoying the year so far.

In October for example, South Korea took 86% of ship orders placed globally that month, a performance driven by demand for liquefied natural gas (LNG) carriers and massive container ships, according to the Korean sources. Moreover, among a global total of 35 LNG ship orders placed over January-October this year, 32 went to South Korean shipbuilders, according to Korea  Joongang Daily.

The pressure on the Chinese shipbuilders, if persisting, will most likely ripple to those that have been closely linking to it, such as steel mills in the next two to three years when the new orders and backlogs are running out, the Guangdong source predicted, confirming that the slow-down in new orders this year has not been detected yet. “The orders of ship equipment we are receiving now are based on the new vessel orders that shipbuilder signed off several years ago (when China’s shipbuilding industry was still booming),” he said.

In 2018, China received 36.7 million dwt new vessel orders, and in the first ten months of 2019, China’s vessel completion and delivery still grew 4.6% on year to 29.7 million dwt, CANSI’s data showed.

As of end-October, China’s shipbuilders still held a backlog of new orders totalling 78.9 million dwt, lower by 7.7% on year, the CANSI data showed, sufficient for the yards to maintain their present level of operations – and employment – for at least the coming two years, Mysteel Global notes.

An oil tanker, source: Pixabay

Chinese shipbuilders resort to mergers for survival

The foreseeable hard days in the coming years, thus, have prompted Chinese shipbuilders to seek means to survive, and among the latest endeavours was the merger of China Shipbuilding Industry Corporation (CSIC) and China State Shipbuilding Corporation (CSSC), two wholly state-owned Chinese shipbuilders, married each other into a shipbuilding giant in late November.

The combination of CSIC and CSSC with the entity adopting the name CSSC has also created the world's largest shipbuilder by sales and backlog, with a 20% global market share, as Mysteel Global reported.

CSSC floated CSIC off as a separate unit in 1999, so it was of little surprise in July when the two disclose their intention to re-merge, Mysteel Global understands.

CSSC had been managing shipbuilding yards in East and South China, and CSIC had been operating yards in North and West China, and new entity will just take over the 310,000 employees from the two old companies.

In the long run, the merge will be benefiting both the shipbuilding and shipping industries in China.

“The merger could help the whole industry chain curb some repeated and low-value added capacity, and at the same time to have the bandwidth to relocate more resources to strengthen the competitiveness in high-end vessel building,” the Shanghai analyst said.

CSSC-CSIC merger signing ceremony on November 26, source: CSSC official website

Besides, the global competition for vessel orders in general will certainly intensify in the future, as all the major shipbuilding countries are nurturing giant-size players.

On November 29 Imabari Shipbuilding Co and Japan Marine United Corp – the nation’s largest and second-largest shipbuilders – had reached a basis agreement on capital and business tie-ups, a deal which some analysts suspect could be the launch pad for a full-fledged integration in the future.

Meanwhile in South Korea, HHI, the world’s largest shipbuilder, is also in the process of acquiring Daewoo Shipbuilding & Marine Engineering Co, and should the merger be approved by anti-trust regulations, the HHI-DSME enterprise would hold 60% of the world market for LNG carriers.

This has not been the first consolation case in China’s maritime industry, though, as back in February 2016, China’s top two shipment service providers were among the first at the frontline to fill the chill in the dry bulk freight market, and China Shipping (Group) Company and China Ocean Shipping (Group) Company joined hands into one under the name of China COSCO Shipping Corporation.

“The union, again, is a combination between the state-owned enterprises (SOEs) in China, but it is more to do with the downturn in the industries, and it is easier for SOEs to arrange such consolidations among themselves as it is basically moving money from left pocket to right, nothing is at stake and no loss,” a second Singapore-based source commented.

The link to the Feature P2: https://www.mysteel.net/article/5012097/FEATURE--Chinas-shipbuilders-in-rough-water-Part-2.html

Written by Anna Wu, wub@mysteel.com, Victoria Zou, zyongjia@mysteel.com, and Hongmei Li, li.hongmei@mysteel.com
Edited by Russ McCulloch, russ/mcculloch@mysteel.com