May 20, 2013
According to the latest quarterly figures released by the China Association of the National Shipbuilding Industry (CANSI), new ship orders have rebounded and are up more than 70% from the same period last year. However, it is too early to celebrate, as tougher times are expected in the upcoming quarters. With the Chinese shipbuilding industry continues to struggle under the pressure of excess capacity, as well as shrinking profit margin in low-end jack-up rigs.
In the first quarter of the 2013, the Chinese shipbuilding industry reported a strong increase in new order intakes. New orders for this period amounted to 9.57 million deadweight tonnage (DWT), a 71.1 percent increase from the 5.59 million DWT in the same period last year. Despite the increase in new orders, completed orders and total ongoing orders, the other two key indicators of the shipping industry, has fallen 15.6 and 24.6 percent respectively in this same period. Furthermore, according to data gathered from the World Shipbuilding Annual Review and Forecast, most of the existing orders are dominated by container ships and bulk carriers – the areas hardest hit by falling demand. These indicators points to an industry still dwelling at the bottom of the business cycle.
Source: Drewry Shipping Consulting Ltd
Changing global demand has lead to a shift in preference to more technologically advanced vessels, such as high-tech drill-ships, large-sized container vessels, offshore units, and semi-submersibles. Unlike jack-up rigs, these highly engineered vessels are designed to operate mostly in deepwater conditions. One of the most common being the semi-submersibles, designed with good stability and sea keeping characteristics, these specialized marine vessels can be used as offshore drilling rigs, safety vessels, oil production platforms, and heavy lift cranes.
Although China has become the world’s largest shipbuilder in 2010, accounting for 43.5% of the global market; it still lags behind in these high-end segments of the market, which is still dominated by Singaporean and Korean shipbuilders. According to South Korean analysts’ forecasts, revenues from South Korea’s top three shipbuilders, Hyundai Heavy Industries Co., Daewoo Shipbuilding & Marine Engineering Co. and Samsung Heavy Industries Co., are expected grow by 10% in 2013, reaching approximately $22 billion.
As the chart below indicates, China is expected to deliver over 20 percent of world’s newly built jack-up rigs in 2013. Unlike the highly engineered vessels built by South Korea and Singapore, those jack-up rigs do not generate much, if any profits for the shipbuilders; with vessel prices dropping significantly over the past two years, slipping to levels not seen since 2004. The problem is aggregated by rising cost of labor and raw material. As a result, many small, lower-tier shipyards will struggle to break even. In a report from Barclays, around 70% of Chinese shipyards will fail to move up the value chain and up to 40% of China’s hundreds of shipyards are predicted to collapse within two years.
Source: Bloomberg News
The economic recession in North America and financial crisis in Europe, as well as decelerated growth in China has significantly affected the demand for new ships. With banks tightening up lending policies after the financial crisis, it is becoming increasingly more difficult for ship owners to refinance and order new vessels. At the same time, cash-strapped shipping companies would lease new ships instead of purchasing them outright, while more and more buyers are seeking financing from the shipbuilders as a precondition for placing new orders. Therefore, due to surplus capacity, vessel prices are expected to remain low; further reducing profit margins. So while the expansion in offshore, deep-sea vessels may offer some temporary relief, without a solid global economic recovery, this industry is unlikely to experience any real meaningful growth in immediate future.
About GCiS China Strategic Research
GCiS (www.GCiS.com.cn) is a China-based market research and advisory firm focused on business to business markets. Since 1997, GCiS has been working with leading multinationals in sectors ranging from technology to industrial markets, medical, chemicals, resources, building and constructions and a few others.