Orders climb at China's shipyards, but rebound favours a few
Sept 19 (Reuters) - China's troubled shipbuilding sector has returned to the top of the global league this year, ahead of South Korea and Japan, but the headline numbers hide a concentration of orders at a few big yards that could offer a blueprint for the industry's future.
While Chinese shipbuilders have won more business so far this year than in the whole of 2012, just 4 percent of the country's more than 1,600 yards have scored new contracts.
Most had the backing of two shipping "policy banks", which are responsible for state-directed spending and trade development, leading to a suspicion that Beijing is using the lenders as a tool to force consolidation in the bloated sector.
"We believe that the major yards that have won orders this year will be the ones left in five or 10 years and that they represent the future shape of China's shipbuilding industry," said Dr Gunnar Gerig, executive director of transaction advisory services at Ernst & Young in Hamburg, Germany.
The global shipping industry is emerging from a five-year downturn, the worst in 30 years, as cargo demand rises on the improving global economy and low asset prices lures private equity money into the sector.
At the same time, Chinese policymakers are cracking down on overcapacity-plagued heavy industries such as shipbuilding and steelmaking, as they seek to shift the country away from its old investment-driven economic growth model.
Figures compiled by Reuters and shipbrokers show around 60 state-owned and private shipyards won about $10.5 billion worth of contracts from foreign and domestic shipowners for vessels totalling 21.2 million dead-weight tonnage (dwt) in the first half of this year.
Among the winners were shipyards in Shanghai, Guangzhou and Chengxi controlled by China State Shipbuilding Corporation and private builders such as Yangzijiang Shipbuilding (Holdings) Ltd and Zhejiang Yangfan.
The volume of orders was "up significantly" versus 19.2 million dwt in full year 2012, said Stephen Gordon, managing director of Clarkson Research Services, a British shipbroking and shipping services company.
Chinese yards won 39.5 per cent of global orders in the first half compared with 36.5 per cent for South Korea, reversing 2012's trend.
The order tally has continued since July with a raft of deals to China Ocean Shipping (Group) Company (COSCO) shipyards in Dalian, Zhoushan and Guangzhou and other facilities including Shanghai Waigaoqiao Shipbuilding. But the latest deals have gone only to yards that had already won orders this year.
That means that while state-owned and better quality private shipyards now have enough construction orders to keep busy into 2015 or 2016, the future looks grim for the rest, many of whom have already run out of work.
Sverre Bjorn Svenning, director of Fearnley Consultants, an offshoot of Norwegian shipbroker Fearnleys, said the firm has tracked 128 shipyards established during the 2003-2008 boom.
Of those, 57 have not delivered a ship since 2011 and another 18 have delivered three ships or fewer. "In my view, all the 75 yards have in practice ceased operations," Svenning said.
The China Association for National Shipbuilding estimated there were around 1,650 shipyards in China. Between a third and 50 per cent of them are set to collapse in the next few years according to the lobby group and other sources.
"There are only about 80-90 yards Chinese that we would recommend to our clients presently," said Martin Rowe, managing director of shipbroking firm Clarkson Asia, based in Hong Kong.
The Export-Import Bank of China (Cexim) and the China Development Bank are the country's two policy banks focused on the shipping industry.
A Cexim senior executive told Reuters that around two-thirds of the shipyards that won orders this year were supported with a mix of financial instruments that benefited individual shipyards or ship owners.
These included shipyards controlled by state-owned groups China State Shipbuilding Corporation (CSSC) and China Shipbuilding Industry Corporation (CSIC), COSCO and private yards such as Sinopacific Shipbuilding, said Chen Bin, deputy general manager at Cexim's transport finance department.
Financial support has also come from China Development Bank and domestic and foreign lenders including the Bank of China Ltd and Standard Chartered Plc.
Cexim said it aimed to lend about $3 billion to the shipping industry this year.
Chen said typically about 30 percent would go to Chinese shipyards. The remaining 70 percent would be advanced in the form of buyer's credits and loan guarantees to support foreign and domestic shipowners ordering ships at Chinese shipyards.
Graham Porter, co-founder of Canada's Seaspan Corp, one of the world's largest container ship operators with about 100 large vessels, said shipowners look to order at shipyards backed by state lenders or well-funded provincial or private yards, which represent a low risk.
Chen said Cexim backs each deal on its own merit. "Right now we don't have a clearly defined shipyard list. It changes year by year," Chen added.
But Shipping experts told Reuters they thought Beijing was intervening to support favoured shipyards either with a list of yards it wanted to see survive or by directing policy support to the most successful.
"(I) believe the list actually exists," said Tom Behrens-Sørensen, co-founder of strategic advisory and corporate finance firm Navisino (Beijing) Partners and a former chairman in North Asia for shipping and oil services group A P Møller-Maersk A/S.
Shipowners contacted by Reuters, including commodities group Noble, Taiwan's U-Ming Marine Transport and Singapore's Pacific International Lines, acknowledged a "flight to quality" of more financially secure yards and those that have upgraded and can build higher specification ships.
Ravindranath Raghunath, senior vice president at Noble Chartering, said the company preferred state-owned shipyards.
"With the three-year lead time to delivery, (I) am not convinced the private yards will be around at that time," he said, adding that loan guarantees were easier to obtain from banks such as Bank of China if state-owned yards were used.
China's two big East Asian shipbuilding rivals have already seen significant consolidation.
Japanese shipyards went through two such phases during the 1970s and 1980s that were partly government sponsored and reduced shipbuilding capacity by around 50 per cent.
In South Korea, debt problems in the late 1980s also led to a wave of consolidation that shrunk the industry from 11 large and medium sized shipbuilders in the early 1990s to around seven major shipbuilders now, including cash-strapped STX Offshore & Shipbuilding.
Ernst & Young's Gerig said in the long-run the number of surviving shipyards was likely to be larger in China than South Korea or Japan because labour costs were lower and automation was less of a feature in China's shipbuilding industry.
But, along with other industry experts, he predicted that many smaller yards, and even some major ones, would collapse over the coming years.
"It is quite obvious that the Chinese shipbuilding industry is in a painful transition phase towards an industry that will continue to shrink and the ambitions and goals presented a few years ago will never be fulfilled," said Svenning of Fearnleys.
"I think if the Chinese yards shall succeed they must have a good home market and cannot rely on copying the Korean success of exports."
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