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When China Rongsheng Heavy Industries announced in December that it had received a big order to build crude oil tankers, it raised fears among many of the world’s shipowners.
Many thought the order might signal the start of a concerted Chinese effort to boost employment in the country’s shipyards and build up its merchant fleet – and further flood oversupplied, depressed shipping markets.
Yet last week, the same shipyard’s first-half figures illustrated how shipbuilders face substantial problems of their own.
Rongsheng, one of China’s biggest, announced it had taken just $58m in orders in the first half, against $725m in last year’s second half, as the worst shipping slump in 25 years deterred owners from placing orders.
Its decline reflects a wider fall in orders. According to Clarkson, the shipbroker, orders worldwide in the first half this year were 46 per cent down even on last year’s depressed first half.
Rongsheng’s two announcements highlight how the interdependent shipowning and shipbuilding industries are suffering together, which has pushed earnings for many ship types to below their operating costs.
Shipowners fear desperate shipyards will slash prices or find some other means to secure new orders, worsening the existing glut. Shipyards fear struggling shipowners will hold off ordering for so long that their cash runs out.
The question for both sides is how to survive until an upturn.
Harald Serck-Hanssen, head of shipping for Norway’s DNB Bank, says it may in the short term make sense for some yards to offer to build vessels at less than cost prices. But he goes on: “The fact of the matter is – whatever way you look at it – there are too many shipyards for any foreseeable future.”
The sharp fall-off in orders comes in the aftermath of the 2002-08 shipping boom, which prompted shipowners worldwide to order vast numbers of vessels and led to a significant ramp-up in shipbuilding capacity, particularly in China.
Delivery of vessels ordered during the boom has flooded most shipping markets with capacity, sending ships’ earnings plummeting.
Erik Nikolai Stavseth, an analyst at Oslo-based Arctic Securities, says it is “no wonder” owners are no longer ordering vessels.
“I think that the entire shipping community sees that if they keep ordering vessels, even though prices have come down significantly, they know that it will only postpone the upturn,” he says.
Yet, even though all shipbuilders complain about the slump’s effects, not all the big Asian shipbuilding nations – Korea, China and Japan – are affected equally.
Korea’s shipyards – the world’s busiest by compensated gross tonnage, a measure of a ship’s size and complexity – continue to win orders for some complex oil drilling ships and liquefied natural gas carriers.
Demand for drill ships remains strong because of the high oil price, while Japan’s strong post-tsunami demand for gas has pushed up rates for LNG carriers.
Kim Moon-joo, a spokesman for Hyundai Heavy Industries, the world’s largest shipbuilder by CGT, says the company is trying to boost its competitiveness in drill ships and offshore facilities.
“We expect new orders for drill ships and large offshore facilities to increase at the end of this year or early next year,” he says.
Sophisticated shipbuilders in Japan, who rely predominantly on domestic shipping companies for orders, have suffered over the past year from the strengthening of the yen. The increase pushed Mitsubishi Heavy Industries, the country’s largest shipbuilder by CGT, into a Y7.7bn operating loss for 2011, against a Y1.8bn profit the previous year.
I think we’re going to see a fair amount of bankruptcies
- Erik Nikolai Stavseth, Arctic Securities
Shipbuilders in China, which builds mainly straightforward oil tankers, dry bulk carriers and container ships that are in most serious oversupply, appear set for the biggest problems.
Many of the Chinese yards opened only in the past decade after the shipping boom encouraged entrepreneurs to turn spare waterfront land into shipyards.
“In China, where there is serious overcapacity, many shipyards have had no work at all this year,” says one Hong Kong-based analyst.
There remains the possibility that Chinese state-controlled companies will place further significant orders with the yards, such as that for at least 10 Suezmax tankers placed last year with Rongsheng. Sinotrans, one of China’s biggest state-controlled transport companies, says it is considering placing orders soon.
However, the likelihood, according to most analysts, is that many shipyards in China and elsewhere face going out of business.
“I think we’re going to see a fair amount of bankruptcies,” Mr Stavseth says. “I think there’s going to be a good shake-up in the shipyard industry.”