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Merger mania intensifies for Chinese yards

Merger mania intensifies for Chinese yards

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China’s top 10 yards will hold 70% of yard capacity within three years, Jason Jiang reports.

The modus operandi ahead of big Chinese maritime mergers involving state entities in recent years has been to install opposing heads in each camp. At the nation’s top two shipbuilding conglomerates this management swap has taken place getting tongues wagging that China State Shipbuilding Corporation (CSSC) and China Shipbuilding Industry Corporation (CSIC) could become once again a single entity. They were split up in 1999 with the Yangtze river serving as the geographical demarcation – CSIC to the north and CSSC to the south of China’s principle waterway.

The Chinese shipbuilding industry is staggering with declining new orders and unsolved overcapacity issues. Further consolidation in the sector is viewed as inevitable.

Data from China Association of the National Shipbuilding Industry (CANSI) shows that Chinese yards took just 15.85m dwt in new orders in the first eight months of the year, an 11.3% year-on-year drop. The decline in new orders also resulted in a decrease in Chinese yards’ order backlog, which stood at 81.11m dwt in the same period, a decline of 29% year-on-year.

According to statistics from online pricing portal VesselsValue, so far this year Chinese yards have taken the highest number of orders of any shipbuilding country, with 203 tanker, bulker, container, gas and offshore orders, 24 ahead of its nearest rival, South Korea.

The main vessels being bought in China are dry bulk vessels, accounting for 60% of all new orders this year. The majority of orders placed in Chinese yards have gone to China State Shipbuilding Corporation (57 orders) and Yangzijiang Shipbuilding (45 orders).

“The domestic shipbuilding sector is still facing severe challenges, including the decline in new orders and increasing costs of raw materials, labour and financing. The existing overcapacity issue has yet to be solved and the R&D capabilities of local yards need to be further improved,” says Guo Dacheng, president of CANSI.

Guo reckons cutting overcapacity is still one of the top priorities for the domestic shipbuilding sector, despite a total of 15m dwt shipbuilding capacity being shed in the People’s Republic since 2013.

Dr Adam Kent from consulting firm Maritime Strategies International (MSI) says the huge contraction in Chinese shipbuilding capacity both through consolidation and wholesale closure of shipyards over the last five years still has a way to go.

According to Kent, the Chinese government’s white list of shipbuilders, designed to help drive and shape consolidation and restructuring, has been overtaken by market factors with deliveries continuing to outpace contracting and most yards struggling to match historical utilisation rates.

Of the 70 yards currently on the white list less than half have taken an order in the last 12 months.

“Apart from a small number of diversified private yards including Yangzijiang Shipbuilding, the focus in China will increasingly be the larger state backed shipyards. In a classic Darwinian struggle where only the fittest survive, it helps to have the hand of the Chinese government propping you up,” Kent says.

By 2019 MSI is forecasting Chinese shipyard capacity to be at less than half the levels witnessed at its peak in 2011.

“With the Korean shipbuilding model, a small number of mega yards building a wide range of high value vessel types, the identified end goal it looks as if through design or misfortune the Chinese shipbuilding industry is on the right, if somewhat tortuous, track,” Kent reckons.

Peter Sand, chief shipping analyst at BIMCO, reckons not many shipyards can be considered healthy and profitable now with the low volume of ordering continuing despite recent megaship orders.

Sand points out that the price of steel has shot up this year, unlike newbuilding prices, eroding margins further.

“The wave of consolidation in the shipbuilding industry will go on some time still”, Sand says. “A heavy industry activity like shipbuilding, which also holds a lot of jobs, is deemed to be poisoned by state interest. This is hurting the free competition and limits the chances for private entities to stay in business,” he warns.

According to statistics from the China Shipbuilding Economy Research Center, over 140 shipyards, mostly private entities, went bankrupt and around 90 shipyards were acquired and merged in China from 2009 to 2016.

“Nevertheless, we are seeing Chinese shipyards bringing home orders, also from outside China, for ships of considerable size and technological advancements, like the 22,000 teu ships. They are preparing for a future which will be quite different from the past that held a lot of simple designs,” Sand says.

Life is not easy for the Chinese state-run yards too. In 2016, Taizhou Wuzhou Shipbuilding, a subsidiary of Zhejiang Shipbuilding, became the first state-run shipyard to go bust. In September, Qingshan Shipyard, an affiliate shipyard of state-run shipping and logistics giant Sinotrans & CSC, decided to quit shipbuilding as the parent group’s latest effort to cut capacity.

All of which brings the CSIC/CSSC merger speculation back into sharp focus. Could the biennial Marintec China mega exhibition in Shanghai be the moment where the nuptials of these two state-backed giants are announced? Maybe. Will it make much difference to the overall capacity scene? Unlikely.

“In terms of the day to day effect on the shipbuilding market, I would think it is unlikely to have a profound practical consequence,” says Martin Rowe, managing director at Clarksons Platou Asia. “Whilst nominally CSIC and CSSC have been competitors until now there has been remarkably little difference in pricing and they produce similar designs and types of vessel. Consolidation of Chinese shipbuilding capacity could well make economic sense but, if mergers in other sectors are anything to go by the efficiency gains are not that easy to spot – ie no layoffs, no reduction in management capacity, etcetera,” Rowe adds.

The Chinese government has reaffirmed its focus on capacity consolidation in the shipbuilding industry this year, and set a target for the top 10 domestic builders to account for 70% of total Chinese output by 2020.

“The small and medium sized private Chinese yards will continue to suffer and it would be more difficult for them to win orders and secure finance. We expect to see more consolidation in the private sector,” concludes Han Yongfeng, an analyst at the Shanghai International Shipping Institute.

This article first appeared in the just published latest issue of Maritime CEO magazine. Splash readers can access the full magazine for free by clicking here.

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Jason Jiang

Jason worked for a number of logistics firms following his English degree, then switched this hands-on experience to writing and has since become one the most prolific writers on the diverse China logistics industry writing for a host of titles including Supply Chain Asia, Cargo Facts and Air Cargo Week. Jason’s access to the biggest shippers with business in China has proved an invaluable source of exclusives.

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