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China's shipyards founder as building boom ends
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China's shipyards founder as building boom ends

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China's shipyards founder as building boom ends

YUEQING, China (Reuters) - Welder Zhang fires up his blow torch and looks up at the towering, 8,800-tonnes oil tanker that is likely to be his last job at China's privately owned Qiligang Shipbuilding Co.

Barring a miracle, the 50-year-old will soon join the thousands of unemployed shipbuilders who have fallen victim to the end of China's maritime boom and the long-awaited consolidation of its more than 1,600 shipbuilding companies.

Four years into one of the worst downturns to afflict the global shipping industry, hundreds of small to mid-sized shipyards are teetering on the brink of bankruptcy as foreign orders dwindle and domestic lenders slash credit.

"The building of this ship is almost done, and we don't expect to have any new jobs soon," said Zhang, who asked to be identified by one name.

"We used to work 30 days a month, but now we work only 10 to 20 days because not many ships are being built. Many workers have moved on to other jobs."

Qiligang Shipbuilding is one of several troubled firms in the eastern coastal Zhejiang province, the world's largest manufacturing base for small to medium-sized dry docks.

According to local media, around 80 percent of shipyards in Zhejiang have either suspended production or are operating at half their capacity.

"The grass is growing high in many yards that have closed due to a lack of orders," said Zhang Shouguo, secretary general of industry group the China Shipowners' Association.

"This is just the beginning of the woes for shipbuilders and the worst has yet to come."

To survive and keep some of the sector's 400,000 workers employed, shipyards must turn to less lucrative businesses such as leasing vessels, real estate or, in the worst case, tearing apart the ships they once used to build, industry experts say.

"Shipbuilding is a very cyclical industry and those who can maintain strength, complete structural restructuring and transform will be a major force after the recovery," said Zhang Yao, spokesman for Singapore-listed Yangzijiang Shipbuilding (BS6.SI), one of China's largest vessel building firms.

"For others without flexibility to deal with the market changes, dormancy may be their best choice. Eventually more than 30 percent of existing shipbuilders will disappear."

His forecast is relatively optimistic compared to the view of other industry officials. The head of the government's China State Shipbuilding Corporation, Tan Zuojun, told local media in February he believed 50 percent of domestic shipyards would go bankrupt in the next two to three years.

MARITIME RECESSION

The shipping industry has yet to recover from being mauled by the 2008 global financial crisis, which triggered what the International Monetary Fund called the "Great Trade Collapse".

The Baltic Dry Index (.BADI), the benchmark for the freight market and an indicator of global economic activity, plummeted more than 94 percent in 2008 from a record high of 11,793 points. This week, it was trading above 1,100.

During a maritime recession, shipbuilding is usually the first and hardest hit sector as global ship owners delay or cancel orders for new vessels to save capital reserves.

But in China, the world's biggest shipbuilder by volume, government intervention helped the industry defy the norm.

Debt-laden shipyards that otherwise should have gone bust were allowed to stay afloat thanks to easy credit, which stemmed from government efforts to bolster foreign exchange reserves to protect the economy from the crisis.

Lending to the overall shipping industry shot up more than 500 percent year-on-year to nearly $4 billion in 2008, according to loan market information service Thomson Reuters LPC.

"When Chinese shipyards have new orders, the buyers must bring foreign currency into China since the shipping contracts are in U.S. dollars," said Lam Pak Ho, Hong Kong-based senior manager at Bank of China.

The huge expansion in Chinese shipyards, which currently hold about half the world's new ship orders, helped create a glut of low-tech vessels that has kept freight rates low and prolonged the agony for ship owners across the globe.

As these foreign firm struggle, orders have declined and financing has become problematic, prompting Beijing to turn its back on what has now become an unprofitable business.

Credit has also dried up as the government tries to cool the economy, falling more than 87 percent from 2008 to around $501 million last year.

New orders to Chinese shipyards tumbled 52 percent last year to 36.22 million deadweight tonnes, the China Association of National Shipbuilding Industry says. This year, new orders are down about 40 percent year-on-year in January-February.

SURVIVAL OF THE FITTEST

Only the largest Chinese shipyards such as China Shipbuilding Industry Corp (601989.SS), China Rongsheng Heavy Industries (1101.HK) and Yangzijiang Shipbuilding, are expected to survive this round of consolidation.

In the government's five-year economic forecast, China's 10 largest shipbuilders are expected to hold at least 70 percent of the domestic market by the end of 2015, compared to less than 50 percent in 2010.

A short drive from the Qiligang Shipbuilding yard in Zhejiang, two unfinished oil tankers stand in the once bustling dry dock owned by struggling Dongfang Shipbuilding (DFS.L).

The shipyard, which had employed more than 600 workers just over a year ago, could become another scrap yard if the company fails to find a more profitable way to survive. China is one of the world's leading ship recycling nations.

"At the end of this year, you could see many shipyards turn into scrap yards," said Venkatesh Narayanaswamy, the former chairman of Dongfang Shipbuilding. "This would be the worst case scenario, because the profit margins are much lower."


Analysis: China's shipyards founder as building boom ends - Yahoo! Finance

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