S\'pore Shipbuilders Bruised As Concerns Mount

I read a report from Citi Securities (China) last week regarding the Shipbuilding industry in China. The people in North Asia are of the opinion that the PRC yards will weather this storm better than the Japanese and the Korean yards. I think it makes a lot of senses. I also feel that the Japanese shipbuilding industry is mature and the Koreans are losing their competitiveness. Hence, the bigger shipyards in PRC ie COSCO and YZJ should be in a better position to survive this winter I summarize the main points of the report for everybody here. Key Points 1) New Shipbuilding orders have dropped drastically From Jan-Sept 08, there were 1917 vessels being ordered, approximately 143 million dwt. Compared to 2007, the figures have come off 60% and 27% respectively. However, it is still around 04-06 level. If you examine them based on vessel types; VLCC has been more resilient than dry bulkers and container ships. Container ships fared the worst. Orders for Oct stand at 34 vessels and 2.9 million dwt. This is the lowest orders since mid 2006. (See page 6) 2) Investments in new builds have dropped drastically Total investment in new builds for 9M2008 is estimated at USD 114 billion, less than half of 2007 investment. Orders for Sept alone have dropped 83% y-o-y. Among which, investments in VLCC stand out. Investments for 9M2008 in VLCC amount to USD 13.9 billion. This is 3x the orderbook for 2007. Reasons provided include the IMO\'s regulations on single hulk tankers being phrased out by 2010 as well as phrasing out vessels built before 1984. (See page 7) 3) Opportunities exist in a sea of crisis Jan-Aug 2008 data showed that PRC shipbuilding industry contribued 127.44 billion revenue and 12.35 billion profit. This is 50% and 92% higher than the corresponding period in 2007. This exceeded market expectations. 9M2008, PRC shipbuilders completed 13 million dwt of vessels. This is a 40% increment compared to 9M2007. In the first 9M2008, PRC accounts for 21.1% of the entire world\'s completed dwt. This is a record for the PRC shipbuilding industry. The figure is estimated to hit 39% in 2010. By then, PRC will overtake Korea to become the world largest shipbuilding nation. 9M2008, PRC orderbook accounts for 220 million dwt. This is 63% higher than 9M2007. This figure is expected to drop as new orders declined and vessels are completed. Since 2005, the orderbook from PRC has been increasing. As at end Sept 2008, PRC accounts for 36% of the entire world\'s shipbuilding orderbook. This shows that the competitiveness of the PRC shipbuilding industry has been increasing. To reinforce this point, PRC has already secured more orders for new builds in the months of July and August, overtaking Japan and Korea. (See page 4) Negative factors are being gradually reduced Steel prices in PRC have declined drastically. Using Shanghai 20m normal mid steel plate as a gauge, the price as at end Oct is only 59% of July\'s prices. The big drop in steel plates\' prices will serve to reduce the raw materials costs on the shipbuilders. Since 2005, the rapid appreciation of RMB has created much negativity to the PRC shipbuilding industry. But since July 2008, RMB appreciation has slowed down. This reduced currency risk will serve to benefit PRC shipbuilding industry. (See page 10) 5) PRC shipbuilders are in a better position to weather the winter Leading shipbuilders in PRC have strong financial positions. Many of these enterprises received initial deposits of their orders in the region of 20-40%. This is higher than the other international shipbuilders. Leveraging on their strong cash balance and low gearing, the leading PRC shipbuilders are making proactive measures to prepare themselves for the long winter. In conclusion, this round of consolidation will allow PRC leading shipyards to organize their internal structures and enahnce their production capabilities. Compared to the declining Japanese shipbuilding industry and the mature Korean shipbuilding industry, PRC shipbuilding industry is still in a period of high growth, leveraging on their cost competitiveness and financial strengthes to withstand the winter. It is widely believed that over the next three years, shipbuilding industry will gradually shift to PRC and it is estimated that China will overtake Korea to become the largest shipbuilding nation by 2010. Economic uncertainties will separate the good from the weak. According to Clarkson, as at end Sept 2009, the 4 largest shipbuilders hold 25% of the world\'s newbuilds\' orders. Smaller yards which make up 72% of the world\'s shipbuilders only secured 10% of the orders. In the coming 3 years, a large number of inefficiently managed smaller yards will be consolidated. The larger yards that survived will continue to grow using multi-pronged strategies, in order to improve their competitiveness.

By Lee Spears Nov. 26 (Bloomberg) -- Shipyards in China, seeking to overtake South Korea as the biggest shipbuilding nation, may stop asking customers for downpayments as they vie for orders in a global recession. Yards including units of China Shipbuilding Industry Corp., the nation’s largest, recently commanded advanced payments of as much as 70 percent, Bao Zhangjing, assistant director of the China Shipbuilding Economy Research Center, said today in Shanghai. The global shipbuilding industry will enter a recession of at least three years starting 2009 on slowing trade and lending, he said. The deepening global financial crisis has slackened global demand for goods from large exporters including China, reducing sales of ships for carrying raw materials and finished goods. New orders in China are set to decrease 42 percent this year, the biggest drop among the three biggest shipbuilding nations, according to Clarkson Plc, the world’s largest shipbroker. “Downpayments of zero won’t be the rule, but there will be occurrences,” Bao said, while attending a conference. “Generally, downpayments at Chinese yards may be less than 20 percent while demand is low.” China last year surpassed Japan to become the second-largest shipbuilder by order backlog, according to Clarkson. The nation had 214 million deadweight tons of ships on order at the end of October, accounting for 32 percent of the global total, while South Korea, the biggest, had 217 million deadweight tons on order, and Japan had 112 million. Deadweight tonnage measures a finished ship’s carrying capacity. ‘Global Cancellations’ “Cancellations will occur globally,” Bao said. “Because China has relatively more start-up yards, many of them focusing on dry- bulk carriers, cancellations may be more severe here.” The Baltic Dry Index, a benchmark of demand for shipping dry goods such as iron ore, posted a fifth straight decline yesterday on weakening steel demand. The index, down 93 percent from its May 20 record, fell 2.4 percent to 804 points. New ship orders globally will fall 60 percent in 2009 from a year earlier to 60 million deadweight tons and will reach 50 million deadweight tons in 2010, Bao said. Slackened demand and canceled orders will leave shipyards with excess capacity beginning in 2012, he said. Sales may drop next year as the trading environment becomes more “challenging” and the financial-market turmoil creates “uncertainty in some shipping markets,” Clarkson said Nov. 11.

Looks like the storm is just starting for Keppel and Sembmarine. Better stay clear of these companies :laugh: