After the shipbuilding boom: tough times for China’s yards

Shipbuilding in China has become increasingly a struggle for survival. Shipowners around the world have been much less eager in the past few years to order new vessels, both in China and elsewhere, and consequently shipyards’ orderbooks and production have shrunk. Excess shipbuilding capacity in Chinese yards has become a major problem. Although 2013 has seen a welcome improvement in the order inflow compared with last year’s depressed volume, there seems little chance of a return to the extraordinarily high levels recorded earlier. Even a moderately healthy volume is proving elusive.

The recent history of the Chinese shipbuilding industry has been a fascinating and impressive story. Nothing as spectacular in the country had happened since the fifteenth century building boom. At that time, the massive imperial fleet was being constructed for Admiral Zheng He and his treasure-ship expeditions to south east Asia, Hormuz, the Red Sea and East African coast.

Zheng He’s merchant fleets, built for the seven voyages of up to two years in duration which occurred between 1405 and 1433, consisted of many ships, some of which were very large in comparison with other countries’ vessels of that era. The huge scale of activity required vast shipbuilding capacity and timber supplies. The 1405 expedition was comprised of 62 large treasure ships, 190 smaller vessels, and transported 27,800 men. Other expeditions were of similar size. The biggest ships were much bigger than any produced elsewhere, in fact the largest wooden ships ever built, incorporating advanced designs and technology.

In the modern era, within a very short period since the early 2000s, a massive shipbuilding industry emerged from relatively small beginnings, pushing China quickly to top position globally. Ships are built for Chinese owners, but this industry is heavily focused on the international market. During the first three years of the new millennium, deliveries of all types of vessel from Chinese yards averaged 6% of the world total (based on deadweight tonnes), far below the principal competitors, South Korea and Japan. From this modest contribution China’s global market share rose to a sizeable 23% in 2008 and then almost doubled to an astonishing 43% in 2012. Two years earlier, in 2010, China had overtaken South Korea to become the world’s largest shipbuilding country, measured by deadweight tonnage. In that year and the next, Korea’s output was still higher when measured by dollar value, because Korea produced a larger proportion of more sophisticated, and therefore more expensive, ships. Last year, China’s production became the highest by value as well as deadweight tonnage.

Looking at actual shipbuilding volumes emphasises the dramatic expansion. China’s yards delivered only 3-4 million deadweight tonnes of newbuilding vessels annually in the early 2000s. Growth was then very rapid. The annual total reached 21m dwt in 2008, and two years later the volume had tripled to 63m dwt. This highly impressive performance was achieved partly by expanding existing yards, but mostly by opening new ‘greenfield’ sites, with many new Chinese shipbuilders entering the market for the first time. Over the next two years, 2011 and 2012, output was sustained at slightly greater levels, 68m dwt and 66m dwt respectively.

The orderbook for new ships at Chinese shipbuilding yards reached a phenomenal 221m dwt peak at the end of 2008, according to data compiled by shipping information providers Clarksons. This volume comprised over one-third of the entire worldwide 619m dwt orderbook. In the next three years, as orders were delivered, the China orderbook held up remarkably well, supported by a resurgence of optimism among shipowners, many of whom returned to the newbuilding market to order additional ships. Subsequently, new ordering receded greatly and the Chinese shipyard orderbook was almost halved within two years, falling to 113m dwt at the end of 2012. Since then it has diminished further, although only slightly.

Following the 2008 global financial crisis and economic downturn, and the resulting chronic over-capacity in shipping markets, orders for new ships have been much harder to obtain, both for Chinese builders and their competitors. However, the vast orderbook for new ships already accumulated in China, and therefore huge backlog of work, ensured that output did not immediately plunge downwards after 2008. Over several years that backlog has been drastically reduced and now, newbuilding deliveries are falling sharply.

Shipbuilding output at Chinese yards was dominated by tankers and container ships for a number of years. Then from 2009 onwards a dramatic change in the production profile occurred. As a result of many orders placed by foreign and domestic shipowners during the freight market boom, and afterwards, bulk carriers were built in greatly increasing numbers, becoming by far the largest output category. In 2008 about 22% of China’s newbuilding deliveries of all vessel types consisted of bulk carriers (measured by compensated gross tonnes or CGT, indicating the work content of ship construction). A few years later in 2011 and 2012, bulk carriers comprised well over 60% of vastly higher totals. Building other ship types was still an important activity, since actual production volumes were sizeable.

What factors were instrumental in enabling China’s shipbuilders to achieve such a powerful performance? Low labour costs, and low land costs for many new production sites, buttressed by support from local and national governments, accompanied by abundant availability of finance, were reflected in competitive pricing. Improving management skills, assisting greater efficiency and productivity, also contributed while technological advances and enhanced product quality further boosted competitiveness. The extended period of extremely strong global demand for new ships between 2003 and 2008, followed by a brief resurgence in 2010 before a collapse ensued, provided a strong background for progress.

This year, a contrasting downwards step change in the pace of Chinese shipbuilding activity has been unfolding. Currently, the rapidly shrinking (although still large) orderbook is being reflected in noticeably diminishing output, indicating an annual 2013 newbuilding deliveries total possibly below 45m dwt. Many of China’s shipyards are in an increasingly precarious position, despite an upturn during this year in the inflow of new orders for future delivery. In some cases production has completely ceased, following completion of all contracts, and yards have closed. Numerous other shipbuilders are likely to be facing the same problem sometime in the next twelve or eighteen months, when their work schedule is completed.

The recent ordering upturn has provided a partial respite. After taking only 21m dwt of contracts in 2012, less than one-third of the volume seen as recently as two years earlier, Chinese shipbuilders secured an estimated 37m dwt of new orders in the January to September 2013 period, according to Clarksons. That achievement reflected increased optimism among shipowners around the world about an approaching shipping market recovery, coupled with low and therefore attractively priced deals available from yards for new vessel construction. The improvement suggests that China’s annual total for new orders received this year may be more than double last year’s figure. But a massive surplus of shipbuilding capacity remains an existential problem urgently requiring a solution.

How can these difficulties be alleviated? Earlier this year consolidation of shipyards was being encouraged by the Chinese government, designed to enlarge individual shipbuilding business units as a means of improving efficiency and profitability. Then in early August the government stepped in with additional support. The State Council published a plan entitled ‘Accelerating Structural Adjustment and Promoting Reform and Upgrading of the Shipbuilding Industry’. A radical restructuring is envisaged over the next three years, emphasising reduction of excessive production capacity, and promoting enhanced competitiveness in the world market, partly through more innovation. Specific proposals include reducing reliance on production of less sophisticated vessels (such as bulk carriers) and increasing output of high-tech ships (including gas carriers and container ships) and offshore units (service vessels and drilling rigs).

Clearly also a strong upturn in global demand for new ships would benefit Chinese shipbuilders. As mentioned, there have been signs this year that some owners are expecting a shipping market revival within the next two or three years and are moving to have new and more economical tonnage available at the outset. But, even if a market recovery does occur within that timescale (and many market players remain sceptical about both timing and magnitude), it seems unlikely that all existing Chinese shipyard capacity could be quickly redeployed profitably. So pressure seems set to continue for a major overhaul of the industry.

Richard Scott
GMI visiting lecturer and MD, Bulk Shipping Analysis