At HSBC’s fifth annual Shipping Conference last week, China’s growing impact on the industry was a major topic for conversation.
In less than a decade China has gone from a virtual nonentity to the largest shipbuilder in the world. But as in so many areas of manufacturing, Chinese companies are strongest at the lower end. In shipbuilding, that means ‘bulk freighters’ (the type of vessel that carries coal or grain). Leadership in container ships (often much larger vessels) and oil and gas tankers (more complicated to construct) belongs to its its main shipbuilding rival: South Korea.
According to CSIC (China Shipping) executive Han Guang, South Korea had a bigger share of new ship orders in dollar terms last year (though China was biggest by tonnage). Many container and tanker shippers are willing to pay the Koreans 10-15% higher asking price, versus the cheaper Chinese alternatives.
“The quality just isn’t there,” explains HSBC Shipping Services banker Chris Ohlson. “[Out of an estimated 5,000] I reckon you only really need to consider 100 shipyards [for building] in China today.”
Another concern expressed at the conference: the rising cost of ‘bunker fuel’ – up from $400 last year to around $630 now.
That’s made operating fuel efficiency more important than upfront construction costs, says Kenneth Cambie, CFO for container shipper OOCL. Plus it puts a premium on size. Cambie calculates that ships carrying 13,000 containers are as much as 40% more fuel efficient than smaller vessels, which is prompting orders for the bigger ships.
That doesn’t play to Chinese strengths. “I think temporarily [for Chinese shipyards] 10,000 [containers] will be the upper limit,” argued Graham Porter, a founding partner of ship chartering firm Seaspan. “In the short term I think it’s a real challenge for the Chinese shipyards,” agrees CSIC’s Han, “[they] cannot provide the better [more fuel-efficient] designs.”
Still, Han says it’s only a matter of time before the Chinese can compete here too, although many may not survive the learning process. “Shipbuilders will have a hard time in the next few years,” he warns, “and some shipyards in China will disappear.”
Insiders are mainly worried about three things: rising wages, unpredictable steel prices and currency appreciation.
Many shipyards are already finding it tough to maintain their low-cost advantage in labour.
“Even the top shipyards will find that 25-30% of their workers just don’t return after Chinese New Year,” says Ohlson. “This is a massive problem for training and for improving quality.”
So, a tough year ahead? “I question whether many of these yards will be making a profit this year on the orders they’re taking,” cautions Ohlson.
And as competition becomes more cut-throat, there was disagreement over whether it would be the state-owned or the private shipyards that prove more durable.
Tim Huxley, CEO of bulk shipper Wah Kwong, said he preferred to buy ships from the state-owned yards, on the basis that they were more likely to receive government support in any downturn.
But Sinopacific chairman Simon Liang thought the best-run private firms were a better bet on quality over the longer term, since “state-owned company bosses [only] stay in their positions for three to five years.”
The consensus of the day: while the shipbuilding industry looks to be plagued by overcapacity right now, demand for more fuel-efficient ships will remain strong in the years ahead. And the firms that survive the current struggle will benefit from a Chinese economy increasingly dependent on imported commodities, says Zhang Liang, president of COSCO, who argued that urbanisation, and continuing fixed asset investment, means ongoing demand for raw material imports.
It remains to be seen if it is the more technologically advanced South Korean, or the Chinese firms playing catch up, that ultimately benefit most from that trend.
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