Neither side knew it at the time, but China’s ‘treasure’ ships dwarfed their European counterparts in the fifteenth century. The second Ming emperor built 250 oceangoing giants, capable of carrying 2,000 tonnes of cargo. The largest of the Venetian galleys could hold just 50 tonnes. A nine-masted treasure ship was 480 feet in length. Seventy years later, the caravel that carried Columbus across the Atlantic was 50 foot long.
Size still matters as far as China’s shipbuilders are concerned and the two biggest state-owned shipbuilders – China State Shipbuilding (CSSC) and China Shipbuilding Industry (CSIC) – announced this month that they are merging. The two companies own a number of yards whose output ranges from aircraft carriers to container ships and tankers. The combined entity will have $120 billion in assets and 240,000 employees, according to industry publication Jane’s Defence.
Rumours about the merger have persisted for a while, gaining momentum in 2015 when CSSC and CSIC swapped senior executives. The two companies were obvious targets for operational efficiencies, following similar mergers between the country’s two largest trainmakers, CNR and CSR in 2015, and then the combination of shipping and logistics giants Cosco and China Shipping in 2016 (respectively dubbed by local media as the ‘divine train’ and ‘divine ship’ to reflect their gargantuan scale).
In theory mergers like these should deliver plenty of savings as duplicated resources are rationalised and the newly combined entities no longer bid against one another for business. An editorial in the Economic Observer said something similar, arguing that the merger will “eliminate backward production technology, remove excess capacity, improve the allocation of state capital and enhance China’s international competitiveness”.
In practice the gains are rarely straightforward, with old rivals keen to protect their fiefdoms and lobbying frantically against job losses.
Xu Baoli from the research division of the State-Owned Assets Supervision and Administration Commission told Sina.com that the latest merger marks another chapter for China’s shipbuilders as the government switches from a focus on encouraging domestic competition to creating an international champion.
Similar combinations have been happening elsewhere, with the world’s largest shipbuilder Hyundai Heavy Industries (HHI) announcing plans to purchase the Korea Development Bank’s stake in Daewoo Shipbuilding & Marine Engineering for $1.7 billion earlier this year. The new group, called Korea Shipbuilding & Offshore Engineering, will cement South Korea’s position in an industry that has struggled with financial issues since a super-boom turned to bust a decade ago.
If HHI’s deal gets past the world’s antitrust bodies, the new group will command about a fifth of the global order book by tonnage, compared to 13% for the CSIC-CSSC grouping. Yet industry experts are unsure on whether shipbuilding has reached a long-anticipated bottom, with orders for new vessels still showing signs of dwindling. HSBC reports that the ratio of orders for container ships as a percentage of the total fleet hit an all-time low of 12.3% in May. At its peak in 2009 it was closer to 60%. The same ratio for oil tankers was 11% of the fleet, compared to 50% back in 2009.
That could signal that orders will accelerate as fleets get older and there are signs that sentiment is improving in the shipping sector, which could also prompt interest in new vessels. The Baltic Dry Index has tripled since February, thanks to rocketing iron ore prices and low inventories at Chinese ports, which has boosted demand for Capesize ships. But Peter Sand, head analyst at shipping association BIMCO, forecasts that fleet growth will outstrip demand across 2019 and 2020 and that an order book of 96 million deadweight tonnes spells “bad news” for the broader shipping industry.
Fresh orders are, however, likely to be driven by new regulations that require ships to burn fuel with a sulphur content of no more than 0.5%. As Mandarin Shipping’s founder Tim Huxley told WiC: “Longer term the advent of these environmental rules will force out older, less efficient tonnage, which should create a market for new vessels too.” But to capitalise the Chinese yards will need to produce these more complex, higher-performing vessels.
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