Mainland shipbuilders reel as steel prices soar

PUBLISHED : Monday, 31 May, 2004, 12:00am
UPDATED : Monday, 31 May, 2004, 12:00am

Rising steel prices are putting the squeeze on Chinese shipbuilders, prompting several small companies to delay or scrap contracts that were signed a year ago.

The delays, however, risk jeopardising the reputation of the mainland shipbuilding industry.

Market watchers said Chinese shipyards could lose future business by trying to renegotiate contracts to cover unanticipated higher materials costs.

'[Increasing steel prices are] a big problem for us. We saw our steel cost double this year,' a senior official from China State Shipbuilding Corp (CSSC) said. 'Not only are our margins squeezed, we have run a loss on some projects.'

New orders at mainland shipyards surged 182 per cent last year to 18.5 million deadweight tonnes (dwt), the People's Daily reported.

Orders at CSSC alone tripled to more than seven million dwt last year. This doubled its order book to 10.2 million dwt and will keep it busy for at least three years.

But many projects signed last year were locked in when steel prices were low. Shipyards are now struggling to fulfil orders, constrained by higher costs for the key material.

'[The increase] was totally not expected. Although we can adjust the price for new orders, there's nothing much we can do for a project signed last year,' the CSSC official said.

Although large players are taking the burden of higher costs, analysts said smaller shipyards were failing to adequately fulfil their contract obligations.

According to some reports, small yards are asking for supplementary payments to cover higher steel prices and costs for components denominated in the euro.

Some firms are also giving priority to more recent contracts signed at higher steel prices and delaying delivery dates for older ones.

'Some smaller yards will have trouble in sourcing steel,' a shipping analyst at a western bank said. 'They may need to renegotiate the price with shipowners in order to catch up with delivery schedules.'

Reports last week said several orders placed by Greek shipowners had been scrapped.

Matthew Flynn of maritime consultancy Flynn Consulting said this and other methods to account for higher steel costs would give mainland shipyards a bad name.

'China yards will lose credibility by trying to recoup their steel or other costs. This will not help their business in the future,' Mr Flynn said. 'You'll never see this type of thing happening in Japan. They will never consider not honouring the letter of a contract.'

China is the world's third-largest shipbuilder after South Korea and Japan. According to Lloyd's Register Fairplay data, China accounted for 8 per cent of global construction last year, completing 4.1 million dwt.

Fuelled by rapid economic growth, mainland steel prices have climbed more than 30 per cent in the past year despite recent central government measures to chill the overheated economy.

According to the China Logistics Information Centre, the average price for ordinary steel plate used in shipbuilding was 4,854 yuan per tonne this year, up from last year's average of 3,729 yuan per tonne.

Hong Kong-listed Guangzhou Shipyard International, however, tried to play down the impact of higher steel prices. 'I don't see [the increase] affecting us,' company secretary Li Zhidong said.

The southern China shipyard reported an operating profit of 66.17 million yuan last year, compared with an operating loss of 65.75 million yuan in 2002.

China is bent on becoming the world's biggest shipbuilding nation. The government has set a target to build 24 million dwt a year by 2015, with 35 per cent of the market.