Shipyards reel as steel prices and yuan soar
Mainland shipyards will have to brave rough seas to maintain profitability in light of rising steel prices and a stronger yuan. And that is despite having turned shipbuilding into the country's 12th-largest industry in value by exporting US$11.94 billion worth of vessels last year, up 49 per cent from the year before.
While South Korea exported US$27 billion worth of vessels in the same year, up 22 per cent, it has been losing orders to the mainland for its lower labour costs.
In terms of volume, Chinese shipyards completed 18.9 million deadweight tonnes last year and overtook Japan as the world's second-largest shipyard in terms of new contracts signed. By 2015, the country is expected to build 22 million dwt of vessels, surpassing Korea.
But overtaking Korea could be more difficult than it looks. 'If the yuan appreciates more than 10 per cent a year, it will definitely delay the time for China overtaking Korea as the world's biggest shipyard,' said Andy Meng, a transport analyst from Morgan Stanley. 'Appreciation in the yuan will deprive the mainland shipyards of the cost edge.'
More than 80 per cent of vessels produced on the mainland are for export. The pricing consideration is in US dollars but most of the costs are denominated in yuan.
Shipyards such as Guangzhou Shipyard International have deployed exchange forward contracts and borrowing in US dollars to alleviate the impact of the firmer yuan. Some local governments also offer low-interest US dollar loans to shipyards, said Jack Xu, a transport analyst for SinoPac Securities.
Even so, some shipyards say it is getting harder to use forward contracts to cover the yuan's appreciation as the choice of hedging tools is limited, given the yuan's uptrend.
In addition, shipyards have been exposed to the risk of rising steel prices.
Vessel contracts are usually prepared with a lead time of up to several years from the date when the construction begins. However, steel inventory in a medium-sized shipyard such as Guangzhou Shipyard is just enough for several months. When the prices of steel rise more than expected, shipyards have to bear the additional costs.
As the nation's steel mills' talks with exporters of iron ore drag on, analysts expect the average steel prices might rise 5 per cent to 8 per cent over the next two years, on top of the 12 per cent from last year.
Some industry veterans even worry about vessel oversupply in the near term, especially of low value-added vessels such as small, dry bulk-ships and small tankers.
'Local shipyards have expanded too fast; it will lead to oversupply in the near term,' said Fan Qiang, assistant president of China Classification Society, an independent organisation responsible for inspecting vessels. One in five vessels in the country is classified by the society.
Chinese shipyards are predicted to increase their unit output at a compound annual growth rate of 18.47 per cent from 2006 to 2010, compared with 11.72 per cent in Korean shipyards, and only 1.54 per cent by their Japanese counterparts, according to Det Nordke Veritas, a risk management consultants firm. In 2010, the mainland will produce 1,064 newbuildings, compared with 540 in 2006.
Mr Xu said an overcapacity would arise after 2010, when the mega Guangzhou Longxue Shipyard and some privately owned shipyards came on stream.