Credit crunch leaves shipyards high and dry

PUBLISHED : Saturday, 18 October, 2008, 12:00am
UPDATED : Saturday, 18 October, 2008, 12:00am

The credit crunch is taking a toll on mainland start-up shipyards, resulting in massive delivery delays, according to a report by global ship broker Clarkson.

In the first eight months of this year, Chinese shipyards have delivered 38 per cent of the vessels that were due to be finished by the end of this year, lagging behind South Korea's 52 per cent and Japanese shipyards' 55 per cent, the report said.

The number of vessels due to be delivered has already been factored into average historical slippage rates.

Chinese shipyards may be behind partly because of reporting delays, the report said. But there may also be problems because some of the shipyards' plans did not take into account the impact of the credit crunch on cash flow, forcing them to delay some projects.

'Many new privately owned shipyards are highly leveraged and pitched the banks for loans purely on the strength of their contracts,' said Jack Xu, a shipbuilding industry analyst for Sinopac Securities.

Since these new shipyards are inexperienced in shipbuilding, some of the vessels they produce do not meet the standards required before they can be delivered to the client.

That means the shipbuilders cannot repay the loans on time and the banks refuse to extend the loans because of the credit crunch, resulting in cash flow problems and delays, Mr Xu said.

There are more than 1,000 shipyards building ocean-going vessels on the mainland: big state-owned enterprises, local government-holding companies, Sino-foreign joint ventures and privately owned firms.

About 70 per cent of the shipbuilders are privately owned, and account for 40 per cent of the vessels built on the mainland, said Germanischer Lloyd, a German vessel classification company.

These privately owned shipyards are located in Suzhou, Zhejiang, Taizhou, Wenzhou, Ningbo and Shandong. Their contribution is expected to surge. It is estimated that by 2015, private shipyards will produce 50 per cent of all vessels in China.

The sharp rise in steel prices in the first half also made it harder for small plants, Mr Xu said. Prices of ship plate increased 30 to 50 per cent in May and June, squeezing profit margins, especially for small shipyards that produce low-end vessels. The banks tightened credit to the shipyards, leaving them incapable of buying enough steel to build ships, he said.

Zhang Weijing, a professor of marine power plant and automation in Shanghai Jiao Tong University, said a shipbuilding boom since 2006 had caused overcapacity and prompted shipbuilders to receive orders beyond their ability to produce, resulting in massive delays.

'Privately owned shipyards are concerned clients may cancel because of the delays,' Mr Zhang said. Many small shipyards would go bankrupt if shipowners cancelled because of delivery delays, he said.

Consolidation among small plants is inevitable, Mr Zhang said. 'Some of the small plants in Jiangsu have transformed themselves into steel structure producers amid the downturn in the industry.'

Choppy waters

Cash flow problems delay vessel deliveries from mainland firms

The percentage of shipbuilders on the mainland that are privately owned: 70%