Growing orders for new ships and the mainland's ambition to challenge South Korea as the world's top shipbuilder is encouraging domestic steel mills to boost shipbuilding plate production to feed rising domestic demand, according to analysts.
Citigroup said mainland steelmakers planned to raise plate production capacity to about 60 million tonnes in 2010 from 40 million tonnes in 2006 - and even at this rate of growth the investment bank still expects a shortfall in supply.
Analysts at Citi forecast steel plate shortages to reach more than 20 million tonnes by 2010. Flat steel plate, with thicknesses in excess of six millimetres, is used in shipbuilding, engineering plants, industrial machinery, bridges, and construction applications.
Fuelled by rapidly rising demand and improving margins, steelmakers are speeding up their expansion of steel plate production.
Last month, Baoshan Iron & Steel (Baosteel), the mainland's largest steelmaker, agreed to pay 14.3 billion for its parent's Luojing steel plate plant.
The plant, which has an annual production capacity of 1.6 million tonnes, will almost double Baosteel's steel plate annual capacity to 3.4 million tonnes and increase its market share from 4 per cent to 7.7 per cent for last year, according to Daiwa Securities analyst Helen Lau.
According to the Japanese Shipbuilding Association, in the first nine months in last year, new ship orders totalled 125 million deadweight tonnes, exceeding the 99 million tonnes for all of 2006. Demand for cargo shipments and huge mainland demand for imported energy and raw materials is driving the construction of all sizes and types of ships. China accounted for more than 30 per cent of all new orders in the first three months of last year, and South Korea for 43 per cent, Ms Lau said.
Liaoning-based Angang Steel is also expanding its steel plate production capacity, expected to reach 3.2 million tonnes after its 22.6 billion-yuan steel project in Yingkou commences operation in the second-half of this year, up from 1.2 million tonnes last year, said executive director Fu Jihui.
Mr Fu said most steel plate went to shipyards in Dalian, one of the mainland's three leading shipyard bases. The remainder was exported, mainly for Korean shipbuilders.
Shougang Concord International Enterprises, the Hong Kong-listed unit of Shougang Corp, also plans to boost production at its Qinhuangdao, Hebei province, steel plant to 2.5 million tonnes of steel plate by 2009 from 1.9 million tonnes last year, to meet rising demand from shipyards, deputy managing director Michael Chen Zhouping said.
About 50 per cent of Shougang International's steel plate is sold to shipbuilders and the remainder for the infrastructure and machinery industries.
Demand for new shipping is growing faster than production capacity; order backlogs at shipyards exceed four years and have recently been increasing further.
Mr Chen said shipbuilders are chasing supplies of steel plate and suppliers including Shougang International had growing bargaining power that could allow them to completely pass on the increase in raw materials costs to shipbuilders.
The situation is reflected in other markets. Japanese shipbuilding companies in December agreed to a 10 per cent price rise on Nippon Steel Corp's steel plate, backdated to October 1.
Steel plate prices have surged 28 per cent to more than 5,000 yuan a tonne in Shanghai in December, compared with about 3,900 yuan in January last year, and the trend is continuing, Ms Lau said.
Higher pricing power and improving technological knowhow has also translated into higher margins.
Su Jiangang, executive director at Maanshan Iron & Steel, said the gross profit margin on shipbuilding plate was about 30 per cent, almost double the company's average gross profit margin. The Anhui-based steelmaker's annual output of steel plate is about one million tonnes a year, he said.
China, the world's largest steelmaker, overtook Japan as the No2 shipbuilder in 2006 after building 14.52 million deadweight tonnes, almost 20 per cent of the world's total.
In 2000, the country had only 6 per cent of the global market.
Beijing has listed shipbuilding as one of its top development priorities and plans to spend billions of dollars to fund the construction of three modern shipbuilding bases near Dalian, Guangzhou and Shanghai.
According to the mid- to long-term industry development plan passed in 2006, the State Council has set a target of at least 25 per cent of total global output by 2010 and 35 per cent by 2015.
By 2010, the mainland aims to have annual capacity of 23 million deadweight tonnes and an output of 17 million deadweight tonnes, with annual turnover at 150 billion yuan, according to the industry blueprint. Annual capacity will further increase to 28 million deadweight tonnes and 22 million deadweight tonnes of output with annual turnover of 180 billion yuan by 2015.