Mainland shipbuilders need to raise their game, analysts say

Mainland shipbuilders will have to consolidate, improve their technology and start building higher-value vessels if the mainland is to maintain its position as the world's biggest shipbuilder, analysts say.

The industry sailed through difficult waters last year, when shipyards were hammered by order cancellations and delivery delays. Now they are seeing a pick-up in bulk vessels, followed by orders for tankers and container ships.

In the first seven months, mainland yards received new orders for vessels totalling 33.32 million tonnes, quadruple the amount in the same period last year, according to the China Association of the National Shipbuilding Industry.

The recovery has prompted several shipyards to seek listings in Asia this month and in the fourth quarter.

Yangzijiang Shipbuilding Holdings, one of the top three private shipyards on the mainland, raised NT$4.56 billion (HK$1.11 billion) by issuing Taiwan depositary receipts on the Taiwan Stock Exchange.

Jiangsu Rongsheng Heavy Industry reportedly will raise US$700 million in Hong Kong in the fourth quarter, while New Century Shipbuilding may relaunch its initial public offering in Singapore as early as in the fourth quarter.

But analysts warned that it would take time for the industry to return to pre-crisis new order levels, given the current sudden bulge in orders, especially for bulk vessels.

'It will take more than three years for the industry to resume its peak level of 2007,' said Jack Xu, a shipbuilding analyst at SinoPac Securities.

A separate report by Nomura Securities said it did not expect a strong, V-shaped recovery in new vessel contracts. But it expected container ship orders to pick up in the second half, since orders for these vessels had come down to 30 per cent of the current fleet. This compares with the order book for bulk vessels, which account for 60 per cent of the existing fleet.

Owing to speculative demand earlier this year for bulk vessels, a segment that mainland shipyards dominate, China overtook South Korea as the world's largest shipbuilder by all three industry measures - new orders, vessel deliveries and the order book - in the first half of this year. But the momentum between the two countries in new orders reversed in July because of a rebound in container vessels.

New orders received by Korean shipyards exceeded those at mainland yards for the first time this year. Korean yards received new orders for 1.59 million tonnes of output, while Chinese yards won 1.19 million tonnes. This closed the gap for new contracts in the year to about 20,000 tonnes.

'If container ship orders continue to pick up in the second half of this year, Korea could overtake China again in the race,' a Nomura report said on September 3. 'Therefore, in order to establish clear dominance in shipbuilding, China would have to move up the value chain and diversify its offering.'

Unlike Korean shipyards, where the top five yards account for 70 per cent of the nation's order book, the industry in China is still very fragmented, with the top five accounting for only 33 per cent of orders.

The number of loss-making shipyards on the mainland increased sharply to more than 150 this year from about 90 in 2007.

This was because new shipyards, which account for about 30 per cent of the nation's orders, are struggling to execute orders and win new jobs after the downturn, according to Nomura's report.

All these factors suggest this is a prime time for consolidation in the mainland shipbuilding industry, a move that will enable mainland yards to improve their production efficiency and upgrade their product lines.

'Chinese shipyards have long been lagging behind their Korean counterparts in terms of production efficiency due to backward technology,' Xu said.

Some Korean shipyards have lowered their labour costs by transferring the production of less sophisticated vessels to countries such as the Philippines. 'By combining their advanced technology with the low labour cost overseas, Korean shipbuilders have become much more price-competitive and succeeded in winning contracts over mainland yards,' Xu said.

Korea's Hanjin Heavy Industry, which started overseas shipbuilding operations in the Philippines in July 2008, has received orders for four 160,000-tonne tankers from Tanker Pacific and three 180,000-tonne bulk vessels this year, all to be produced in the Philippines.

To the relief of mainland shipyards, migrating production lines overseas is not a trend among Korean shipbuilders, said James Hie Suk Yoon, a shipbuilding analyst for BNP Paribas Securities Korea.

'Other Korean yards are not interested in expanding overseas, as their existing production in Korea is huge, and they can't shut it down,' he said.