The contracting boom (2006-08) led to an expansion of shipbuilding capacity as new yards opened and existing capacity grew. However, the low contracting environment since 2008 has put increasing pressure on yards to fill this capacity. As China is home to 35% of the world’s yards it is interesting to see how recent contracting activity has affected yards here. Graph of the Week In 2012 ytd just 23 Chinese yards out of 197 yards with an active orderbook have secured a contract. The Graph of the Month shows the percentage of Chinese yards by administration type which have last received a contract in each year. As the graph shows, no contracts have been placed in 2012 at any yard within the state-run CSIC group, nor at any joint venture yard.
LOCALising the problem
However, more pertinent is the fact that 32% (52) of the 163 active local yards in China have not taken a contract since 2009 or earlier, whilst 59% (96) of local yards in China have not taken a contract since 2010. New local yards, in particular, have relied on bulker orders. A revival in bulk contracting in 2010 helped some yards fill berths, but the majority of local yards have struggled to attract orders since the downturn, with the number of bulker contracts falling 64% y-o-y in 2011. The situation has been exacerbated by the difficulty these yards have had in competing for business in the more specialised vessel sectors currently favoured by investors. Top tier local yards, such as Jiangsu Rongsheng, are the notable exceptions.
Stating the obvious
All state yards with an active orderbook (18) have taken a contract since 2010. State yards have enjoyed a greater degree of government assistance in recent years with easier access to finance. This has protected state yards to a greater degree from the vulnerable position which smaller yards have been placed in by the current lack of contracting.
Facing Facts
Overall, 28% of Chinese yards have not received a contract since 2009 (see pie graph). This may seem a large number of yards which, one may argue, could potentially face closure. Even if this worst-case scenario were to develop though, it would have minimal effect on capacity. This is because the majority are small local yards which currently represent less than 5% of the Chinese orderbook.
The remaining yards have all received a contract since 2010, but 44 of these yards still have an orderbook that is composed entirely of bulkers. This is a relatively risky position to be in, considering that only 82 bulker contracts have been placed globally in 2012. The remaining yards (98) have some form of diversification of product type. 20 of these yards have a containership on order, 18 have a tanker on order and 8 are building gas vessels. No Chinese yard is building all three types and 46 yards are only building “other” vessel types like small general cargo ships or tugs.
Clearly, a significant number of Chinese yards face a difficult situation. Almost a third of yards last took a contract in 2009, and many others have an undiversified product mix reliant on an oversupplied bulk market. State and ‘top-tier’ local yards look to be protected from the contracting drought, but for others, real challenges lie ahead.