The recent contracting shortage has led to fears that yards may soon struggle to fill available capacity. Nowhere is this problem starker than amongst the 122 medium and small Chinese local yards (MSL yards, defined here as all private yards bar the 20 largest when sorted by 2011 output). This has led to speculation that some yards may either go out of business or have to merge with others to survive.
Rapid Growth
During the shipbuilding boom, the capacity at Chinese MSL yards expanded quickly. As shown by the Graph of the Month, they took 4-5 times their existing capacity in new orders in 2006 and 2007. This led to rapid growth in deliveries. In 2004, Chinese MSL yards output vessels of 0.7m CGT, rising to 3.9m CGT in 2011, or 20% of total Chinese output. However, MSL yards have suffered from a sharp fall in the number of contracts they have taken in the past 18 months. In 2012 so far, MSL yards have received orders of 0.42m CGT, equating to just 19% of the deliveries they have made in the same period.
Survival Difficulties?
Much of this is because smaller Chinese yards are heavily reliant on winning contracts for tankers and bulkers, as shown by the fact that these types account for 63% of year-to-date MSL deliveries (in CGT). There has been limited contracting in these sectors recently, despite relatively low newbuilding prices. Unlike their larger counterparts, smaller yards tend to be less able to stimulate new business by offering generous financing packages or loss-making deals to owners. A lack of direct state support, combined with the increased difficulty in gaining finance, will constrain yards further. This is particularly the case in light of recent comments by the China Banking Regulatory Commission regarding the need to limit loans to industries with excess capacity. This will make it hard for local yards to spend funds either on developing new fuel-efficient designs or diversifying their product mix.
Diversification Matters
Based on the current orderbook, projected deliveries by medium and small local yards will decline in 2013 and 2014. Their share of total Chinese output is also projected to fall to 6% by 2014. Just 25 of the 122 MSL yards have vessels on order for delivery beyond 2013. Therefore, it seems realistic that some yards may close. Already small yards like Bluesky and Jingang have filed for bankruptcy, whilst shipbuilding operations at China Dongfang have been suspended.
Despite this, many MSL yards may survive by building non-commercial vessels, such as fishing boats or yachts. Additionally, some yards have begun to take on ship repair (e.g. Dalian Lushun) or demolition work instead. This willingness to adapt makes mass closures of MSL yards seem less likely. Then again, even if all of these smaller Chinese yards were to shut, this would lead to the loss of 20% of Chinese shipbuilding capacity, even though 75% of Chinese yards are classed as MSL yards. This represents 8% of global yard capacity. So, any closures would help ease likely shipbuilding overcapacity in the coming years, but would not be a quick and total solution to this global issue.