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Afla Laval 20th Feb 19 .

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China feels the pressure - but refuses to crack

The Naval Architect: September 2018Cossco Containership

There are two ways of looking at the expected and now state-approved merger of CSIC and CSSC, the twin behemoths of Chinese shipbuilding that separated in 1999 to represent the territories north and south of the Yangtze River.

 

On the one hand, it could be argued that the creation of the world’s largest-ever shipbuilding enterprise – casting even the likes of the Korean Big Three into its shade – will cement the dominance of Chinese shipbuilding. After all, the nation has enjoyed the world’s largest orderbook for some time; despite South Korea making a surprising return by securing more orders in the first half of the year at 4.96M cgt (compensated gross tonnage) to China’s 4.39M, the latter has a much greater backlog formed by its years of pre-eminance, at 28.25M cgt to Korea’s 17.38M (figures provided by Clarkson Research Services). The feted mega-corporation could extend China’s lead even further by exploiting increasingly advantageous economies of scale.

 

Conversely, the merger might be said to reflect desperation rather than dominance. In April this year, the Shanghai Stock Exchange restricted and issued a delisting risk warning on CSSC shares after the company announced a profit warning in January. CSSC suffered net losses in both 2016 and 2017 of RMB2.6 billion (US$389 million) and RMB2.3 billion (US$344 million) respectively. Despite the scanty improvement year-on-year, Chinese listing rules penalise companies that experience losses for two consecutive years by imposing a daily trading limit of 5%; a third year of losses will see complete delisting from the stock exchange.

 

In an effort to return to profit once again, CSSC and its subsidiaries have reportedly sold off a number of assets, including Waigaoqiao Shipbuilding’s share in the struggling CSSC Cruise Technology, and CSSC’s stake in CSSC Shengui Equipment. By merging with CSIC, which posted a net income of RMB838 million (US$125 million) at the year-end of 2017, CSSC would be thrown a far more effective lifeline to return to the black.

 

Whatever the ultimate meaning of the re-unification of CSSC and CSIC, it almost certainly represents the growing pressure on the nation’s shipbuilding industry caused by increasingly difficult trading conditions. These include rising steel tariffs and material costs, expectations of higher wages across an increasingly affluent workforce, low newbuilding prices, and the yuan’s growth against the dollar.

 

To combat this gloomy prospect, Chinese shipbuilding has been forced to adapt. Early indications appear to be positive, with a palpable sense of renewed optimism that has been buoyed by a surge in newbuilding orders, with CANSI reporting a year-on-year increase of 99.6% (in deadweight tons) compared to January-May last year. Moreover, the number of yards that have delivered vessels in 2018 sits at 143, a considerable increase from the 107 in 2017 (although far off the 239 that managed this in 2010). There are a number of factors that have contributed to this turnaround.

 

Firstly, there has been a noticeable shift across the industry towards the construction of increasingly large vessels, such as VLCCs (very large crude carriers) and 20,000 TEU+ ULCSs (ultra-large container ships), with China taking the lead from Korea in this segment as the latter continues to suffer from a prolonged slump. Construction of very large vessels means that, whilst actual numbers of vessel orders may be falling, the total dwt of orders is on the up, with more complex and longer builds providing a welcome source of revenue.

 

One example of such a vessel is COSCO Shipping Universe, a 198,000 dwt, 21,237 TEU ULCS delivered on the 12 June by Jiangnan Shipyard. By deadweight, it is the heaviest container vessel of all time. Although a record-breaker, COSCO Shipping Universe in only a small part of COSCO’s orderbook, which is the largest in the industry with 27 vessels to be delivered by the end of next year. 10 of these will be ULCS (over 14,000 TEU), which were deferred from their original 2018 delivery.

 

Such heavy ordering by the state-owned COSCO is likely to benefit the Chinese shipping industry, particularly as the liner company is set to take over Hong Kong-based OOCL in a massive USD$6.3 billion deal, rendering it the world’s third-largest liner behind Maersk Line and Mediterranean Shipping Company.

 

International companies, too, have chosen Chinese yards to construct ULCS amidst other vessels, as suggested by CANSI figures claiming export ship orders between January and May are up 108% year-on-year. Yangzijiang Shipbuilding, for instance, completed the 25th 10,000 TEU vessel for Canadian containership firm Seaspan in May, which will charter a number of the vessels to French major CMA CGM (as reported in July/August’s The Naval Architect). The latter themselves ordered nine 22,000 TEU containerships in 2017, to be built both at Hudong-Zhonghua Shipbuilding and Shanghai Waigaoqiao Shipbuilding, with delivery expected by the end of 2020. Notably, all will be powered by LNG.

 

As well as LNG, Chinese shipbuilding is attempting to diversify into a number of new segments beyond its staples of containerships and bulk carriers (although the latter still proves lucrative, with orders this year from Alpha Bulkers and Mitsui for a quartet and quintet of kansarmaxes, respectively). This is somewhat due to China being undercut by nations such as the Philippines competing for these low-margin vessels, with China’s response being rebranding itself as a high-tech shipbuilder able to compete with the likes of Europe. For example, an undisclosed Chinese yard is currently in the process of building a 104m, Ulstein-designed polar expedition vessel, complete with electric propulsion, putting the country in direct competition with European yards.

 

The nation is also close to completing Snow Dragon 2 (Xuelong 2), a scientific research icebreaker that was started in 2016 and was docked at Jiangnan Shipyard this March for equipment installation. It is the country’s second such vessel, and the first to be completely constructed locally, with predecessor Snow Dragon built in 1993 in Ukraine and transferred to Jiangnan Shipbuilding to be converted into a research vessel. Notable is the fact that Finnish company Aker Arctic Technology provided Snow Dragon 2’s basic design. Although demonstrating the continuing primacy of European technical expertise, it does show willingness within China for greater international co-operation (see May 2018’s The Naval Architect).

 

Outside of shipbuilding, a further attempt to modernise China’s shipping industry is the construction this year of the Wanshan Marine Test Field, a coastal facility spanning 2,252nm for the testing of autonomous and unmanned ships. Led by industry, academic and government partners, it is the first of its kind in Asia, and is larger than Kongsberg/NTNU’s Trondheimsfjorden site in Norway and the DIMECC Jaakonmeri Test Area in Finland, establishing China as a major player in the race to develop commercially viable autonomous vessels.

 

It is apparent that Chinese shipbuilding has the unique opportunity to offer both low-cost mass production and highly specialised vessels, gaining further ground over its rival Korea as the country’s shipbuilding industry continues to fall into the doldrums.

 

However, despite national goals and intentions, it is only a continuing trend of orders that will prove a resurgence of Chinese shipbuilding.

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