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State subsidy may boost overcapacity

State subsidy may boost overcapacity

China and South Korea's support for shipbuilders may add to a glut of capacity, slowing a recovery in freight rates and vessel prices.
The world's two largest shipbuilding nations have taken steps this year to aid shipyards and safeguard jobs as customers delay or scrap orders amid tumbling world trade. That support will likely ensure more vessels enter service, even as lines mothball and scrap existing ships because of a lack of cargo.
"The Chinese and Koreans, in particular, will make sure that these ships come," Philip Clausius, chief executive officer of lessor First Ship Lease Trust, told a conference in Singapore yesterday. The "daunting number" of ships that "will hit the market over the next three, four, five years will make the recovery a rather slow and painful one."
China's bid to become the largest shipbuilding nation by 2015 may also worsen the glut as it competes for market share, said Matthias Umlauf, senior economist at HSH Nordbank AG. The world's shipyards have dry-bulk ship orders with a combined capacity of 64 percent of the existing fleet, according to data compiled by Bloomberg.
China has "the chance to become the world's largest shipbuilding nation and they will not let this chance go," said Umlauf. "They will support their national champions and that will definitely add to the overcapacity situation."
Order backlogs
The 26 biggest shipyards in China are currently holding backlogs totaling 158 million deadweight tons, while the backlog at South Korea's 17 largest yards has reached 176 million deadweight tons, according to a Sept. 24 Morgan Stanley report.
State support may ensure that many of these vessels are delivered even if banks won't finance them, said C.K. Ong, president of U-Ming Marine Transport Corp. Ong estimated that shipowners will likely need to raise as much as US$90 billion to help fund the roughly US$165 billion of dry-bulk vessels on order worldwide because of dropping asset values.
"What worries me is whether the Chinese or Korean governments will sit still and let the shipyards get into financial trouble because of the non-delivery of ships," Ong said. "My own personal view is that this is unlikely."
Mainland yards' deliveries jumped 58 percent in the first eight months to 23.4 million deadweight tons, according to Kong Fanhua, a senior researcher at China Ocean Shipping (Group) Co., the nation's largest shipping group.
Delay requests
Customers of Chinese shipbuilders had asked yards to delay 20 percent of vessels not already under-construction as of Aug. 31, the China Association of the National Shipbuilding Industry said in a report published in Shipping Exchange Bulletin today. Delays have also been requested for about 10 percent of vessels already in progress, it added.
In the first eight months, 84 ships were canceled at Chinese yards, the association said. That's 2.1 percent of their backlogs.
China Cosco Holdings Co., the world's largest dry-bulk operator, axed a US$299 million order for eight vessels at affiliate Cosco Corp (Singapore) Ltd. in July. The shipbuilder has gained 28 percent this year in Singapore trading.
Hyundai Heavy Industries Co., the world's largest shipyard, has fallen 0.3 percent in Seoul trading this year, compared with the benchmark Kospi Index' 50 percent gain. Second-ranked Daewoo Shipbuilding & Marine Engineering Co. has gained 24 percent.
China State Shipbuilding Corp. and China Shipbuilding Industry Corp., which construct more than 70 percent of dry-bulk vessels, are both state-owned.
Rates plunge
Dry-bulk shipping rates tumbled 92 percent last year on overcapacity and China's waning demand for iron ore. Rates rebounded fivefold this year, reaching a high on June 3, according to the Baltic Dry Index. They have since dropped 49 percent as China pares imports of commodities.
State support for struggling shipyards may prevent a rationalization of overcapacity, driving down vessel prices and profits across the industry. The aggregate capacity at the world's 55 biggest shipyards is already as much as 40 percent bigger than demand, according to Morgan Stanley.
Ship-price tumble
That oversupply may help cause prices for new vessels to fall by as much as 20 percent by the end of next year, according to the bank. Prices for newly constructed container vessels fell 31 percent in the first half on the capacity glut, according to Morgan Stanley. Bulk-ship prices dropped 26 percent and tanker prices declined 25 percent.
China in June announced a two-year plan to help shipbuilders, including funding for cash-strapped producers and moves to encourage mergers and acquisitions. In April, South Korea unveiled an 11.5 trillion won (US$9.6 billion) financing package to help shipowners pay for new and existing orders.
Global shipbuilding orders slumped more than 90 percent in the first seven months, according to Clarkson Plc, the largest shipbroker, as lines pared growth because of slumping world trade. Yards may enter a global price war next year, triggered by South Korean discounting, Mitsui Engineering & Shipbuilding Co., Japan's second-largest shipbuilder, said last month.


Updated : 2021-10-26 19:18 GMT+08:00