Many Chinese shipbuilders to run aground in 2011

China's shipbuilding industry, holder of the world's largest orderbook, will see dozens of small shipyards go under or get taken over next year, as a choppy wave of consolidation rocks an oversupplied market. Fuelled by vigorous government support and cheap labour, the number of shipyards has grown exponentially in the past decade in China, reflecting its role as the world's top exporter and one of the biggest buyers of foreign oil, iron ore and grains.
But many small shipyards face a bleak year in 2011 as growing numbers of clients cancel orders to avoid floating unchartered vessels, and Beijing tightens credit in its fight to rein in inflation.
"There are too many shipyards. For the next couple of years, a number of them won't be able to survive on their own," Robert Lorenz-Meyer, president of BIMCO, the world's largest shipowners' grouping, told Reuters. "There will be consolidation, but hopefully some yards will re-focus on scrapping," he added.
China has more than 2,000 registered shipyards across its coastal region, with around 250 in the export business, Lloyd's Register says.
By the end of the year, that number could be trimmed by more than a hundred, leaving a leaner industry able to better compete with more experienced shipbuilders in South Korea and Japan.
"Dozens, if not hundreds, of small shipyards won't make it to the end of next year. The big companies will either take them over or they will just disappear," said an executive with an Asian shipping company, who asked not to be named.
TIGHTENING CREDIT
Small to medium-sized Chinese shipyards were seen to be the most vulnerable to takeovers as credit becomes harder to obtain.
China's central bank increased reserve requirements by half a percentage point last week, putting a brake on a lending spree launched two years ago that helped inflate shipyard numbers.
"The small shipyards are vastly different from the publicly listed companies who have the backing of China's banks and government," said Jung Shin, analyst at HSBC in Hong Kong.
"China can't just waste taxpayers' money on saving underperforming shipyards. They will be quite selective."
The global freight industry has yet to recover from pre-crisis levels due to its buying spree just before the economic downturn two years ago, which caused a significant decline in seaborne trade.
The current orderbook represented around 25 percent of the current fleet, down from 50 percent in late 2008 due to cancellations and delays.
Still, as much as 40 percent of orders due for delivery next year were expected to be postponed or cancelled, analysts said.
China has an orderbook of at least 3,000 vessels, or more than 35 percent of the world's total, double the number of its nearest competitor South Korea, BIMCO and shipbroker Clarksons say.
Besides the cancellations, small shipyards have also faced wage increases of around 10 percent since the start of 2010 and a slowly rising local currency, said Dong Qiang, vice president of China Shipbuilding Industry Corp. (CSIC).
China released its currency from a de facto peg to the U.S. dollar in June, but has permitted the yuan to strengthen less than 3 percent since. A stronger yuan cuts into profits of Chinese shipbuilders who sell their product overseas in dollars and euros.
GLOBAL TREND
Consolidation will ripple through the sector worldwide, not just in China.
Acquisitions and joint ventures were seen picking up next year as international shipping firms look to expand operations, eyeing smaller counterparts weakened by the global financial crisis.
A survey by law firm Norton Rose last week showed 60 percent of the 177 shipping firms polled were planning joint ventures and 58 percent looking at strategic acquisitions in the next 12 months. China was identified as a key area of investment.
Beijing was likely to favour consolidation between domestic companies instead of foreign firms to ensure protection of thousands of jobs, industry experts said.
Chinese employed in the transport manufacturing sector, which includes shipping, automobiles and airline makers, numbered 4.7 million in 2009, versus 2.8 million a decade ago, official data show.
"Shipbuilding is extremely labour-intensive and China, of course, fears social unrest coming from unemployment," said Lorenz-Meyer.
A leaner sector will help China easily attain its goal of becoming the world's largest ship maker by 2015 at the expense of rivals South Korea and Japan, many analysts say.
"China will be on top for sometime," said Shin. "The quality of ships is improving and they are still offering discounts of 10 to 15 percent below South Korea."
Those advantages will persist, thanks to the higher government subsidies and cheaper labour than competitors enjoy.
China's biggest fish -- shipyards such as powerhouses CSIC, state-owned China State Shipbuilding Corp. (CSSC), and Guangzhou Shipyard International -- are expected to thrive in the Darwinian environment.
Major shipbuilder Rongsheng Heavy Industries Group Holdings this month raised its IPO size by nearly half to $1.8 billion, fuelled by strong demand, with its listing set for Friday.