Dark clouds loom over China's shipbuilding industry

(Ecns.cn) -- In early July the gate to the Zhejiang Jingang Shipbuilding Co remained locked as two security guards napped in the janitor's room.

Zhejiang Jingang is the largest private shipbuilder in Taizhou, a county-level city on the eastern coast of China. In its heyday the company had about 3,000 employees, but it is now unable to meet debt obligations of over 300 million yuan (US$47.1 million).

The company filed for bankruptcy last month. Most of its workers have been laid off. Those who remain eke out a living while they wait for the court's final decision.

This is not the only shipyard hit by shrinking orders and excess capacity in Zhejiang, a province known for its advanced shipbuilding industry.

According to The Time Weekly, hundreds of private shipyards in China are struggling to remain solvent.

A sluggish global market has caused a serious decline in new orders and lower profit margins, resulting in an industry-wide downturn, says the newspaper.

During the first five months of this year, new orders amounted to 9.54 million deadweight tons, down 47.3 percent year-on-year, according to statistics from the China Association of the National Shipbuilding Industry.

Many private shipyards in Zhejiang, Fujian and Shandong provinces have submitted applications for bankruptcy.

Zheng Weimin, deputy general manager of Zhejiang Hexing Shipyard, said orders in the first half of 2012 have only been about 10 percent of last year's in his company, which has basically suspended business and dismissed most of its employees.

Even the high-performing Zhejiang Haichang Shipbuilding Co has struggled to sustain business. Yang Shaoshun, assistant general manager of the company, predicted they will only have eight to nine shipbuilding orders this year.

High risk

In 2009 and 2010 China replaced South Korea as the world's leading shipbuilding nation. At that time it outpaced its neighboring rival in key indicators such as shipbuilding volume, order backlogs and new orders, according to London-based Clarkson Research.

Yet since last year China's shipbuilding companies have seen sharp declines in new orders and output.

Last October, the Ningbo Hengfu Shipping Trade (Group) Co and the Ningbo Beilun Sky Shipbuilding Co both went to the wall, showing the first signs of the industry's downturn.

Lower down payments and increased instances of contract defaults are making the situation even worse, says Yang Shaoshun.

Such changes will continue to squeeze the shipbuilding industry's profitability, he adds. Financing is the last option for most shipyards, but the banking sector is also having difficulty, especially in the European Union.

Most banks regard the export-led shipbuilding industry as "high risk," and refuse to underwrite or extend loans to related companies.

Under such circumstances, the number of debt-laden shipyards continues to rise. According to Tan Zuojun, general manager of the China State Shipbuilding Corporation, about 50 percent of shipbuilding companies in China may go bankrupt in the next two to three years.

Brighter future?

The shipbuilding industry may face even gloomier prospects in 2012 than in 2011, says Bao Zhangjing, chief analyst and deputy director of the China Shipbuilding Economy Research Center.

With more small- and medium-sized shipyards going bankrupt, a reshuffle of the industry is inevitable, industry watchers say.

China's shipping industry was fuelled by a boom just before the global financial crisis. Back then, the country gave rivals a run for their money by offering lower costs and attractive financing to foreign ship buyers. That advantage has mostly disappeared.

According to The Time Weekly, some domestic shipyards have realized this and hope to learn from their Japanese and South Korean counterparts by focusing on market demand and improving their technology.

In other words, the current slump in the industry could also be an opportunity. If Chinese shipyards spend more on research and development, become more efficient and produce more advanced ships, the industry's future could still be bright, experts say.