Shipbuilding Industry Economic Operation Analysis for 2017

By China Shipbuilding Industry Association

“The Action Plan For Deepening Structural Adjustment and Accelerating Transformation and Upgrading of the Shipbuilding Industry (2016-2020)” and “The Action Plan For the Sustainable and Healthy Development of Ocean Engineering Equipment Manufacturing Industry (2017-2020)”were officially pub lished in 2017.The Action Plans identified overall requirements, priority tasks and safeguard measures for the shipbuilding industry to deepen structural adjustment and accelerate transformation and upgrading during the 13th Five-Year Plan period,and guided ship enterprises in healthy and steady development. Meanwhile,the year of 2017 was also a year of recovery of international shipbuilding market after a long-time adjustment. By closely centering on industry policies and grasping favorable opportunity of market rebound and through painstaking effort of the whole industry, the Chinese shipbuilding industry obtained good performance of the three major shipbuilding indicators continuing to lead, continuous optimization of the product mix, more rational industrial structure, deeper combination of industry and finance, quality upgrading of the marine equipment industry,and international status continuing to rise. Affected by depth adjustment of the international shipbuilding market,underlying problems such as “financing difficulty”, “delivery difficulty” and“making profit difficulty” remained and situations the shipbuilding industry was facing remained grim.

Overview o f Econom ic Operation

1.Two up and One down of the Nationa l Three Ma jor Shipbuilding Indicators

In 2017 comp letion of national shipbuilding hit 42.68 m illion dwt,increasing by 20.9% year-on-year(YOY); newbuilding orders received hit 33.73 million dwt, up 60.1% YOY; by the end of December, ship orders at hand stood at 87.23 million dwt, down 12.4%YOY.

2.Ship Export on the Grow th

In 2017 national completed export ships hit 39.44 million dwt, up 17.9%YOY; export ship orders received hit 28.13 m illion dwt, up 72.9%; at the end of December, export ship orders at hand stood at 78.68 million dwt, down 14.7% YOY. Export ships accounted for 92.4%, 83.4% and 90.2% of national shipbuilding completion, newbuilding orders received and orders held at hand respectively.

In January-November of 2017,Chinese ship export value hit $21.07 billion, up 4.4% YOY. Among export ship products, bulk carriers, oil tankers and container vessels still held the dom inant position, exports totaled$12.88 billion, making up 61.7% of total export. Ship products were exported to 181 countries and regions, mainly Asia.Value of Chinese ships exported to Asia amounted to $11.07 billion, making up 52.5% of total export; value of ships exported to Europe amounted to $4.12 billion, making up 19.6% of total export;ships exported to Oceania amounted to$2.79 billion, making up 13.2% of total export.

3.E c o n om ic B e n e fits o f Shipbuilding Industry on the Decline

In January-November of 2017,China had 1407 shipbuilding industry enterprises above the designated scale,they realized main business revenue of RMB590.04 billion, down 8.2% YOY. The shipbuilding sector registered RMB279.19 billion, down 5.9% YOY; the marine equipment sector recorded RMB84.53 billion, down 6.1% YOY; the ship repair sector reported RMB20.69 billion, down 26.2%; the ocean engineering special equipment manufacturing sector garnered RMB41.69 billion, down 12% YOY.

Shipbuilding industry enterprises above the designated scale realized total profit of RMB14.18 billion, down 15.9%YOY. The shipbuilding sector registered RMB7.5 billion, down 35.4% YOY;the marine equipment sector recorded RMB4.53 billion, down 10.3% YOY;the ship repair sector reported RMB690 million, up 38%; the ocean engineering special equipment manufacturing sector garnered RMB770 million, turning losses into profits.

Main Characteristics of Economic Operation

1.In terna tiona l Ma rke t Sha re Ranks First, Industrial Concentration On the Rise

In 2017 international shipping market bottomed up, and newbuilding market remained active. Chinese ship enterp rises grasped the favorab le opportunity of market rebound to actively develop market. Year-round shipbuilding completion, newbuilding orders and orders at hand accounted for 41.9%, 45.5% and 44.6% respectively of the global market, and the th ree major shipbuild ing ind icators on the in ternational market ranked first. Industrial concentration of the shipbuilding industry further rose,shipbuilding completion of the national Top 10 Shipbuilders made up 58.3%of the national total, increasing 1.4 percentage points over 2016. The trend was obvious that new orders concentrated on advantageous enterprises, new orders of the Top 10 accounted for 73.4% of the national total; advantages of Chinese backbone ship enterprises were obvious,industrial core competitiveness improved,five of them entered the Global Top 10 in terms of completion and four entered the Global Top 10 in terms of new orders.

2.Product M ix Optim ized, Brand Build ing Deve lops in an O rde rly

Manner

In 2017 Chinese backbone ship enterprises stepped up investment in scientific and technological innovation,product mix upgraded, and a number of high-technology and high value-added ships were successfully developed. Global first 38800 dwt smart ship, global most advanced 6000 dwt stone dumper, 84000 m3 super-large gas carrier, saturated diving support vessel and other high-end ships and ocean engineering equipment were successfully delivered. Global largest 22000 TEU dual-fuel container vessels, 174000 m3 LNG carriers, 174000 m3 LNG-FSRU, 300000 dwt FPSO and other high-technology ships and offshore engineering orders were received in batch, new order CGT/DWT ratio hit 0.34. Chinese ship enterprises kept up with market demand and continuously advanced brand development of superior p roducts. NACKS pushed forward product upgrading of large container vessels and clean energy ships and built brand ships with good performance,quality and technology. In 2017 seven projects in the shipbuilding industry won State Science and Technology Prizes,four projects -- Shanghai Waigaoqiao Shipbuilding’s product Capesize vessel,Jiangnan Shipbuilding’s product dualfuel liquefied ethylene gas carrier,Guangzhou Shipyard International’s product medium range transport (MR type) oil product tanker, and CSSC Huangpu Wenchong Shipbuilding’s product engineering (operation) vessel-- entered the list of nominees for the Second Manufacturing Single Champion Products.

3.Hammer at Segment Market,Lead Market Demand

In 2017 in m a rke t dem and insufficiency of the three mainstream newbuildings over recent years, Chinese backbone ship enterprises took the initiative to explore segment markets of special ships, river and sea combined transport ships, small and medium ships and ocean-going fishing vessels, with brilliant achievements. They successfully delivered global first th ree-petal independent C-type storage tank liquid ethane gas carrier and global first 25000 dwt LNG high-pressure duel-fuel bulk carrier, Asia’s largest self-propelled hanging suction dredger “Tian Kun”and China’s first pure electric dump ship were launched. Chinese offshore engineering equipment manufacturing industry nurtured new economic growth points, and actively explored development of ocean m ineral resou rces, ocean biological resources and ocean space resources and other non-oil/gas markets.They delivered world first deepsea semisubmersible large intelligent fishing ground “Ocean Fishing Ground 1”,jack-up multifunction offshore pasture p latform, Deepsea Warrior manned submersible; ultra-deep water doubletower semi-submersible drilling platform“Blue Whale 1” succeeded in assisting China’s first marine gas hydrate pilot exploitation; global first deepsea mining vessel project was steadily advancing.They actively explored new sectors of offshore wind power, marine natural gas power generation vessel, floating power generation+seawater desalination platform,offshore garbage power generation vessel,offshore entertainment integrated platform,offshore hotel, etc.

4.Practica lly Prom o ting Lean Managem en t to Low e r Costs by Multip le Measures

The year 2017 saw a continued sluggish global shipping and shipbuilding market. Amidst problems of receiving order difficulty, ship delivery difficulty and making p rofit difficu lty, ship en terprises centered on market and customer demand variations, conducted all-out transformation in product strategy,technology innovation and management mode, took measures of lean management,cost control, smart manufacturing and risk prevention to reduce costs. CSIC promoted p riority project “p roduction mode transformation - lean shipbuilding”,the group’s shipbuilding efficiency was im proved continuously. Dalian Shipbuilding Heavy Industry’s first ship of 72000 dwt oil product tankers was launched 17 days ahead of schedule,VLCC docking construction cyc le was shortened; Huangpu Wenchong continuously carried out cost reduction and efficiency improvement, controlled expenditures by strictly implementing budget management, exercising cost specific management and actively practicing procurement management,reduced costs by more than RMB300 million. Jinhai Heavy Industry Co Ltd saved power cost by 10% each year through PV power generation roof project; Zhoushan Wanbang Yongyue Shipyard introduced ship repair robot to improve operation efficiency by three times on the average; NACKS realized production mode transformation via smart manufacturing, its shipbuilding intelligent workshop adopted automatic line to improve productivity by three times; China Merchants Group and CSIC saved financing cost by issuing corporate bonds.

5.Ma rke t-O rien ted Means o f De leve rag ing, Deepe r Industry-Finance Combination

In 2017 when European banks held a wait-and-see attitude and some banks were tightening ship financing,Export-Import Bank of China and China Development Bank continued to support the Chinese shipbuilding industry in transformation and upgrading towards high-quality manufacturing by policyoriented financial means. China’s ship financial leasing business developed rapidly and gradually became a main buyer of the global newbuilding market.According to incomp lete statistics,Chinese financial leasing companies such as ICBC Financing, Minsheng Financing,CDB Leasing and BOCOMM Leasing accumulatively ordered more than 3 million dwt ships from domestic shipyards and supported healthy development of Chinese shipbuilding enterprises.Chinese backbone ship en terprises constan tly created new financing models and solved financing difficulty by market-oriented means of issuing bonds and debt-to-equity swap. By implementing market-oriented debt-toequity swap, CSIC effectively optimized its capital structure and effectively reduced its leveraging rate, with assetliability rate declining by 11%。

6.Independen t Innova tion o f Key Technology, Marine Equipment Industry Quality Upgrade

In 2017 IMO toughened rules and regulations for the marine equipment industry, especially requirements for discharge. To cater to new requirements of the shipping industry and the shipbuilding industry for green and eco-friend ly p roduc ts, Ch inese marine equipment industry stepped up R&D of key and core technology and strengthened product development and business development. Global first micro-ignition dual fuel engine,domestic first independently developed high-pressure SCR system marine lowspeed diesel engine, and world largestdiameter marine propeller were delivered for use. Independen tly developed electrically driven marine winch, CS21 marine medium-speed diesel engine, full speed stabilizing fin, R6 mooring cable,GCS1000 gearbox and other products and technologies filled domestic gaps and broke overseas monopoly. Qingdao Shuangrui BalClor series ballast water management system became Asia’s first product that had obtained USCG type approval certificate.

Main Prob lems of Econom ic Operation

1.“Finan c ing D ifficu lty”Problem Yet to be Efficiently Eased

In 2017 financial institutions paid more attention to risks of marine and ocean engineering equipmen t manufacturers, some banks tightened credit or extended credit approval,making corporate financing even more difficult. Despite market rebound, the marine and ocean engineering equipment market was still at a low point, corporate cash flow declined substantially, large backbone enterprises faced the tight fund problem.“Financing difficulty”problem of the shipbuilding industry could not be eased efficiently.

2.O rde rs a t Hand Dec lined Con tinuous ly, Decapacity Has a Long Way to Go

Over recen t years, all major shipbu ild ing coun tries have been working to dissolve surplus capacity,but compared with drastically declining newbuilding demand, new orders could hardly meet normal production need.China’s orders at hand had decreased for fou r years in a row, most ship enterprises could only sustain some one year work volume and faced tough challenge in guaranteeing continuous production capacity. From demand side perspective, international newbuilding market stood at 80 million dwt on yearly average and China could receive more than 40% of market orders. Amidst new normality of newbuilding demand, only by persisting in promoting supply side structural reform and giving full play to decisive role of market in resource allocation and striving to make an effort in decapacity, can the shipbuilding industry really bottom out and achieve recovery.

3.Rap id R ise in In teg ra ted Costs, Substan tia l Sh rinkage o f Profit Space

In 2017 affected by declining ship orders at hand and increasing keel-laying ship shortfall, the newbuilding market competition was extremely fierce. On one hand, shipbuilding market demand features low price and quantity, operating insufficiency in ship enterprises, delivery difficulty and two ends under pressure.On the other hand, prices of raw materials led by hull planking continued to rise at an average of more than 40% since the end of 2016, RMB-USD exchange rate rose continuously, enterprise financial charges increased, labor insufficiency led to rigid rise of labor costs; there were more cases of enterprise order change and delayed delivery, and general expenses continued to grow.The rapid rise in integrated costs of ship enterprises substantially squeezed profit space, industry profitability substantially decreased and sustainable development was lashed.

4.Ex te rn a l En v ironm en t Con tinued to Agg rava te, At-Hand Project Risk Grew

In 2017 that international wellknown offshore engineering operators Hafira Shipping, Tide Water, Falstad Shipping, etc. applied for bankruptcy or planned debt regrouping dealt heavy flow to the offshore engineering manufacturing market, there were cases of delayed delivery of at-hand offshore engineering platform projects and ship abandonment and market environment continued to aggregate. According to statistics, there were more cases of contract termination and ship abandonment p rojects of offshore engineering platforms held by Chinese ship enterprises at hand, these projects were repeatedly requested for delayed delivery by the ship owner and finally received ship abandonment,imposing great influence on the shipyard production and operation. The feature of ocean engineering equipment product customization made resale extremely difficult, offshore engineering industry technology was changing rapidly, offshore engineering projects at hand gathered ship abandonment risk and delivery situations were particularly tough.

Pred iction

In 2018 g loba l econom ic development will tend to be robust and shipping market is expected to be steady and improved. International shipping demand slightly increases, aging ships are phased out, surplus capacity will further be digested and absorbed,and newbuilding market is expected to remain active. Global newbuilding transactions in 2018 are projected at 70-75 million dwt, ocean engineering equipment transactions are projected at about $13 billion, with possibility of small rise of newbuilding prices. Large ship transactions will drop in 2018, some small and medium ship transactions will be active, and markets of luxury cruises,pure car carriers, ro-ro passenger ships and other special ships are still worthy of attention. Global oil and gas development will continue to rebound, market hot spots will still concentrate on floating production platforms, offshore wind farm construction, operation and maintenance equipment and LNG related equipment sectors. It is estimated that in 2018 main economic indicators of the Chinese shipbuilding industry will remain low,shipbuilding completion may possibly dec line somewhat, new orders may increase over 2017 and year-end orders at hand are projected at about 80 million dwt.

Suggestions

1.Un sw e rv ing ly P rom o ting High Qua lity Deve lopm en t o f the Shipbuilding Industry

The year 2018 is a key year forming a connecting link between the preceding and the following for the shipbuilding industry to implement 13th Five-Year Plan. The whole industry should center on“Made in China 2025” and the strategic goal of building an ocean power, carry out key tasks set out in “The Action Plan For Deepening Structural Adjustment and Accelerating Transformation and Upgrading of the Shipbuilding Industry(2016-2020)” and “The A c tion Plan For the Sustainable and Healthy Development of Ocean Engineering Equipmen t Manu factu ring Industry(2017-2020)” and other policies, take innovation and development and industrial upgrade as core, deep integration of manufacturing technology and information technology as important grip, vigorously advance supply-side structural reform,and comprehensively improve industrial in ternational competitiveness and sustainab le development capability.The industry shou ld unswervingly promote high quality development of the shipbuilding industry and strive to build a shipbuilding system of tremendous scale and strength, strong innovation capability,good quality and benefits and optimized structure and establish China as a world shipbuilding power and an advanced country of ocean engineering equipment manufacturing.

2.Take va rious m easu res t o solve the “financing d ifficulty” o f the shipbuilding industry

At present, the Chinese shipbuilding industry is in a critical period of structural adjustment and transformation and upgrading, and financial support and particularly financing capability is the key factor for the shipbuilding industry to realize high quality development.Financial institutions are suggested to vary measures with enterprises, practice differential credit policy to the marine and ocean engineering equipment industries in line with actual conditions, create financing modes and step up financing support to good quality ship enterprises.All enterprises should actively seek diversified financing methods and optimize financing structure by listing and financing in domestic and overseas stock exchanges and issuing various debt financing instruments while making an effort to prevent financial risks. They may try using renminbi for pricing or settlement in foreign trade and related investment and financing activities to reduce forex risk and remittance cost.Good quality backbone enterprises are encouraged to perform market-oriented debt-to-equity swap to reduce assetliability ratio.

3.Pa y A tte n tio n to Bo th Decapacity and Restructuring of the Shipbuilding Industry

Newbuild ing demand on the global shipbuilding market somewhat rebounds, bu t by calm analysis,2017 transactions were at a low level compared with those during the 12th Five-Year and 11th Five-Year Plan periods and size of ship orders at hand keeps sh rinking. A lthough Chinese backbone ship en terp rises actively dissolve surp lus capacity via various channels and have obtained interim results, the whole industry must be fully aware of the basic fact that international shipbuilding market oversupp ly will remain in a long time to come, pay high attention to importance, arduousness and complexity of decapacity, firm ly curb the impulse of capacity expansion by building high-technology ships, and stick to the path of market-oriented and legalized decapacity. It is imperative to actively develop combination of marine and offshore engineering equipment manufacturing industry with tourism,fishery, renewable energy, deepsea space and mineral resources tapping, widen segment market, actively create demand,nurture new economic growth points and accelerate optimization and adjustment of industrial structure.

4.En te rp rise Te chno log y Innova tion and Im p rovem en t o f Quality and Efficiency

At present, world ship science and technology is developing rapidly,international shipbuilding new rules and new standards are frequently launched,ship owner requirements for technology and quality are more stringent, chief rivals including Japan and Korea are stepping up scientific and technological innovation, bringing greater challenges for the Chinese shipbuilding industry.On one hand, we must cater to market structural change, closely contact ship owner, step up R&D investment, improve innovation capability. On the other hand,enhancing cost control and management has become an im portan t way for enterprises to improve international competitiveness under dual pressure of ship price depression and rising comprehensive costs of the manufacturing industry. Improving productivity and lowering manufacturing cost should become the core to boost all work. By strengthening accounting management,reducing cost and improving efficiency,advancing integration of IT application w ith industrialization, develop ing smart manufacturing, practicing lean shipbuilding, controlling procurement cost and lowering energy consumption among other measu res, en terp rise management will be improved in an allround way.

5.S tre n g th e n in g O c e a n Eng inee ring Equ ipm en t At-Hand Order Risk Control

W ith grim ex terna l m arket environment of the international ocean engineering equipment industry, at-hand ocean engineering project orders are frequently delayed in delivery and even withdrawn. All enterprises should fully recognize importance and urgency of ocean engineering project risks, enhance and perfect all-process management and risk prevention of ocean engineering projects and reduce their own default risk factors. For in-process projects,customer’s requirements should be met, their difficulties in financing and operation leasing should be assisted for resolving, and delivery conditions should be created. For claims projects,arbitration, compensation and other work progress should be closely traced, and effective measures be adopted to avoid any systematic risk.★