H1 2018 Economic Operation Analysis for the Shipbuilding Industry

By China Association of the National Shipbuilding Industry (CANSI)

In H1 2018, the global shipping market rose marginally, international crude oil prices continued to rise and the global shipbuilding market sustained the rise momentum of last year. China’s new ship orders grew substantially yearon-year (YOY), shipbuilding completion fell YOY, and handheld ship orders rallied. The problem of "financing difficulty", “ship delivery difficulty"and "making profit difficulty" is still here, and steady and healthy development of the shipbuilding industry still faces challenges.

I. Economic Operation General

A. National Three Shipbuilding Indexes A Mixed Bag

H1 national shipbuilding completion reached 18.86 million dwt, down 28.9%YOY; new ship orders reached 22.70 million dwt, up 97.2% YOY; by the end of June, handheld ship orders had reached 91.07 million dwt, up 9.9% YOY.

B. Ship Export A Mixed Bag

H1 national completed export ships hit 17.39 million dwt, down 30.8% YOY;export ship orders hit 20.48 million dwt,up 102%; by the end of June,handheld export ship orders had reached 81.23 million dwt, up 5.9% YOY. Export ships accounted for 92.2%, 90.2% and 89.2%of national shipbuilding completion, new ship orders and handheld ship orders respectively.

C. Economic Benefit of Shipbuilding Industry Down YOY

In January-May, national shipbuilding industry enterprises above designated size amounted to 1210 and realized main business revenue of RMB194.3 billion,down 2.6% YOY. The shipbuilding manufacturing sector earned RMB78.8 billion, down 4.8% YOY; the marine equipment manufacturing sector earned RMB27.1 billion, up 0.3% YOY; the ship repair sector earned RMB7.46 billion, down 13.8% YOY; the ship retrofitting sector earned RMB3.39 billion, up 8% YOY; the offshore engineering equipment manufacturing sector earned RMB15.3 billion, up 14.9% YOY. Shipbuilding industry enterprises above designated size realized total profit of RMB4.14 billion,down 26.1% YOY. The shipbuilding manufacturing sector realized profit of RMB930 million, down 67.8% YOY; the marine equipment manufacturing sector realized profit of RMB890 million, down 42.2% YOY; the ship repair sector was in the red by RMB70 million; the ship retrofitting sector realized profit of RMB200 million, up 39.3% YOY;the offshore engineering equipment manufacturing sector realized profit of RMB760 million, up 117% YOY.

Ⅱ. Characteristics of Economic Operation

A. Cling to Advantages and High End, Product Mix Trim Pays Off

H1 Chinese mainstream shipbuilding enterprises grasped the favorable opportunity of the recovering market,continued to maintain the advantage of undertaking bulk carrier order, and Jiangsu Yangzijiang Shipbuilding Group Co Ltd, Jiangsu New Era Shipbuilding Co Ltd, Shanghai Waigaoqiao Shipbuilding Co Ltd, Qingdao Beihai Shipbuilding Industry Co Ltd and so on undertook in batch ore carrier orders; 2500-passenger deluxe ro-ro ship, 7800Cars PCTC,84,000m3 VLGC, 18,600m3 LNG filling tanker, polar expedition cruise and other high-end ship markets made new progress. Mainstream enterprises focused on lean shipbuilding, strengthened management system construction,20,000TEU container vessel, 8000Cars PCTC, 350,000t FPSO and other hightechnology and high value-added ship and offshore engineering projects were successfully developed.

B. Strengthen Production Management,Make Every Endeavor to Cut Cost

H1 fierce market competition compelled the enterprises to strengthen production management to reduce cost by hook or by crook. “CSSC‘Cost Project’ Implementation Plan” stipulated the cost cutting hard task by taking cost cutting hard measures; CSIC carried out “Model transfer -- lean shipbuilding” model,practically advanced shipbuilding index benchmarking, which resulted in continuous improved production management; DACKS, by advancing smart manufacturing and strengthening production management, hull modeling rate, advanced outfitting rate, primary steel utilization rate and shipbuilding efficiency and other main production indexes reached Japanese and Korean advanced level; Yangzijiang Shipbuilding, by implementing lean management, went all out to ensure smooth delivery of its first ship model product, optimized technological process, shortened time on building berth and dock, and shipbuilding completion grew by 27% YOY.

C. Boost Merging and Reorganization,Industrial Concentration Further Raised

H1 shipbuilding market preliminarily showed signs of recovery, but demand insufficiency and capacity surplus conflict still existed, under the joint effect of market forcing mechanism and policy guidance, the Chinese shipbuilding surplus capacity was further reduced.COSCO Shipping reduced capacity exceeded 3.6 million dwt and reduced offshore engineering capacity hit 9 projects, China Merchants Group cut 1.5 million dwt shipbuilding capacity;CSSC and CSIC continued to reduce surplus capacity by relocating old plants,optimizing inventory capacity and merging and regrouping; CIMC ENRIC integrated former Nantong Pacific Ocean Engineering Co., Ltd., Xiamen Xiangyu Group Co., Ltd acquired Nantong Mingde Heavy Industry Co., Ltd., Qingdao Huatong State-Owned Capital Operation (Group) Co., Ltd.restructured Qingdao Shipyard Co., Ltd.,such cross-sector, cross-region, crossownership merging and reorganization was sped up. Concentration of H1 China shipbuilding completion top 10 companies stood at 67.9%, up 9.6 percentage points from 2017; concentration of new order undertaking top 10 companies stood at 83.3%, up 9.9 percentage points from 2017, and industrial concentration further improved.

D. Key Equipment Manufacturing Breakthrough, Independent Design and R&D Headway

H1 Chinese marine equipment enterprises continued to step up scientific and technological R&D input, catered to market demand, independent R&D made new progress and a batch of key equipment manufacturing succeeded.6EX340EF ultra-long stroke lowspeed diesel engine, ACD320DF dual fuel marine medium-speed engine,CHD622V20 marine high-speed highpower diesel engine and other independent brands obtained market approval. Qingdao Shuangrui became global first company certified by IMO new G8 type approval,China’s first commercial full-scale ship marine desulfurization washing equipment went off line and was mounted on board the ship, first domestic offshore platform gas turbine generator unit was delivered for use; marine integrated power propulsion system engineering technology development project achieved important results.

Ⅲ. Problems with Economic Operation

A. Raw Material Cost Rises, Industrial Profitability Slumps

H1 marine steel prices extended the rise momentum, at June-end, 20mm ship steel plate monthly average price reached RMB4850/t, up over 30% YOY. The continuous rise of marine steel brought huge pressure on corporate production and operation. On one hand, the steel hike will directly affect corporate profitability;on the other hand, building high-tech ship involved high cost, and even some ship form was in the red from the contract execution to commencement due to the steel hikes. Furthermore, the rigid rise in labor and logistic costs brought huge pressure on corporate operation. Statistics show total profits of Chinese shipbuilding manufacturing enterprises declined by 67.8% YOY, main business revenue profitability only stood at 1.2%, down 3 percentage points from last year, and industrial profitability slumped.

B. “Financing Difficulty” Problem Substantially Affects Shipbuilding Production and Operation

At present, international shipping and shipbuilding markets take a nascent recovery trend, however, affected by geopolitics and trade conflict among other external factors, the recovery is on shaky ground. Domestic major financial institutions are generally cautious about credit support for the Chinese shipbuilding industry, some banks imposed uniformity in all cases for shipbuilder financing to mitigate risk, failing to implement differential credit policy. In the sluggish market environment, ship down payment stands at 5%-10% only. On one hand, shipyards have to advance a large amount of money to complete shipbuilding, intensifying financing reliance; on the other hand,due to inability to issue advance payment guarantee, enterprises dare not take orders, even though an order is taken,excessive long cycle of issuing the guarantee makes the order invalid. This deteriorates external survival environment of shipbuilders.

C. New Ship Form and New Technology R&D Capacity to be Improved

H1 Chinese ship enterprises lacked rapid response capability to ship design differential demand and weak building capability of special ships and high value-added ships, and the problem of relatively single marine product mix cropped up. Ship form undertaken in H1 was still dominated by bulk carrier, with rare transacted order of large LNG carrier and large container ship. Currently,transacted ship forms on the new ship market are largely small batch and multi-variety ships, which have even higher requirements for corporate design technical reserve, product development capability and ship form reserve: Chinese ship enterprises have to improve design and R&D capacity.

D. Offshore Operation Market Recovers, Building Market Not Clearly Better

In H1, benefiting from international crude oil hikes, offshore engineering equipment operation market recovered moderately, second-hand market order deals were active and supply-demand conflict was eased. Nevertheless, due to gigantic handheld order size, new demand on the offshore engineering building market remained limited on a short term, and equipment prices on the downturn. In the January-June period, 36 offshore engineering equipment were transacted in the world, valued at USD5.3 billion, down 23% in terms of value. Meanwhile,prudence of shipowners and vibrancy of offshore engineering equipment made delivery of offshore engineering equipment difficult and long-term undelivered offshore engineering equipment projects brought huge pressure on corporate operation.

IV. Market Predictions and Suggestions

A. Predictions

In 2018, global economy will still maintain the mild recovery momentum, shipping trade demand increases marginally, but affected by international trade conflict and implementation of new environmental protection regulations, shipowners are cautious about ordering new ships. Some segmented ship form markets and new route new ship demand market will keep vibrant. It is predicted that global new ship deals are about 80 million dwt, shipbuilding completion about 90 million dwt and handheld orders may remain at 190 million dwt; Chinese shipbuilding completion will stand at about 36 million dwt, new ship orders are expected to increase from 2017, and handheld orders by year-end will remain at 90 million dwt.

B. Suggestions

（1）Step Up Financial Support to Advantageous and Strong Ship Enterprises

At present, although shipping and shipbuilding markets are yet to get rid off depression, the supply-demand conflict has not been fundamentally eased, the new ship market initially takes recovery trend, a number of superior and strong ship enterprises of high product technology and good management benefits perform noticeably well, and with the gradual rise of the medium and long-term new ship market, these ship enterprises will become the forerunners of high-quality development of the Chinese shipbuilding industry. Chinese financial institutions are suggested to implement the differential credit policy, set up a mutual-communication link mechanism,explore the cooperation model of winwin development and jointly realize sound and steady development of the shipbuilding industry.

（2）A Variety of Measures to Carry Out Offshore Engineering Equipment“Destocking”

Take advantage of State policies including the “Belt and Road”initiative, actively cooperate with countries and regions along the “Belt and Road”, jointly carry out oil/gas resource development, expand offshore engineering equipment use demand,support well-established financial institutions to handle good quality offshore engineering equipment at hand through financing, lease or selling, and based on market variation, operate in due course to dissolve risks.

（3）Build Green Development Concept, Boost High Quality Development of the Shipbuilding Industry

The 19th National Congress of the Party called on focusing on three campaigns in the next three years --fending off and dissolving major risk,targeted poverty alleviation and pollution prevention and control. The central government launched in succession“Three-Year Action Plan to Win the Blue Sky Defense War" and “Regulations on the Prevention and Control of Marine Environment Pollution from Ships”among other policy documents. At present, the State increasingly raises environmental protection requirements and steps up regulation. The whole industry should be conscious of the situations, constantly strengthen research into new technologies and new processes, improve technical strengths and management, build green development concept and boost high quality development of the shipbuilding industry.

（4）Actively Widen Marine and Offshore Engineering Vision in a Bid to Improve Competitiveness

International new ship market competition is fierce, new ship price recovery is weak, comprehensive cost encounters rigid rise, and corporate profitability slumps as a result. Facing the tough external environment, Chinese shipbuilding enterprises should continue their effort in technical innovation,management improvement, cost control and advancing quality and effectiveness;they should also actively widen vision,closely watch demand from the offshore wind power, sea ranch, maritime travel and submarine mining industries, nurture new sectors for economic growth in a bid to improve competitiveness.★