Ship Building in China - Industry Report.pdf

CONTENTS Error! No text of specified style in document. December 2011 www.ibisworld.com.cn | 1-800-330-3772 | chinahelpibisworld.com IBISWorld Industry Report 3751 Ship Building in China December 2011 About This Industry . 2 Industry Definition 2 Main Activities . 2 Similar Industries . 2 Additional Resources . 3 Industry Performance 4 Executive Summary . 4 Key External Drivers 4 Current Performance . 4 Industry Outlook 9 Industry Life Cycle . 11 Products industry revenue increased by 17.2%. During April and September, the volume of monthly new orders exceeded output volumes of new ships, which resulted in slight increases of handling orders. WWW.IBISWORLD.COM.CN Ship Building in China December 2011 6 However, there are still several major problems in this industry, such as excess production capacity, ship delivery delays, rising labor costs, higher raw material costs, and high requirements for new international standards. Also, weaker new orders in 2009 will gradually have a negative effect in the next few years. 2009 In the first quarter of 2009, China's GDP growth slowed to just 6.1% (the lowest growth rate since 1990), before recovering with the implementation of the government's large-scale economic stimulus plan. Quarterly GDP growth in the second and third quarters rose to 7.1% and 7.7%, respectively, with GDP growth for the whole year reaching 9.1%. Mainly promoted by stable growth in emerging economies and increased liquidity, the world economy is estimated to have declined by just 1.0% in 2009, with growth of 3.4% in 2010. China's Ship Building industry has been largely affected by shrinking international trade activities and a slump in international shipping industries. Globally, in early 2009, the volume of new orders for ships declined by over 90% and recovered only slightly from June 2009 onward, with improving economic conditions. Despite slight increases in new orders, prices for new ships also declined significantly, with increasing delays or cancellations for orders that had not been commenced. On the whole, this industry is recovering in terms of new orders, but the poor performance is expected for several years as it has a long life cycle. Negative effects of the global financial crisis are expected to emerge with slowing industry revenue and profitability growth. With the large volume of handling orders, output of the Ship Building industry in China increased strongly and industry revenue increased by 37.4% in 2009. However, with a major decrease of 55% in the volume of new orders received, the volume of handling orders of shipbuilding enterprises in China was 188.17 million DWT at the end of 2009, down 8% from 2008. Industry revenue growth is expected to slow in the next several years. 2008 In 2008, petroleum prices peaked, contributing to oceanic transportation becoming the cheapest way to deliver cargo over long distances. Therefore, demand for cargo ships, especially container carriers and oil tankers, continued to rise, pushing up ship prices. However, the environment for Chinese shipbuilding industries was not favorable in the last quarter of the year. The subprime mortgage crisis in the US caused general demand from the US to drop. This also had severe impacts on global financial market, resulting in difficulties in shipbuilders accessing finance. Also some foreign clients canceled contracts to reduce financial risks. Further, the Chinese yuan continued appreciating against the US dollar. This made long-term contracts worth less over time. Also, as the Korean won continued depreciating, Korean ships, as well as American ships, became more competitive than Chinese ships. Steel prices continued to increase in the last quarter of 2008. The rising cost of iron and steel smelting and decreasing global iron ore supplies were the main causes of higher raw material costs. Accompanied by relatively low production efficiency, rising steel prices negatively affected Chinese shipbuilders significantly. Competition from Japan and South Korea intensified. Higher efficiency, capabilities to build high value-added ships, and advantages in the Japanese yen and Korean won contributed to greater competitive strength over Chinese shipbuilders. The inflated China stock market declined from the beginning of 2008, also negatively affected listed shipbuilding companies. To sustain growth in the negative environment, companies in this industry conducted research and development to improve production efficiency. Increasing required down payment ratios was also a policy adopted by many firms to minimize risks of further US dollar depreciation. In 2008, industry revenue totaled $45.36 billion, up 72.9%. The very strong revenue growth rate was contributed by the appreciation of the Chinese yuan, the delivery of ship orders received before 2008, and the economic census conducted during the year. The State Administration of Science Technology and WWW.IBISWORLD.COM.CN Ship Building in China December 2011 7 Industry for National Defense reported total ship output of 28.8 million DWT for the year, up 52.2% from 2007. 2007 In the first two months in 2007, newly accepted contracts by Chinese shipbuilders amounted to 49% in the world in compensated gross tonnage, almost twice the new contracts by South Korean shipbuilders. However, the large number of contracts contained inflated factors, such as long-term contracts with delivery due in several years, contracts that were won due to low prices, and contracts with only low-value- added processes performed in China. Long-term contracts mean low actual annual output. Low prices and low value add mean low profitability. In March 2007, STX Shipbuilding Co., Ltd in South Korea initiated the construction of its production base in Dalian, China, symbolizing that South Korea was enlarging investment in shipbuilding in China. However, the production base was merely a processing base, with no facilities for assembling ships. Other Japanese and Korean shipbuilding companies that would establish China production bases used exactly the same strategy. The purposes of such strategies are to utilize materials and labor in China with lower costs; to prevent core shipbuilding technologies divulged to Chinese companies; and to easily transport finished ship components back to their countries. Despite these factors, the Ship Building industry in China developed rapidly due to the fulfillment of existing contracts, extensive demand from domestic oceanic shipping companies, enhanced production efficiency and innovative shipbuilding technologies. Although efficiency and technologies still lagged those of Japan and South Korea, Chinese ship builders were narrowing the gap. For example, Chinese firms were now building LNG (Liquefied Natural Gas) ships, which was previously monopolized by South Korea. In 2007, industry output was 18.9 million DWT, accounting for 23% of world output. Industry revenue increased by 43.2% to $26.24 billion. 2006 In late 2005, steel prices fell slightly. However, fulfilling the large volume of contracts required high volumes of steel plates. By the end of 2004, the existing contracts for Chinese shipbuilders amounted to 28.7 million DWT, of which the latest schedule was due in 2009. Most ship builders had their schedule in three years to 2008 fully filled with contracts. This partially caused the steel price to remain high, which lasted into 2006. International ship price levels had been raised to balance increased raw material costs. Chinese ship builders therefore benefited from higher final prices and continued rapid growth in 2006. However, internal industry problems existed. First, China reformed the exchange rate policy in 2005, allowing the yuan to float according to wider market changes. Since then, the yuan has appreciated against the US dollar. As a result, international contracts of which prices were marked in US dollars depreciated. Second, full participation in international markets soon revealed the inefficiency of designing ships and auxiliary equivalent for ships by domestic players. Importing ship components and equipment reduced profit rates. Lastly, domestic players had strengthened production capacity without developing corresponding sophisticated management techniques, which resulted in longer building cycles and higher costs compared with other developed countries. In 2006, industry output was 14.5 million DWT, accounting for 19% of world output. Industry revenue increased by 29.3% to $18.33 billion. International trade The value of international trade in this industry generally increased in the five years to 2011. Fluctuations exist as shipbuilding contracts last for years. Exports are expected to increase from $9.92 billion in 2006 to an estimated $50.92 billion in 2011 at an annualized growth rate of 38.7%. Competing imports are WWW.IBISWORLD.COM.CN Ship Building in China December 2011 8 expected to increase at an annualized rate of 14.9% in the five years to 2011, from $530.6 million to a forecast $1.06 billion. Despite the global financial crisis, exports still increased by 52.8% in 2009 and by 36.0% in 2010, due to the effects of the crisis being delayed on the shipbuilding industry. With the global recession resulting in fewer contracts being executed and largely shrinking new orders, export growth in the few years after 2012 will be much lower than in 2009 and 2010. WWW.IBISWORLD.COM.CN Ship Building in China December 2011 9 Industry Outlook ACMR-IBISWorld forecasts that in the five years to 2016, industry revenue will increase at an average annual rate of 11.2% to $149.83 billion. There is expected to be 3,342 establishments owned by 974 enterprises operating in this industry in 2016, employing almost 676,168 people. Exports are forecast to increase at an annualized rate of 8.3% to $75.92 billion in 2016, accounting for 50.7% of industry revenue. Forecast slower export growth will be the result of fewer new contracts and increased contract cancelations since 2009. Besides, the appreciation of the Chinese yuan will negatively affect the shipbuilders' profits as the cost to settle exchange rate also rises. Competing imports are expected to total $1.44 billion, accounting for 1.9% of domestic demand, with an average annual increase of 6.3% in the five years to 2016. Affected by the global financial crisis from 2008, new ship orders decreased sharply in 2009. The impact of this decrease likely will not be felt until 2012. However, as the economic condition improved in 2010, the volume of new orders received was 75.23 million DWT, up 90% from 2009, which has offset some negative effects of 2009. However, expansion of manufacturing facilities to cope with increasing contracts in 2006, 2007 and 2010 will become a burden in other years when orders decrease and result in low industry performance. As China has become the world's largest shipbuilding country in the world, the ability to cope with external uncertainties also must be improved. It is possible that governmental support for this industry's technical advancement will avoid a significant downfall of industry revenue. Large companies in this industry are developing new ship types for better cargo variety and higher profitability. In the long term, China plans to have several shipbuilding bases with high value-added ship products in 2015. The Changxing Island shipbuilding base of CSSC is built to be such a base. In the outlook period, the world will be more active in treating global warming. Low-carbon shipbuilding will be a new competing point for the global competitors, in which area Japan and South Korea has already been very active. Demand for “clean“ fuel such as LNG (Liquefied Natural Gas) will continue to grow, with LNG ship design and building becoming an important growth segment for domestic ship builders. Domestic manufacturers will focus more on the environment issues in the outlook period. Since the environment for shipbuilding development in China is not favorable due to high steel prices, low production efficiency, low technology intensity, and long building cycles, the Ship Building industry in China will not continue growing as strongly as in the current performance period. The Chinese yuan appreciation will also continue to negatively affect the export market in the outlook period. WWW.IBISWORLD.COM.CN Ship Building in China December 2011 10 WWW.IBISWORLD.COM.CN Ship Building in China December 2011 11 Industry Life Cycle This industry is in the growth stage of its life cycle. Life Cycle Stage Industry revenue and value added increased faster than real GDP growth during the current performance period Ship variety is low, which assists with standardization within the industry Technology changes mostly involve the development of improved ship specifications In the five years to 2011, the growth rates of both industry revenue and value added are expected to be significantly higher than GDP growth rates that averaged about 10%. Further, the number of establishments in the industry is still increasing. The industry is dominated by three types of ships: oil tankers, bulk cargo carriers and container carriers, which in total accounted for 79.2% of shipping output in value in 2010 in China. This indicates that the variety of product in this industry is low, which assists companies in standardizing processes and developing efficiencies. In recent years, the research and development of shipbuilding in China has focused mainly on improving the capacity of dominant ship types. Although the development of new ship types, such as specialized chemical carriers is encouraged, the plan for such development is for the long-term, about a decade in the future. Generally, the growing Chinese economy and increasing demand for global cargo transportation will present major market opportunities for China's shipbuilding industries. However, competition from Japan and South Korea, appreciation of the currency and a faltering global economy form negative external conditions for this industry, making growth in the near future slower. WWW.IBISWORLD.COM.CN Ship Building in China December 2011 12 Products and, (2) General demand for passenger ships is low because bridges and passenger aircraft have strong substitution effects on passenger ships. WWW.IBISWORLD.COM.CN Ship Building in China December 2011 16 Major Markets Exports 58.3% Domestic Commercial Shipping 31.2% Government 10.5% The Ship Building industry in China heavily relied on global market. Exports make up 57.9% of the industry revenue in 2011. According to China Customs, oil tankers, bulk cargo carriers and container carriers in total accounted for 79.2% of exports by value in 2010. This market segment is expected to slightly slow down during the outlook period, mainly due to the debt crisis in the eurozone and various economic troubles in developed countries. Domestic commercial shipping is estimated to acc