China Shipyards Squeezed by Low Down Payments Amid Credit Crunch

China Shipyards Squeezed by Low Down Payments Amid Credit Crunch

During the 2007 shipping boom, China’s shipyards charged down payments of as much as 60 percent of a vessel’s value. Now, shipbuilders are cutting those payments to as little as 2 percent, giving an advantage to state-owned companies that can tap the government’s cash.

With flagging demand pushing shipyards to compete by cutting down payments and China taking measures to rein in lending, the nation’s privately owned yards are getting squeezed by state-owned rivals that enjoy greater access to financing. China Rongsheng Heavy Industries Group Holdings Ltd. (1101), the largest shipbuilder outside state control by order book, said this month it’s seeking government support after failing to win any new vessel orders this year.“The payment terms mean shipyards have to burn their own money to build ships, which brings them extraordinary cash-flow pressure,” said Lawrence Li, a Shanghai-based analyst at UOB-Kay Hian Holdings Ltd. (UOBK) “Only state-owned yards that are able to secure funding can offer such aggressive down-payment terms.”

State-backed companies grabbed 74 percent of new vessel orders in China, the world’s biggest shipbuilding nation, in the first half of this year, according to data compiled by UOB-Kay Hian. That compares with 52 percent in all of 2012.

Dalian Shipbuilding Industry Co., a unit of state-owned China Shipbuilding Industry Corp., won an order this month to build seven ships that can carry 8,800 containers each. The buyer, a unit of state-run China International Marine Containers (Group) Co., agreed to pay 2 percent of the total amount of $595 million as a first installment and the rest upon delivery.

Fivefold Surge

New orders for commercial vessels at Dalian’s parent, which also built the nation’s first aircraft carrier, surged more than fivefold in the first half in terms of contract value, the company said in a statement posted last week on the website of China Association of the National Shipbuilding Industry.

China Shipbuilding Industry and China State Shipbuilding Corp., the two biggest yards owned by the government, didn’t reply to e-mailed and faxed questions from Bloomberg News.

The ability to get financing has become one of the most critical issues for yards to win orders, said Bao Zhangjing, deputy director of the China Shipbuilding Industry Economy Research Center.

“The market is going to be more dominated by fewer players given the current situation,” Bao said. “Those with competitiveness will have opportunities. State-owned companies and some local firms are doing relatively better.”

Of about 1,591 shipyards in China in 2011, 70 were state-owned, according to the latest available data from the shipbuilders group.

Vessel Glut

Rongsheng and other shipmakers are struggling as a global vessel glut makes orders more difficult to win and pushes down prices. A third of the shipyards in China, the world’s biggest shipbuilding nation, may be shut in about five years as they failed to win orders “for a very long period of time,” the shipbuilders group said July 4.

A clampdown on excessive short-term borrowing sent China’s overnight repurchase rate to a record 13.91 percent last month, forcing at least 22 companies including China Development Bank Corp., a backer of the shipping industry, to cancel or delay bond sales. Premier Li Keqiang said this month that China will seek to keep economic growth above an unspecified lower limit without indicating any immediate plans to boost credit even as the pace of expansion slows, while the State Council pledged to maintain its “prudent” monetary-policy stance.

Tight Liquidity

Shipyards generally have tight liquidity, and low down payments have worsened the situation, said Wang Jinlian, secretary general of the shipbuilding group. Yards received down payments averaging 40 percent in 2007, with 60 percent being the high mark, Wang said.

Buyers now pay about 5 percent to 10 percent on average, he said, characterizing 2 percent as “abnormally” low.

“We urge financial institutions to help key enterprises like Rongsheng,” Wang said.

Rongsheng has plunged 29 percent in Hong Kong trading since saying it was seeking government support on July 5. Trading of the shares was suspended July 4 after the Wall Street Journal said the company recently eliminated about 8,000 jobs. The shipyard, which has forecast a loss in the first half, said it’s restructuring its workforce and is in talks with financial institutions about renewing credit facilities.

Rongsheng’s down-payment requirements are “competitive” in the market, the company said in an e-mailed statement to Bloomberg News, declining to disclose the terms. While it hasn’t landed any new ship orders this year, it secured contracts to build offshore equipment, the company said.

Yangzijiang, Hyundai Heavy

Some private shipyards in China continue to win contracts. Yangzijiang Shipbuilding Holdings Ltd. (YZJ), the nation’s second-biggest private yard, said in a July 4 statement it has won $1.01 billion of shipbuilding orders in the first half.

Demand is picking up for South Korean yards as well, said Park Moo Hyun, an analyst at E*Trade Securities Korea in Seoul. Hyundai Heavy Industries Co., the world’s biggest shipbuilder, said this month it plans to raise prices in the second half.

“The big Korean shipyards have already achieved more than 60 percent of their order targets for this year,” Park said. “This is enabling them to get better payment terms.”

Global ship orders surged from about 2007 because of speculation fueled by China’s demand for raw materials. The government also provided low-cost financing for new vessels to help support shipyards, leading to a global increase in orders.

‘Sake of Workers’

Chinese yards had an order book of 218 million deadweight tons in 2008, overtaking South Korea as the world’s largest shipbuilding nation, according to Clarkson Plc, the world’s biggest shipbroker. China held an order book of 109 million deadweight tons at the end of June, 13.4 percent lower than a year earlier, according to the Ministry of Industry and Information Technology.

Lianyungang Wuzhou Shipbuilding Heavy Industry Co., based in eastern China’s Jiangsu province, has reduced the number of workers by half from last year to about 1,000, Chairman Ye Yunzhu said. The privately held yard is maintaining production by accepting orders to build vessels with a price tag of about 10 million yuan ($1.6 million), he said in a phone interview. It used to build vessels priced at more than 100 million yuan.

“We are only maintaining basic production for the sake of workers,” Ye said. “We can’t make money at the moment, therefore our focus is to avoid losing money.”

To contact the reporter on this story: Jasmine Wang in Hong Kong at jwang513@bloomberg.net