Global storm hits China's sea-commerce
By Chris Stewart
HUA HIN, Thailand - The stunning growth at China's shipbuilders, shipping lines
and ports over the past few years is juddering to a halt as cash-strapped US
consumers cut demand for Chinese goods and banks balk at lending to potential
customers.
A weather gauge for the industry, the Baltic Exchange Dry Index, has dropped
like a barometer in a typhoon as slowing international trade has left too many
ships seeking business from too few customers. The measure, which tracks sea
freight prices for commodities such as coal, hit a five-and-a-half year low
last week, down 87% from a record in May.
Carriers hauling iron ore from Australia to feed Chinese steel mills run by
Shougang Corp, Jiangsu Shagang Group and other
industry giants face a drop in seaborne iron trade of as much as 10% as
steelmakers cut production, according to JP Morgan Securities analyst Johnson
Man Leung.
The drop-off in international trade and future outlook has helped to drive down
shares in China Cosco Holdings, the world's top transporter of resources,
almost 90% in the past 12 months, dropping faster than even the benchmark
Shanghai Composite Index, itself down 66% this year.
The global economic slowdown will push some shipping lines into bankruptcy,
investor Marc Faber said during a shipping conference in Singapore on October
14, Reuters reported. A glut of new vessels is adding to woes, with Goldman
Sachs estimating that this may help drive shipping fees down 40% next year and
47% the year after, according to the July 28 Reuters report
Even where traders have goods they want to transport, many are struggling to
persuade banks to grant guarantees of payments for the goods. Such letters of
credit and other credit lines for trade are frozen, Bloomberg reported last
week, citing the managing director of an Asia-based shipping company. "Nothing
is moving because the trader doesn't want to take the risk of putting cargo on
the boat and finding that nobody can pay," the executive said.
The downturn comes as Cosco and other carriers in the region are facing higher
costs from tighter regulations and covering piracy risks. The European Union
has forced an end this month to shipping conferences, alliances of carriers
that set prices in concert and which are viewed in some parts as the equivalent
of piracy in a free-market world. That should intensify competition and put
further downward pressure on shipping prices.
Piracy of a more traditional sort, notably off the coast of Somalia, is driving
up the cost of insurance cover. Hijackings in the area, on the most direct
route between Asia and Europe, have driven insurance costs up 10-fold this year
for shipping passing through the Gulf of Aden, according to Lloyd's List, a
trade publication. The alternative route, around the bottom of South Africa,
adds to cost by being thousands of kilometers longer.
Ship operators are also facing increased costs as they come under pressure to
cut emissions of greenhouse gases from their vessels, at present excluded from
national measures of carbon dioxide emissions under the Kyoto Protocol on
global warming. Ships carry about 90% of the world's traded goods by volume and
are estimated to contribute between 2.7% and 3.5% of global greenhouse gas
emissions.
The industry's top regulatory body United Nation's International Maritime
Organization (IMO) in London this month discussed how best to rein in
emissions. Further talks are to be held "early in 2009", the IMO said on its
website after its recent meeting. Failure to reach agreement may lead the UN to
impose its own emissions rules in December 2009.
Shares of shipbuilders are also tumbling as an excess of capacity limits demand
for new orders and tightening credit forces cancellations while higher raw
material costs squeeze margins. China State Shipbuilding, the country's leading
shipbuilder, is down about 87% since January 8.
"We expect to see massive downward revisions on shipbuilders' earnings over the
next 12-month period, driven by recent sharp increases in plate prices and
other key raw material prices," Macquarie Group analyst E S Kwak said in an
August research note. Steel prices jumped about 30% in the first half.
At least 21 orders were cancelled at China's shipyards in the first eight
months this year and more can be expected, said Bao Zhangjing, chief researcher
at China Shipping Industry, a unit of China State Shipbuilding, citing data
from shipping services company Clarksons.
The maritime sector needs about US$300 billion over the next three to four
years to fund construction of vessels that are already on order, according to
Nordea Bank Finland, Bloomberg reported this month. At least a quarter of
container ships, dry-bulk vessels and oil tankers on order are not financed,
the report said, citing Hong Kong-based ship lessor Seaspan Corp.
The number of contracted new ships in China in the first half this year
declined 48% from a year earlier to 455, with a 45% drop in carrying capacity,
reducing the country's share of the global market to 33.7% from 42.96%,
Ireland-based ResearchandMarkets said in a report last month. New orders may
decline a further 16% a year in 2009 and 2010, Macquarie's Kwak wrote.
China Export-Import Bank, the state's largest provider of shipping finance, had
by June cut the percentage of lending to as low as 65% of order values from 80%
in the past, the South China Morning Post reported. The bank cut loan
facilities to overseas shipowners - China's shipbuilders exports about 80% of
their output - by between 30% and 40% in the first three months this year, said
Li Li, a ship financing director in the bank's export credit department.
China State Shipbuilding and China Shipbuilding Industry Corporation dominate
the sector in China, but the number of private shipbuilders, now about 3,000
compared with fewer than 400 a decade ago. These yards are particularly feeling
the pinch, as their small asset base gives them little in the way of collateral
when seeking loans.
The head of a private shipbuilder in Taizhou city in Zhejiang Province, who
preferred to remain anonymous, told Asia Times Online that part of the money
for shipbuilding came from banks, but "it's difficult for us to get money from
[official] banks." Instead cash is "borrowed from friends and underground
banks".
He said soaring steel prices and labor costs are also hurting the company's
margins. "A ship's price is fixed when the contract is signed, but raw material
prices have jumped higher than expected," he said.
The most difficult problem facing private shipbuilders is capital, said Bao.
"The chance for new and emerging private shipbuilders to receive lending from
banks is low given their limited assets," he said.
China's ports are also feeling the pinch, with throughput growth slowing to
single-digit figures from 22% last year, the South China Morning Post reported
on October 17, citing Daiwa Institute of Research director Geoffrey Cheng.
Shanghai, the country's biggest port, increased throughput 9% in the first nine
months to 21.08 million 20-foot equivalent units, a pace that is short of the
11% full-year growth target indicated by an official at Shanghai International
Port Group, the report said.
Throughput at Shenzhen, the mainland's second-biggest port, dropped 2.4% last
month, the first decline in seven months, while the nearby Shekou Container
Terminal, owned by China Merchants Holdings (International), saw growth tumble
to 11% in September from 31% in August and 39% in July.
The slowing growth may lead China Merchants Group to delay for a year
construction of a new berth in Qingdao, northeastern China, the South China
Morning Post reported, citing a company official said, while plans for
expansion at Dachan Bay in Shenzhen would be postponed.
Cosco Pacific, which has interests in 17 mainland port projects, is also
suffering setbacks, with growth easing to below 17% in September from 22.4% in
the first eight months of the year.
Even so, the strength of China's economy, which expanded by 9% in the third
quarter, means some fair winds are blowing for shipping-related companies,
helped by the government encouraging domestic spending to play a bigger part in
the economy and reduce dependence on exports.
Growing riverine trade on China's extensive inland waterways, as economic
growth is encouraged away from the coastal areas, will also help to reduce
slack. An official at CSC Nanjing Tanker Corp, China's leading crude carrier
and a subsidiary of the China Changjiang National Shipping (Group) Corp, said:
"As the company focuses on domestic oil transport, the impact of the slowing
global economy is limited."
China's shipbuilders are also benefiting from strong output resulting from
existing orders. Their output in the first half of 2008 jumped 42.5%
year-on-year, compared with a 29.4% jump in 2007 and an average annual compound
output growth of 24%. That helped to drive China State Shipbuilding's
first-half profit up 80.6% to 1.95 billion yuan (US$285 million).
The country's ship repair and ship-breaking industry is also enjoying a boom,
with sales income up 76% year-on-year in the first half, 24 percentage points
faster than the same period last year, ResearchandMarkets said.
Chris Stewart is the Thailand-based Business Editor for Asia Times
Online. With additional reporting by Olivia Chang, Asia Times Online
senior reporter.
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