The slow­ing Chi­nese econ­omy strands ship­builders

▶ The slow­down in Chi­nese ex­ports and im­ports is af­fect­ing ev­ery cor­ner of the ship­ping in­dus­try ▶ “Peo­ple are call­ing us not to lay up one ship but 15 or 20”

Bloomberg Businessweek (North America) - - Contents - - Bruce Ein­horn, with Carol Mat­lack

When busi­ness slows and own­ers of ships and off­shore oil rigs need a place to store their un­needed ves­sels, Sar­a­vanan Kr­ishna sud­denly be­comes one of the in­dus­try’s most pop­u­lar ex­ec­u­tives. Kr­ishna is the op­er­a­tion di­rec­tor of In­ter­na­tional Ship­care, a Malaysian com­pany that moth­balls ships and rigs, and th­ese days he’s busy tak­ing calls from be­lea­guered oper­a­tors with ex­cess ca­pac­ity. There are 102 ves­sels laid up at the com­pany’s berths off the Malaysian is­land of Labuan, more than dou­ble the num­ber a year ago. More are on the way. “There’s a huge de­mand,” he says. “Peo­ple are call­ing us not to lay up one ship but 15 or 20.”

Ship­builders, con­tainer lines, and port oper­a­tors feasted on China’s rise and the global re­sources boom. Now they’re among the big­gest vic­tims of the coun­try’s slow­down and the world­wide de­cline in de­mand for oil rigs and other gear amid the oil price plunge. China’s ex­ports fell 1.8 per­cent in 2015, while its im­ports tum­bled 13.2 per­cent. The Baltic Dry In­dex, which mea­sures the cost of ship­ping coal, iron ore, grain, and other non- oil com­modi­ties, has fallen 76 per­cent since Au­gust and is now at a record low. Ship­ping rates for Asiao­rig­i­nated routes have dropped, too, and traf­fic at some of the re­gion’s ma­jor ports is fall­ing. In Sin­ga­pore, the world’s se­cond-largest port, con­tainer traf­fic fell 8.7 per­cent in 2015, the first de­cline in six years. Vol­umes at the port of Hong Kong, the fourth-busiest, slid 9.5 per­cent last year. Be­yond Asia, the gi­ant port of Rot­ter­dam in the Nether­lands recorded a dip in con­tainer­ized traf­fic for the year.

Glob­ally, or­ders for new ves­sels dropped 40 per­cent in 2015, to $69 bil­lion, ac­cord­ing to Lon­don­based con­sult­ing firm Clark­sons Re­search. The de­mo­li­tion rate for un­wanted ves­sels jumped 15 per­cent. Just a few years ago, as the glob­global global econ­omy i im­proved and oil prices rose,

many com­pa­nies or­dered more fuel- ef­fi­cient ships. There were more than 1,200 or­ders for bulk car­ri­ers that trans­port iron ore, coal, and grain in 2013, com­pared with just 250 last year, ac­cord­ing to Clark­sons. Many of the ships or­dered are now in op­er­a­tion, says Tim Hux­ley, chief ex­ec­u­tive of­fi­cer of Wah Kwong Mar­itime Trans­port Hold­ings, a Hong Kong-based owner of bulk car­ri­ers and tankers. “You have a mas­sive over­sup­ply,” he says.

The dam­age is es­pe­cially se­vere in China, the world’s lead­ing pro­ducer of ships. New or­ders for Chi­nese ship­builders fell by nearly half last year, ac­cord­ing to the Min­istry of In­dus­try and In­for­ma­tion Tech­nol­ogy. In De­cem­ber, Zhoushan Wuzhou Ship Re­pair­ing & Build­ing be­came the first state- owned ship­builder to go bank­rupt in a decade.

The yuan has dropped 6 per­cent since last Au­gust. While that should help ex­ports, Hutchi­son Port Hold­ings Trust, a com­pany con­trolled by Hong Kong bil­lion­aire Li Ka-shing that runs some of China’s top con­tainer ter­mi­nals, has yet to see an uptick in out­bound busi­ness. Ac­cord­ing to Ivor Chow, chief fi­nan­cial of­fi­cer of Hutchi­son, the de­val­u­a­tion is lead­ing to a slow­down in traf­fic as cus­tomers wait to see how much lower the yuan will fall. “Peo­ple are re­ally hes­i­tant to com­mit to or­ders at this point,” he said on a con­fer­ence call with an­a­lysts on Feb. 2. The slow­down is hurt­ing many Chi­nese ports. Sales at Shang­hai In­ter­na­tional Port were 7.5 bil­lion yuan ($1.1 bil­lion) in the third quar­ter, down from 7.6 bil­lion yuan the year be­fore, and net profit was 1.4 bil­lion yuan, a de­cline of 18 per­cent. The Shang­hai Ship­ping Ex­change’s con­tainer­ized freight in­dex has dropped 27 per­cent since the start of 2015. While con­tainer vol­ume at Shang­hai’s port, the world’s largest, grew 3.7 per­cent last year, that was down from 4.8 per­cent growth the pre­vi­ous year and was largely the re­sult of tak­ing mar­ket share away from high-cost ri­val Hong Kong, ac­cord­ing to Bloomberg In­tel­li­gence an­a­lyst John Mathai.

The slide in oil prices is es­pe­cially painful in Sin­ga­pore, home to Kep­pel

and Sem­b­corp In­dus­tries, the world’s two largest pro­duc­ers of off­shore oil rigs. Or­ders for the two com­pa­nies dropped in 2015 to their weak­est lev­els in six years. Sin­ga­pore’s state in­vest­ment fund, Te­masek Hold­ings, which has ma­jor stakes in both Kep­pel and Sem­b­corp, is dis­cussing the sale of non­core as­sets or is­su­ing new shares. “We have to plan for a longer win­ter,” Kep­pel CEO Loh Chin Hua said on a call with an­a­lysts on Jan. 21.

South Korea in De­cem­ber an­nounced plans to es­tab­lish a $1.2 bil­lion fund to help lo­cal ship­ping com­pa­nies pay for new ves­sels they’ve or­dered, ac­cord­ing to the Min­istry of Oceans and Fish­eries. The govern­ment will push ship­yards to down­size and fo­cus on their core busi­nesses— one ship­builder op­er­ated a golf course. Hyundai Heavy In­dus­tries, the world’s big­gest ship­builder, said on Feb. 4 that it had suf­fered its ninth con­sec­u­tive quar­terly op­er­at­ing loss, fol­low­ing a 1.7 tril­lion-won ($1.4 bil­lion) loss in 2014.

The re­ces­sion in ship­ping is caus­ing trade fric­tion. Dae­woo Ship­build­ing and Marine En­gi­neer­ing is in the worst po­si­tion among Korea’s ship­builders. Korea De­vel­op­ment Bank and an­other sta­te­owned len­der, Ex­port-im­port Bank of Korea, are lead­ing a 4.2 tril­lion-won bailout of Dae­woo. “We see this case as a prob­lem,” Shinichiro Otsubo, di­rec­tor of the ship­build­ing divi­sion at Ja­pan’s Min­istry of Land, In­fra­struc­ture, Trans­port and Tourism, told Bloomberg in De­cem­ber. “If this aid pack­age keeps the firm from cut­ting ca­pac­ity, the ef­fect will be po­ten­tially big.” Ja­pan hasn’t ruled out the pos­si­bil­ity of fil­ing a com­plaint with the World Trade Or­ga­ni­za­tion.

There are some bright spots. Com­pa­nies that op­er­ate oil tankers have been busy as cus­tomers take ad­van­tage of record-low crude prices to build up their in­ven­to­ries: Or­ders for new tankers in­creased 14 per­cent last year, ac­cord­ing to Clark­sons. Back in Malaysia, In­ter­na­tional Ship­care’s busi­ness is so strong that Kr­ishna says the com­pany is run­ning out of places to store cus­tomers’ ships. Since the start of De­cem­ber, de­mand has spiked about 30 per­cent. “It’s un­prece­dented,” Kr­ishna says. He’s hop­ing to add ca­pac­ity.

The bot­tom line In Asia, port oper­a­tors, ship­builders, and ship­ping lines are suf­fer­ing from the global loss of ap­petite for China’s goods.

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