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Stimulus package limits the effect

Stimulus package limits the effect
China?s shipyard stimulus package could have only limited immediate effect in helping the country?s shipbuilders while harming prospects for smaller shipyards.

China"s shipyard stimulus package could have only limited immediate effect in helping the country"s shipbuilders while harming prospects for smaller shipyards.

Chine"s shipyard stimulus package, approved by the State Council two weeks ago, could have only limited immediate effect in helping the country"s shipbuilders while harming prospects for smaller shipyards.

Outlining the impact of the new policy, Macquarie Securities said the three-year halt on new shipbuilding capacity would benefit large existing yards, while disadvantaging smaller yards that are expanding.

?Our visitations to Chinese private yards showed that a lot of greenfield yards were relying on capacity expansion when signing large amounts of orders. With the ban on capacity expansion, that huge orderbook is unlikely to be delivered,? said a team of Macquarie analysts headed by Winnie Guo.

Other measures in the package include allowing banks to offer export credits to foreign owners, extending tax rebates and other financial support to Chinese shipyards until 2012, increased government support for innovation and a push to scrap older vessels.

Macquarie said while export financing should make ordering from Chinese yards more attractive and increase Chinese shipbuilders" competency in the global market, the current market conditions meant there were likely to be few orders.

The tax breaks apply to China State Shipbuilding Corp and China Shipbuilding Industry and allow them to get a rebate on 17% VAT on vessels ordered by China Ocean Shipping (Group), China Shipping Group and Sinotrans.

Macquarie pointed out that while Guangzhou Shipyard and China State Shipbuilding were two listed subsidiaries of CSSC, ?both yards have had limited orders placed by the three leading state-owned enterprise shipping companies?.

Turning to scrapping, the investment house said with Chinese owned vessels accounting for less than 10% of the global fleet, accelerating the scrapping of older ships is unlikely to significantly affect the size of the world"s total number of vessels.

Consequently, ?the stimulus package ultimately will not change the weak new order volume and cancellations?, Macquarie said.

?Currently, a secondhand handysize bulk vessel is selling at $20m, while it costs Chinese shipbuilders $23m to build a handysize and the newbuild handysize price is $33m. Under such circumstances, shipowners do not have any incentive to place new orders.?

Cancellations may overtake the limited number of contracts

Overall, the Macquarie analysts thought the volume of new orders would remain weak this year, while ?cancellations may accelerate and overtake the limited number of contracts signed?.

Neither will niche markets such as product tankers protect shipyards from the slump in the shipbuilding market.

Turning to Guangzhou Shipyard International, Ms Guo said ?we do not expect the relatively better tanker market to shield it from the industry downturn. We think the company"s earnings will drop significantly in 2011?.

This would reflect a slump in new orders this year and in 2010 compared with previous years.

Guangzhou Shipyard specialises in building chemical and product tankers ranging from 29,000 dwt-42,000 dwt and ro-pax vessels.

?We estimate the amount of new orders that Guangzhou Shipyard International can secure in 2009 is 119,000 cgt, down 41% year-on-year, and will recover slightly in 2010 with 153,000 cgt of new orders placed,? Ms Guo said.

She added: ?We estimate Guangzhou Shipyard has already secured revenue of Yuan2.9bn ($426.5m) for 2011 and Yuan572m for 2012. With limited new orders expected to be placed in the coming years, we believe 2011 revenue is unlikely to increase significantly from the current level.?

Macquarie estimated that shipbuilding revenue in 2011 would top Yuan5.2bn, down 39% from projected revenue of Yuan8.5bn in 2010.

The shipyard will also be hit be relatively high steel and labour costs which together account for about 36% of the firm"s operating costs.

Macquarie forecast that labour costs would rise by 5% this year and, while Chinese ship plate prices are set to fall 20% this year these would still be relatively high compared with 2007 and 2006.


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