The following article is reproduced from this latest edition from Lloyd's Register's marine technical news publication, Horizons.
The shape and size of China's future ship-building industry will be determined by many influences. In the near future, it will be improving global trade, the price of energy and the availability of credit. And key to those drivers, will be the banks.
At present, there is little, if any, commercially viable lending from historic sources, so who will be the bankers to the shipping industry? And what will the appetite be of those traditional shipping banks for a return to lending on anything like the scale of twelve months ago? A likely scenario is that banks will move back into the market on an extremely selective basis.
So it follows that there may be an opportunity for China's major banks to become principal global providers of ship finance services. We have seen the major ship financing banks reduce their loan books considerably in the past four months, with clear statements that they will be honouring all commitments.
However, when one adds up all of the committed loan facilities and compares it with the number of ships to be constructed through 2009/10, there would appear to be a very significant component to be funded through the balance sheets of the purchasers.
Given the marked deterioration of trading revenues, it seems unlikely the balance of funding will be available and, if it is not, that many of those ships will progress no further than the drawing board.
Notwithstanding the challenges we face, there is no denying the fact that China has emerged in the first decade of the 21st Century as a maritime superpower. We have witnessed an unparalleled and unprecedented freight boom in the past few years.
Chinese shipyard capacity exploded to meet the demand that was generated. But the boom is over and we are now in difficult and uncertain times. The shipping industry has come to a crossroads after a period of considerable and excessive, growth.
There are more ships on order than ever before, but freight rates have fallen to very low levels.
Question marks about the financing of the order-book hang menacingly over the market. Owners now want to delay delivery and renegotiate contact prices, especially of those ships ordered at high prices, with the prospect of operating these vessels at a considerable loss for a long time.
We are now facing a period of considerable over-capacity, which beggars the question: How long will it take for the overcapacity to be matched by demand?
As far as China is concerned, to answer that question we must look at the origins of the country's economic development.
Globalisation and an economic strategy centred on industrial exports has been the driver. The country's shipbuilding industry has reflected this in its orderbook: the majority of ships built or on order were contracted by foreign owners.
But now, with the emergence of a strong consumer base that flourished under the forces of industrialisation, the question is whether China can rely on the purchasing power of its emerging consumer base to keep its factories busy and by implication its demand for raw materials and energy strong, if external demand for manufactured goods remains weak.
If it can, this will in turn fuel the demand for more ships for the domestic fleet and help strengthen the emerging marine supply chain. All this has the potential to help China move towards becoming a world leader in quality as well as quantity.
The question is whether the growth potential in the domestic fleet is sufficient to sustain viable output levels during this unprecedented downturn and support the development of new maritime capabilities.
China's state planners appear to believe that is part of the solution. In February 2009, the State Council unveiled the China Shipbuilding Industry's Adjustment & Revitalisation Plan as a response to the adverse impact of the recession.
Among the initiatives in the six-point plan was a determination to spur demand for new ships by speeding up the replacement of China's ageing domestic fleet. A reduction in the maximum age for coastal trading vessels is one solution being discussed. The plan also is expected to provide the impetus for a long-awaited structural reform of the industry and its products, and to provide the incentives for expansion-minded domestic or other owners to buy any ships whose construction might otherwise be terminated by a lack of financing or the inability to negotiate new terms.
While few would have chosen this path, the slowdown brought by the recession likely will give China's shipbuilding community an opportunity for action. And while the temptation may be to cut corners and costs in this environment, now is the time to invest in the infrastructure and system development that will ensure greater quality and a more competitive industry.
The slowdown will give China's more progressive yards a chance to re-engineer their building processes ensuring safer work environments, more efficient and diverse production and component supply lines and, ultimately, better quality ships.
Increased funding of research and development facilities – such as the recent green light for MARIC to develop a design for China's first 200,000 cubic-metre LNG ship – will be a large differentiator in helping move to a more competitive position. It is in everyone's best interest that the competition remains strong among the great shipbuilding nations of North Asia – from quality and cost perspectives.
And while South Korea and Japan may have experience and long-term relationships on their side, one of China's advantages will be its insatiable demand for energy, complementing its low-cost labour base.
China's maritime industry will be underpinned by the commitment to import its energy and other raw materials in Chinese-built, Chinese-owned, managed and crewed ships. Beijing's ambition to transport 50 percent of the country's energy needs in Chinese owned and operated tonnage is common knowledge.
Increasingly, we see Chinese owners and yards investing in oil tankers and their design development growing due to Chinese oil imports. But continued growth in demand for a cleaner source of energy – LNG – is stimulating demand for domestic LNG designs for ships to be built at Chinese yards. This may not be a high-volume sector. There continues to be uncertainty about what impact the development of gas pipelines will have on the demand for gas ships. But we can say with some confidence that, if China begins to resemble Japan's proportionate reliance on gas imports, significant numbers of LNG ships will be required.
Lloyd's Register's Design Support team is currently assisting with the development of a number of domestic designs with our shipbuilder clients. Most of these are for tankers, but several are also for gas ships.
However, the Chinese shipbuilding community need not look only within its borders to find solutions for present recession-driven problems. The global shortage of quality ship-repair facilities is well documented and represents a second area for investment and development.
China currently has an opportunity to develop the first fully sustainable shipbuilding industry within the borders of one country. As well as shipbuilding and ship repair China also has an opportunity to show the world responsible recycling, on an equally large scale.
It is clear that there is a shortage of scrapping facilities capable of meeting the soon-to-emerge standards of the IMO's Ship Recycling Convention. This could be met by China.
The demolition of ships long has been associated with poor working conditions and high environmental impact. The current practices are under fire from governments, the public and the industry itself.
The pressure to scrap vessels in more sustainable ways will open opportunities for modern recycling facilities to challenge the dominance of Bangladesh, India and Pakistan, which, unlike China, are not signatories to the new convention.
A realignment of China's tertiary shipyards to recycling increasingly looks a lucrative option, with many already in possession of the concrete facilities in locations suitable for the trade.
So, at a time of uncertainty for all, China has the potential to be in a strong position when the markets turn around. A managed and market-driven reduction in capacity, continued ascent of the technology ladder, a large domestic ship-owning base and an apparently insatiable appetite for energy and raw materials – give China opportunities that are the envy of most nations.
Lloyd's Register has faced many challenges with our colleagues in China's shipbuilding industry in the 140 years since we opened our first offices here. Supporting our clients as they respond to this recession will probably be among the greatest. If successful in meeting these challenges, there is no doubt that the future belongs to China.