New policy to end that sinking feeling

‘Capable shipyards' to receive tax incentives and technical support to develop ‘green ocean vessels'

China is taking another round of decisive measures to stabilize the revenue growth of its shipbuilding industry on a solid foothold amid a declining global shipping market, said a government official.

Chen Bin, director-general of the department of industry of China's National Development and Reform Commission, said the Chinese government will offer favorable tax policies and technical assistance to capable shipyards to develop greener ocean vessels, regeneration of aging ships and support new orders of law enforcement and other public service vessels for domestic needs.

"The development of offshore engineering products will be treated as a priority to diversify the production categories in Chinese shipyards because the demand for offshore engineering products such as energy vessels, offshore pipe-laying vessels and oil drilling rigs has steadily increased in recent years," Chen said.

"Even though offshore engineering products are more expensive and complex to build, the burgeoning global demand for energy resources is expected to keep orders flowing," Chen said.

Boosted by a previous investment package of infrastructure projects such as road, airport and port, as well as dynamic international trade activities, China's shipbuilding sector enjoyed a golden developing era between 2005 and 2008.

However, the country's shipyards began to face weaker market demand in 2009, when an overcapacity in the international shipping business and a sharp drop in global trade volumes occurred.

Chen said the turmoil in the global shipping industry has caused Chinese ship makers difficulties. Because they are heavily reliant on foreign orders for profits, it is time for them to seek new market growth points.

The Chinese Association of the National Shipbuilding Industry reported sinking profits in the first half of 2013. Profits of 80 major shipbuilders monitored by the association totaled 3.58 billion yuan ($580 million), a 54 percent drop from the same period a year earlier.

A total of 20.6 million deadweight tons of new vessels have been completed for both domestic and international shipowners in the first half of the year. This represents a 36 percent decrease from the previous year.

Currently, China has 1,600 shipbuilding-related enterprises (including 800 large shipyards), with an annual industrial output value of 800 billion yuan. A total of 1.5 million people work in the industry.

Chen said a declining Chinese shipbuilding industry can cause a direct financial effect on industries such as steel and machinery because they are all closely related.

Earlier this month, the State Council, China's cabinet, laid out a plan to improve and readjust the country's shipbuilding industry between 2013 and 2015, to reshape the industrial structure of this massive sector, urging governments in Liaoning, Jiangsu, Zhejiang and Guangdong provinces to stop approvals of new shipyards and upgrade the value chain to build high-end vessels.

"Many Chinese shipbuilders are now betting on vessels deemed to be higher in value, such as liquefied natural gas and liquefied petroleum gas carriers, as well as marine fishing vessels, offshore pipe-laying vessels, large icebreakers and chemical tankers," said Li Lei, an industry analyst with Shanxi Securities Co.

Li said many shipyards in Jiangsu and Zhejiang provinces hope this trend will help them tap into more international buyers and reach new markets.

The State Council said the Chinese shipbuilding industry should be able to maintain 25 percent of the global market share for high-end vessels and one-fifth for the global offshore engineering-product market by 2015.

As part of this plan, the government will offer incentives to ship owners who want to replace their aging ships by ordering new vessels. Voluntarily scrapping high-carbon-emission and old ships is also welcomed. The government currently is in the process of drafting a plan to decide how many years should pass before a vessel can be defined as an aging ship.

Cao Jianhai, a researcher at the institute of industrial economics with the Chinese Academy of Social Sciences in Beijing, said it is still too early to predict what impact this policy will bring to Chinese shipping companies.

"Large shipping companies such as China Cosco Holding Co Ltd and China Shipping Container Lines Co Ltd will for sure be keen on such an advantageous policy in reducing the market competition among medium and small shipping companies because the majority of their ocean vessels are relatively new and large," Cao said.

"On the other hand, medium and small Chinese shipping companies will not be keen to spend money on new ships because their financial situation is quite modest and many of them cannot afford to equip new vessels. The ships they have are all aging vessels with a service period of between 15 and 20 years."