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One-Third of China Shipyards Face Closure as Orders Slump

July 5 (Bloomberg) -- China, the world’s biggest shipbuilding nation, may see a third of its yards shut down in about five years as they struggle to win orders amid a global vessel glut, an industry group said.

The yards in peril of closure have failed to get any orders “for a very long period of time,” Wang Jinlian, secretary general of the China Association of National Shipbuilding Industry, said in an interview yesterday. They may end operations in three to five years if the “gloomy market persists.” The nation has more than 1,600 shipyards.

China Rongsheng Heavy Industries Group Holdings Ltd. fell to a record low in Hong Kong after saying it’s seeking financial support from the government and its largest shareholder amid a drop in orders and prices. Shares of China’s biggest yard outside state control were halted yesterday after the Wall Street Journal reported it recently cut about 8,000 jobs.

“Because of the overall market, there’s no way out for the companies; so only the strongest will survive,” Sarah Wang, a Shanghai-based analyst at Masterlink Securities Corp., said. “Life for China’s shipyards will be tougher this year as any form of credit crunch is critical.”

Rongsheng Restructuring

More than half of the Rongsheng employees laid off were subcontractors and the rest full-time workers, the Journal reported July 3, citing Lei Dong, secretary to the Shanghai-based company’s president. William Li, a Rongsheng spokesman, declined to comment on the report.

The shipbuilder is estimated to have had a net loss in the first half, it said in today’s filing. Shareholder Zhang Zhirong agreed to provide an interest-free 200 million yuan ($33 million) loan to the Shanghai-based yard, it said.

Rongsheng is undergoing “workforce restructuring,” and is “gradually downsizing production” in some areas, it said in today’s statement without elaborating.

The shipyard fell 16 percent to 89 Hong Kong cents, the lowest close since the company’s 2010 listing in the city. The stock has slumped 28 percent this year, compared with an 8 percent drop in the benchmark Hang Seng Index.

The order book at China’s shipbuilders fell 23 percent at the end of May from a year earlier, according to data from the shipbuilders’ group. Yards have reduced down-payment requirements, with some slashing their rates to as little as 2.5 percent of contract value compared with 20 percent before 2010, according to UOB-Kay Hian Holdings Ltd.

Tight Liquidity

The nation’s clampdown on excessive short-term borrowing sent the overnight repurchase rate to a record 13.91 percent last month, forcing at least 22 companies including China Development Bank Corp., a backer of the shipping industry, to cancel or delay bond sales. Economic growth in China has held below 8 percent for the past four quarters, the first time that has happened in at least 20 years.

“Currently financial institutions themselves may have tight liquidity, so they are reluctant to lend money to companies in this sector,” China Association’s Wang said. “If they can help some good companies, there would be no problems.”

Rongsheng had as many as 38,000 workers including its own employees and contract staff at the peak of the industry boom a few years ago, UOB-Kay Hian analyst Lawrence Li said. Brazil and Greece accounted for more than half of Rongsheng’s 2012 revenue, according to data compiled by Bloomberg.

The company posted a loss of 572.6 million yuan last year, after three consecutive years of profits, according to data compiled by Bloomberg. It had short-term debt of 19.3 billion yuan as of the end of 2012, the data show.

The shipbuilder targets new ship and offshore orders worth more than $2.3 billion this year, Chairman Chen Qiang said in Hong Kong in March. The company pared about 3,000 employees last year as it aims to return to profit, he said at the time.

Cash Conversion

Rongsheng’s cash conversion cycle, a gauge of days required to convert resources into cash, more than doubled to 582 last year from 224 in 2011, the data show.

Ten of the 14 analysts tracked by Bloomberg recommend selling Rongsheng stock with the rest rating it hold. The company raised HK$14 billion in its initial public offer.

Ship prices for a vessel that can carry as many as 13,500 boxes fell to $106 million in April, which was then the lowest since Clarkson Plc started compiling the figures in June 2008. Contracts for new vessels halved to $84.7 billion in 2012, compared with $174.7 billion in 2008, according to Clarkson.

About 464 shipyards in China won 18.7 million deadweight tons of orders worth $14.3 billion last year, the lowest since 2004, according to Clarkson. That compares with contracts for 14.6 million tons worth $29.6 billion received by 88 yards in South Korea, the world’s second-biggest shipbuilding nation.

China had 1,647 shipyards with annual sales of more than 5 million yuan at the end of December, according to the China Association. The sector contributed an industrial output of 790.3 billion yuan last year.

To contact the reporter on this story: Jasmine Wang in Hong Kong at jwang513@bloomberg.net

To contact the editor responsible for this story: Vipin V. Nair at vnair12@bloomberg.net

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