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China Raises Ship-Scrapping Subsidy 50% to Trim Overcapacity

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Dalian Shipyard
Shipyard workers sweep the ground at an assembly area at the Dalian shipyard in Dalian, Liaonin Province. Photographer: Qilai Shen/Bloomberg

Dec. 10 (Bloomberg) -- China, the world’s biggest shipbuilding nation, will increase cash subsidies for scrapping obsolete ships by 50 percent to help cut overcapacity and emissions.

The government will grant 1,500 yuan ($247) per gross ton for shipping companies to replace obsolete ships, according to a statement on the transport ministry website yesterday. The award applies to vessels scrapped in the years 2013 through 2015.

Chinese shipbuilders also stand to benefit from the subsidy, half of which is awarded only after replacement orders are placed. China Rongsheng Heavy Industries Group Holdings, the nation’s biggest shipyard outside state control, rose 8.9 percent to close at HK$1.22 in Hong Kong. China Shipping Development Co., a Shanghai-based commodities shipping company, gained 0.9 percent to HK$5.35. The city’s benchmark Hang Seng Index fell 0.3 percent today.

“The program will be positive for the shipbuilding sector in the long term,” said Lawrence Li, a Shanghai-based analyst at UOB Kay-Hian Holdings Ltd. “In the near term, it may not be material for the shipping industry, as the incentive is not attractive enough and many cash-strapped shipping firms may not be able to place new orders amid a bad market.”

New Orders

Under the new program, ship operators get half the money upon completing scrapping and the rest after placing new building orders, according to the statement. By comparison, under a 2010 rule, they had to complete scrapping and place new ship orders before getting any of the subsidy.

The program is “somewhat disappointing” as it didn’t lower the age requirement for ships that can be scrapped, which means less tonnage is eligible, according to a note published today by Credit Suisse Group AG analysts led by Davin Wu.

The Baltic Dry Index, the benchmark for commodity-moving rates, has slumped 41 percent in the past four years. The monthly index that tracks prices for all types of vessels dropped 31 percent in November from its peak in September 2008, when the global financial crisis caused orders to slump, according to Clarkson Plc, the world’s biggest shipbroker.

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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