The Shipping Industry Is Suffering From China’s Trade Slowdown

So many boats, so little cargo as Chinese exports and imports drop.

Ship: The Asahi Shimbun/Getty Images; Container: Shutterstock; Illustration: 731

When business slows and owners of ships and offshore oil rigs need a place to store their unneeded vessels, Saravanan Krishna suddenly becomes one of the industry’s most popular executives. Krishna is the operation director of International Shipcare, a Malaysian company that mothballs ships and rigs, and these days he’s busy taking calls from beleaguered operators with excess capacity. There are 102 vessels laid up at the company’s berths off the Malaysian island of Labuan, more than double the number a year ago. More are on the way. “There’s a huge demand,” he says. “People are calling us not to lay up one ship but 15 or 20.”

Shipbuilders, container lines, and port operators feasted on China’s rise and the global resources boom. Now they’re among the biggest victims of the country’s slowdown and the worldwide decline in demand for oil rigs and other gear amid the oil price plunge. China’s exports fell 1.8 percent in 2015, while its imports tumbled 13.2 percent. The Baltic Dry Index, which measures the cost of shipping coal, iron ore, grain, and other non-oil commodities, has fallen 76 percent since August and is now at a record low. Shipping rates for Asia-originated routes have dropped, too, and traffic at some of the region’s major ports is falling. In Singapore, the world’s second-largest port, container traffic fell 8.7 percent in 2015, the first decline in six years. Volumes at the port of Hong Kong, the fourth-busiest, slid 9.5 percent last year. Beyond Asia, the giant port of Rotterdam in the Netherlands recorded a dip in containerized traffic for the year.

Globally, orders for new vessels dropped 40 percent in 2015, to $69 billion, according to London-based consulting firm Clarksons Research. The demolition rate for unwanted vessels jumped 15 percent.

Just a few years ago, as the global economy improved and oil prices rose, many companies ordered more fuel-efficient ships. There were more than 1,200 orders for bulk carriers that transport iron ore, coal, and grain in 2013, compared with just 250 last year, according to Clarksons. Many of the ships ordered are now in operation, says Tim Huxley, chief executive officer of Wah Kwong Maritime Transport Holdings, a Hong Kong-based owner of bulk carriers and tankers. “You have a massive oversupply,” he says.

The damage is especially severe in China, the world’s leading producer of ships. New orders for Chinese shipbuilders fell by nearly half last year, according to the Ministry of Industry and Information Technology. In December, Zhoushan Wuzhou Ship Repairing & Building became the first state-owned shipbuilder to go bankrupt in a decade.

The yuan has dropped 6 percent since last August. While that should help exports, Hutchison Port Holdings Trust, a company controlled by Hong Kong billionaire Li Ka-shing that runs some of China’s top container terminals, has yet to see an uptick in outbound business. According to Ivor Chow, chief financial officer of Hutchison, the devaluation is leading to a slowdown in traffic as customers wait to see how much lower the yuan will fall. “People are really hesitant to commit to orders at this point,” he said on a conference call with analysts on Feb. 2.

The slowdown is hurting many Chinese ports. Sales at Shanghai International Port were 7.5 billion yuan ($1.1 billion) in the third quarter, down from 7.6 billion yuan the year before, and net profit was 1.4 billion yuan, a decline of 18 percent. The Shanghai Shipping Exchange’s containerized freight index has dropped 27 percent since the start of 2015. While container volume at Shanghai’s port, the world’s largest, grew 3.7 percent last year, that was down from 4.8 percent growth the previous year and was largely the result of taking market share away from high-cost rival Hong Kong, according to Bloomberg Intelligence analyst John Mathai.

The slide in oil prices is especially painful in Singapore, home to Keppel and Sembcorp Industries, the world’s two largest producers of offshore oil rigs. Orders for the two companies dropped in 2015 to their weakest levels in six years. Temasek Holdings, which has major stakes in both Keppel and Semcorp is discussing the sale of noncore assets or issuing new shares. It’s in discussions with company executives about raising cash by selling noncore assets or issuing new shares. “We have to plan for a longer winter,” Keppel CEO Loh Chin Hua said on a call with analysts on Jan. 21.

South Korea in December announced plans to establish a $1.2 billion fund to help local shipping companies pay for new vessels they’ve ordered, according to the Ministry of Oceans and Fisheries. The government will push shipyards to downsize and focus on their core businesses—one shipbuilder operated a golf course. Hyundai Heavy Industries, the world’s biggest shipbuilder, said on Feb. 4 that it had suffered its ninth consecutive quarterly operating loss, following a 1.7 trillion-won ($1.4 billion) loss in 2014.

The recession in shipping is causing trade friction. Daewoo Shipbuilding and Marine Engineering is in the worst position among Korea’s shipbuilders. Korea Development Bank and another state-owned lender, Export-Import Bank of Korea, are leading a 4.2 trillion-won bailout of Daewoo. “We see this case as a problem,” Shinichiro Otsubo, director of the shipbuilding division at Japan’s Ministry of Land, Infrastructure, Transport and Tourism, told Bloomberg in December. “If this aid package keeps the firm from cutting capacity, the effect will be potentially big.” Japan hasn’t ruled out the possibility of filing a complaint with the World Trade Organization.

There are some bright spots. Companies that operate oil tankers have been busy as customers take advantage of record-low crude prices to build up their inventories: Orders for new tankers increased 14 percent last year, according to Clarksons. Back in Malaysia, International Shipcare’s business is so strong that Krishna says the company is running out of places to store customers’ ships. Since the start of December, demand has spiked about 30 percent. “It’s unprecedented,” Krishna says. He’s hoping to add capacity.

With Carol Matlack

The bottom line: In Asia, port operators, shipbuilders, and shipping lines are suffering from the global loss of appetite for China’s goods.

Shipping Industry Sounding the Alarm on Global Growth