shipping market report china

7/27/2019 Shipping Market Report China

1/11

Shipping and ship nance

The China eect


2/11

Berwin Leighton Paisner LLP

Shipping and ship nance /01

China is emerging romthe economic doldrums

with a leaner and moretechnologically adeptshipbuilding industry. Itsnancial institutions arealso beginning to ex theirmuscles. We examine thesteady progress o Chinatowards outrightleadership o an industrythat makes and marketsthe most essential tools ointernational commerce.Tom Budgett

Partner, London

ContentsForeword ...........................................................................................................01

At a glance ......................................................................................................02

Dominant role or China ................... .................. .................. .................. .03

From boom to bust ....................... .................. .................. .................. .......04

The road to recovery ..................................................................................06

Chinas advantages today: the price advantage .........................08

Quality perceptions changing ...............................................................09

Technology advances .................................................................................10

Ship nance rom western banks remains important .................11

Top 20 shipping nance banks ...............................................................12

Doing business in China .................. .................. .................. .................. ..... 14

Regulatory environment ................. .................. .................. ................... .... 15

Our view o the uture ................ .................. .................. .................. ........... 16

Methodology ................. .................. .................. .................. .................. ........... 16

Shipping contacts ..........................................................................................17

The Chinese Governments ve-year plan or its shipbuilding industry is

simple to dominate the sector by 2015 with annual shipbuilding exports in

excess o US$80bn. That it will achieve such dominance is widely regarded

as inevitable. However, the exact speed o this development will be a unctiono worldwide trade and this will be led, ironically, by demand in China.

It is entirely predictable that a drive to maximise the export o shipsis accompanied by the export o nancial services. And, as industrial

output has increased, so has the appetite o Chinese nancial institutions

to support their nations ambitious shipbuilding programme. But China,by virtue o its regulatory inrastructure, is very dierent rom Japan in

this regard and the development o a cross-border banking and leasing

industry or big-ticket items may take longer to mature.

The rapid emergence in the past decade o China as a shipbuilding

heavyweight to challenge Japan and South Korea has been a product o

the low cost o Chinese labour and a seemingly endless demand or newtonnage worldwide. However, the merry-go-round was interrupted by the

nancial crisis o 2007/8. Since then a more critical appraisal o Chinas

inuence has emerged with concerns about its contribution to over-capacityin certain markets, a perception o poor quality rom some o its yards and

the threat o excessive bureaucracy as an inhibitor to urther development.

In terms o global ship nance, despite the diminished activity o many

banks in the sector, our research shows that those institutions rom the

US and Western Europe that are deeply embedded in the industry willcontinue to set the benchmark or the newer market entrants.

This report examines the development o both the shipbuilding and ship

nance industries in China and their uture signicance or the global shippingmarket. I am grateul to the experts who have agreed to be interviewed

or this publication and or their authoritative remarks. These have providedthe insight upon which the conclusions o this report are based.

Tom Budgett

Partner, London

[email protected]

Foreword


3/11

Dominant role or ChinaAt a glance

Ship Finance snapshot

At a glanceKey statistics to set the scene

Shipping and ship nance /0302/ Shipping and ship nance

Chinese shipping to remainstrong over the next ve

years and beyondChina has already eclipsed SouthKorea to become the worlds largest

shipbuilder. Its market share has

increased ve-old in just ten years.The Governments ve-year plan

calls or yet urther growth, but

sheer volume o tonnage is only onemeasure o industrial leadership.

China must continue to compete

in other areas, such as quality andinnovation, i it is to achieve its

stated goal o becoming the worlds

most important and technicallyadvanced shipbuilding nation.

However, the progress to date is

genuinely impressive and, perhaps,a harbinger o more extraordinary

developments to come.

It is clear, in the current economicclimate that the recent exponential

growth in Chinese shipbuilding cannot

continue. The last thing that theindustry needs just now is or Chinese

Government policy to exacerbate

the problem o oversupply.

Dominant role or China

So, where will Chinago rom here?We believe that Chinas shipbuilding

industry will continue to grow, but

at a more sedate pace than it hasto date. The cost o labour in the

shipyards will remain comparatively

low, resulting in a Chinese productthat is consistently price competitive.

China has been at thecentre o the growth o theshipping industry or thelast ten years certainly.Paul Taylor,

Socit Gnrale Corporate

and Investment Banking

The pace o growth inChina cannot continue.China is the biggestimporter, but not thebiggest owner or nancier.There will be change.Xu Wei,

CMB Financial Leasing Co

Chinese nancial institutions have

been very active domestically, but

we anticipate that they will now

become increasingly involvedin cross-border transactions

or ships built in China. Whilstthose western banks that have

remained committed to the

industry will continue to benet

rom long-standing relationshipswith traditional clients, the retreat

rom the market by others has

created a unding gap which islikely to continue well into the

markets recovery phase. Although

there is some evidence that thecurrent distress o the shipping

industry is attracting interest rom

private equity that is trying to callthe bottom o the market, such

alternative investors will plug only a

small part o the gap. There is thenan opening or Chinas banks and

leasing companies and, although

they seem rather slow to respond,we expect that they will cautiously

embrace this opportunity in the

medium term.

Chinese revenue rom yards

down rom the rst 11 monthso 2012

o Chinese yards had noorders placed in 2012

(Lloyds List / ICAP)

Chinese yards licensed to buildLNG ships but only two with

experience o building them

amount China has lent to non-

Chinese shipping clients since2009 (Lloyds List)

operating costs up over the

same period the previous year

change in gross tonnage produced (2008-2011)

2008 2011

>137m

>123m

>19m

>15m

Chinese shipping companies making losseso up to 158% rom the previous year

(Cansi)


4/11

BLP Ship Finance report /05

Medical device company unding: a quick introduction

04/ Shipping and ship nance

From boom to bust

From boom to bust

That China had potential as a

shipbuilder rst became evident

in the 1980s. Cheap labour and

readily available nance propelledChina to a position over the last

three decades, in which it couldrst challenge and then surpass

its rivals to become the worlds

biggest shipbuilding nation.

The boom was encouraged byGovernment policy and closely

related to the rapid development o

Chinas oreign trade.

The global nancial crisis

has changed the landscape

considerably. Too many smaller,

privately-owned shipyards wereestablished to ride the crest o

the boom. Now a considerableproportion o those companies are

seeking to merge and restructure

to survive. New orders are scarce

(two-thirds o Chinese yards arereported as having no new orders

beyond 2013-2014), the cost o raw

materials has increased and theunding gap means that nance

has become less readily available.

Competition on price has drivenmany yards down the value chain,

with the result that too many

inexpensive but low value-addedlarge ships are being produced.

Over the last decadeChina sucked in drycargo and then exportedmanuactured items.It has been remarkableand in many ways asalvation to the shippingcommunity, though ocourse it added to the over-heating o the industry.David Capps,

Capco Trust Jersey Limited

The expansion o shipyards inChina over the last ten years roma ew hundred to over a thousandhas had a negative impact on themarket. Supply grew much tooast, Chinas growth was initially apositive, but the supply overtookthe rise in demand.Yiannos Mouzouris,

Interorient

The impact o Chinahas been massive. Theincrease we have seen inseaborne trade since 1999is one o the highest sincerecords began.Claudio Chiste,

Investec Bank

Once seen as a positive infuence

China is now accused by some

commentators as being largely

responsible or the oversupplyo shipping globally, with a

consequent collapse in assetvalues and reight rates.


5/11

The road to recovery The road to recovery

Shipping and nance report /0706/ Shipping and nance report

At the peak o the shipbuilding

boom in China, there were

approximately 1,600 shipyards

(some say even twice that number),many o them small and privately-

owned. It is estimated that nomore than 300 will survive the

current spate o bankruptcies

and consolidation within the

industry. In view o the deartho new orders, the Government

is encouraging consolidation

with a view to concentratingshipbuilding capacity in the large

state-owned groups, such as China

State Shipbuilding and ChinaShipbuilding Industry and the pick

o the private enterprises, such as

China Rongsheng Heavy Industries.

The plan identies shipping as a

key development area and sets

out to Promote the upgrading

o the three main vessel typeso bulk vessel, oil tanker and

container vessel according to newinternational shipbuilding standards.

Improve the ship equipment

industry and loading rate. Give

priority to the development olarge liqueed natural gas (LNG)

and liqueed petroleum gas (LPG)

vessels, ocean-going shing

The road to recovery

vessels, luxury liners, and other

high-tech and high-added-value

vessels. Accelerate the independent

design and manuacture omobile marine drilling platorms,

oating production systems,marine engineering work ships,

auxiliary ships, and key supporting

equipment and systems.

The establishment o three

massive shipyards locatedin Bohai Bay and theestuaries o the YangtzeRiver and Pearl River hasrevved up the ormationo industrial clusters witheconomies o scale so thatshipbuilding costs can begreatly reduced.Zhen Hong,

Secretary General o Shanghai International

Shipping Institute, Proessor o Shanghai

Maritime University

We believe that the Chinese

shipbuilding industry will emerge

rom the current global economic

recession more competitive androbust than ever beore and with

the capability to realise the vemissions articulated in the twelth

ve-year development plan.

These missions are to promote

technological innovation andprogress, speed up industrial

restructuring, implement brand

building and business improvementstrategies, create an efcient

shipbuilding system and optimize

the industrial layout.

In general we believe that

many o the smaller yardsin China will close and, ona worldwide basis therewill be ewer yards outsideChina, Korea and Japan.Thomas Zachariassen,

Nordea Bank


6/11

Chinas advantages today: the price advantage

08/ Shipping and nance report

Chinas advantages today:the price advantage

Quality perceptions changing

The most oten-cited reason or

Chinas dominance is price. The

countrys low labour costs and state

support are perceived as the mainadvantages that it has over its rivals.

As the Chinese shipbuildingindustry progresses the price

advantage derived rom lower

labour rates will be lost, though thisseems at least a decade away.

The price advantage is partly oset

by a perception that particularly

in smaller yards in China there is

a quality trade-o. This trade-ois less evident in low-value-added

ships than it is where cutting edgetechnology is required.

The perception o quality is also

gradually changing, possibly asa consequence o consolidation

and the drive or ewer but more

technically advanced shipyards.

Many o the advantages oChina are all price-related:e.g. capacity and demandappetite. China has theability and capacity to becheaper than anywhere

else currently, so canmould the competition.Paul Taylor,



I think that or plain vanilla

ships, such as bulkers andtankers, they (Chineseships) do what is required.Standard ships or trade ocommodities clearly work.The more sophisticatedvessels are not so triedand tested.Kevin Bourque,

DVB Bank

Overall the perception is that build-quality and reliability are improvingand the yards ability to move upthe value chain is increasing. Thereare a lot o similarities to the growtho Korea in ship building. It tooktime or them also to emerge as acredible contender and move up thevalue chain.Sven Dybdahl,

DVB Group Merchant Bank (Asia)

Quality perceptions changing


$5.4bnbulker vessel sales 2012

$3.4bntanker vessel sales 2012


7/11

Technology advances Ship nance rom western banks remains important

10/ Shipping and ship nance Shipping and ship nance /11

Technology advances Ship nance rom westernbanks remains important

China has seven yards licensed to

construct LNG vessels but only two

with actual experience o having

done so.

China is actively seeking out

opportunities to collaborate withother countries or the purpose

o technology transer. Much o

the maritime technology beingtranserred to Chinese companies

comes rom Europe, particularly

Germany and Scandinaviancountries, although joint ventures

with both Japanese and Korean

yards have also been eectivein enabling Chinese builders to

acquire technology, engineering

skills and production know-how.

In difcult markets or ship nance,

such as those that have prevailedsince the onset o the nancial

crisis, some banks make or theexit and the remainder concentrateon quality. The core western ship

nance banks are busy with top

quality transactions which arerequently over-subscribed. There

is, however, a unding gap generally

and we have considered, or thepurposes o this report, whether

this might be plugged to some

extent by the Chinese nancialinstitutions, such as Bank o China,

China Development Bank and ICBC,

that have so enthusiastically takento cross-border aircrat nance.

There is no concrete evidence,

however, that these institutions are

yet committed to international shipnance on a global scale.

In order to accelerate its technical

capability, China has been

importing advanced production

methods and key equipmentincluding complete production

lines, as well as using oreignsourced hardware and sotware

or computer-aided design and

computer-aided manuacturing.

This has enabled Chinese navalarchitects to become more

procient in the design o ship

hulls, compartment layouts andpropeller-rudder combinations

that improve speed, efciency

and structural integrity. As aseparate but equally important

development, considerable

emphasis is now being placedon uel efciency and industrial

policies that promote green

shipping. Those surveyed in thisreport see greater international

technology sharing as the best

route or China to compete withJapan and South Korea in relation

to the most complex vessel types.

Within the industry, views

vary widely about incentivesand pressures on China in ship

nance. There is a widespreadunderstanding that while shippingis important to the country,

steelmaking and energy are more

important to the uture o theChinese economy.

Although the leading

positions o South Koreaand Singapore in marineengineering equipment,LNG ships and other hi-techbusiness seem unshakeablein the short run, Chinais expecting a gradualincrease in the share ohigh-end shipbuildingmarkets by dint o itsrising competitiveness.Zhen Hong,

Secretary General o Shanghai International

Shipping Institute, Proessor o Shanghai

Martime University

Where it is very difcult orship owners to get nance,

some Chinese banks arewilling to give support.Ben Zhang,

Binghua, Accord Marine Service

I have seen Chinese and Japaneseyards working together tocollaborate on technology. I thinkChina will increasingly collaborateinternationally, but more so withGermany, Norway and Singapore.Xu Wei,

CMB Financial Leasing Co

It would be helpul i theChinese banks were toinvest more in shipping,but it isnt clear i theywill do so now. I thinkthe Chinese banks maybecome more involved inthe longer term, but mostlywith Chinese operators. Soar, the Chinese banks havenot had a big impact onlending to the sector.

David Capps,Capco Trust Jersey Limited

In 2010, the shipping community

was encouraged by statementsrom the then Prime Minister Wen

Jiabao to believe that Chineselenders were ready to ride to therescue o the industry. A sum o

US$5bn was pledged to Greek

ship owners ordering rom Chineseyards and this was, or some, an

indication o intent. In act, the

progress o the Chinese institutionsin these markets has been cautious.

Predictably, China Eximbank has

been one o the most active and,together with Sinosure and other

leading Chinese banks, there has

now been approximately US$13bno Chinese support or 40 non-

Chinese ship owners (Source:

Lloyds List). This trend should

continue as the relationshipsbetween oreign ship owners and

the Chinese institutions deepen and

as the yards themselves bulk outtheir order books. For instance, in

early 2013 ICBC Financial Leasing

has announced a nancing o51 vessels or the French OSV

Operator Bourbon in an amount o

US$1.5bn. But it would be unwise

or too much reliance to be placedupon China as the immediate

answer to the current shortall inavailable unding.

Chinese liquidity is not a cure-all.


8/11

12/ Shipping and ship nance Shipping and ship nance/13

Top 20 shipping nance banks Top 20 shipping nance banks

Germany

DVBUS$14.7bn

Top 20 shipping nance banksShipping nance continues to be dominated

by a core group o well established banks.

Source: Lloyds list

Norway

DNBUS$26bn

Norway

NordeaUS$17.5bn

Germany

HSH NorbankUS$39bn

Germany

CommerzbankUS$25.5bn

Germany

Nord LBUS$15bn

Germany

KWUS$118bn

Japan

BTMUUS$16.5bn

KoreaKorea Exim

US$14bn

Japan

SMBC

US$10bn

China

Bank o China

US$16.5bn

Hong Kong

HSBCUS$13bn

France

Credit Agricole

US$11bn

Switzerland

Credit Suisse

US$10.8bn

Italy

Unicredit

US$9bn

France

BNP Paribas

US$14bn

China

ICBC

US$15.5bn

China

China Exim

US$14bn

USA

Citibank

US$12bn

UK

RBS

US$18bn

Chinese liquidity will be important.I building ships in Chinese yards,Chinese liquidity will be a majorsource, but not a completepanacea. The bigger issue iswho, save or the Export CreditAgencies, will nance all the shipsbeing built in Korea and Japan?Nigel Anton,

Standard Chartered Bank


9/11

A trial o Chinas rst ree trade zonewill be launched in Shanghais PudongNew Area as early as the end othis year (2013). Pudong authoritieshave accelerated preparations toconsolidate the three bonded zones inthe Waigaoqiao port, Yangshan Deep-Water port and Pudong InternationalAirport into the ree trade zone.(China.org.ch)

Doing business in China Regulatory environment

14/ Shipping and ship nance Shipping and ship nance /15

Doing business in China

Despite the international

importance o China as a

shipbuilding nation, it is still seen

as a jurisdiction in which there areunique challenges or the conduct

o business. Cultural dierencessometimes rustrate or even

present insurmountable barriers or

the western businessman.

But there are success stories and the

patient investment o time to build

key relationships is usually rewarded.One such example is the Graig

Shipping Group which has been

building ships in China since 1995and supervising the construction o

newbuilds or others, including most

recently or Chinese owners such asMinsheng Financial Leasing Co. and

Shanghai Xiang An Electric Power

Shipping Co.

It is an important pre-requisite or

success in China that the western

businessman careully identies the

appropriate decision makers or thosecapable o inuencing the outcome

o negotiations. Considerable timeand eort should then be spent

on establishing the level o trust

required to move orward in the

business relationship. There must begive as well as take and a willingness

to be generous in the sharing o

expertise. A rigid attitude towardscontractual matters may not always

be rewarding.

A disadvantage o working inChina is that it is more complicatedand there are complex culturalissues. I am amiliar with China,but or many people it is likecomparing a Mac with a PC thetwo are undamentally dierent.Yanir Yakutiel,

Delta Shipping

When you do business with

enterprises, in particularmajor state ownedenterprises (in China) youhad better make sure thatyou make enough moneyto cover unexpectedcontingencies.A ormer Beijing-

based banker or J.P. Morgan

Regulatory environment

There are both general and local

regulatory issues or shipbuilding

and ship nance in China. Capital

adequacy is o particular concernor banks.

On the technical side and in termso the local regime, relative lack

o regulation in the shipbuilding

industry in China has led to theprolieration o private yards with

the attendant problems mentioned

above. We may expect a strongerguiding hand rom Government

as the industry enters its phase o

consolidation and rationalisation.In order to encourage ship

nance by Chinese institutions,

a more liberal environment iscalled or with, perhaps, tax

incentives to encourage cross-

border leasing, a relaxation

o rules governing oreign

exchange and oreign currencyclearance, improved acilities

or the registration o securityinterests in ships, (both during

and ollowing the construction

phase) and encouragement or

oreign nancial institutions toinvest in Chinese operations.

The development o ree trade

zones in Tianjin and Shanghai isan interesting rst step towards

liberalisation o various aspects

relating to shipping and may intime provide a suitable platorm

or cross-border ship nance.

The one thing that may

have changed permanentlyor banks is regulation, withBasel III penalising banks ithey do not have the rightamount o tier one capitalset aside. This is prejudicialor longer term asset nancein general, to the extent thatthe number o participantsmay reduce lower.Paul Taylor,




10/11

JUHO RANTA-AHO

Senior Associate, Asset Finance

T: +65 6571 [email protected]


Shipping contacts

China will continue to be among

the worlds biggest and mostimportant manuacturing orces in

global shipping. The developmento its role in cross-border shipnance may be less immediate,

though it should become

increasingly inuential in years tocome. Western European banks

will continue, or the oreseeable

uture, to be the main liquidityproviders or the industry, and may

be augmented to some extent rom

alternative sources, such as privateequity. However, consolidation o

the Chinese shipbuilding sector is

materialising rapidly and, whilst

Our view o the uture

the economy continues to grow,

the demand or new and moretechnically advanced shipping will

be met in China with increasingefciency by a rationalised industrywhilst, at the same time, the

Chinese nancial institutions will

address the demand or greateraccess to nance or export o

ships to oreign owners. BLPs

own view is based on experiencein advising clients as they take

advantage o the opportunities

created by the burgeoningevolution o shipbuilding and ship

nance in China.

Shipping contacts

TOM BUDGETT

Partner, Asset Finance

T: +44 (0)20 3400 [email protected]

RUSSELL CLIFFORD



DAVID BROTHERTON


T: +65 6571 [email protected]

SIMON SPELLS

Associate, Asset Finance


KIERAN HEALY


T: +44 (0)20 3400 2270

[email protected]

ANNA BURY


T: +65 6571 6606

[email protected]

JAMIE WISEMAN-CLARKE



Methodology

Berwin Leighton Paisnercommissioned the BD

Consultancy to conduct

interviews with a range orespondents rom the shipping

and shipping nance industry

over a six month period in2012/2013. In total 25 interviews

were conducted.

While some intervieweesexpressed the right to anonymity

in their opinions which we oered

them, many o our intervieweesdeclared themselves happy to

stand behind the views which they

aired by being specically quotedin the body o the report.

We are very grateul to all those

who took the time to take part inthe production o this report.

Our research has shown

that, whilst China aspiresto the No.1 position inshipbuilding, it still has away to go to eclipse itsnearest rivals ully. Thesame is true o internationalship nance where therereally is no substitute ordepth o experience.Tom Budgett

Berwin Leighton Paisner

Parter

This rms asset nanceand structured nancegroup continues to berecognised as a signicantplayer in the market.Chambers 2012

Our view o the uture

16/ Shipping and ship nance


11/11

Getting in touch

When you need a practical legal solution or

your next business opportunity or challenge,

please get in touch.

Berwin Leighton Paisner LLP

Adelaide House, London Bridge

London EC4R 9HA England

Tom Budgett

Tel: +44 (0)20 3400 4972

[email protected]

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