China to become the world's largest shipbuilder

Chinese shipyards are expected to tap capital markets in the next two years to fund Beijing's ambition for China to become the world's largest shipbuilder. While industry experts worry about overcapacity after 2010, order volumes are rising and margins on new ships are recovering thanks to China's booming trade, driving some Asian shipbuilders' shares up by more than 600 percent this year. Big Chinese shipbuilders such as Guangzhou Shipyard International Co. Ltd. and IPO candidate China State Shipbuilding Corp. (CSSC) are expected to see bumper profits in 2007 and beyond, as domestic demand enables China to displace industry heavyweights South Korea and Japan.

Major yards around the world are fully booked through 2009, but some shipbuilders such as Japan's Kawasaki Heavy Industries Ltd. have warned of possible overcapacity beyond then as yards expand in order to capture growth. "There is strong investor interest in the market for Chinese shipyards due to the industry boom and a scarcity of listed companies," said Michael Chan, an analyst at Macquarie Research.

Analysts, though, expect major Chinese shipbuilders to see steady top-line growth as the global shipbuilding industry relocates in order to tap China's cheap labor. Strong local demand and China's price advantage will drive order growth. A ship ordered today will take three years to delivery. "Ship orders are likely to be stable in the next six months but there will be a big question mark after that," said Hyejin Koo, an analyst with Lehman Brothers in Seoul.

China, which lists shipbuilding as one of its top development priorities, will spend billions of dollars over the next half-decade to fund the construction of three modern shipbuilding bases near Dalian, Shanghai and Guangzhou. "The government's contribution will be minimal and the money will be raised in the market by companies and funded by bank loans," said Zhang Guangqin, president of the China Association of National Shipbuilding Industry.

China is the world's third-largest shipbuilding nation and had 18 percent of the global market in 2005, lagging South Korea and Japan which accounted for a combined share of more than 60 percent. But Beijing aims to become the largest shipbuilder by 2015, with output of 24 million deadweight tonnes (dwt) a year, or 35 percent of the world's total.

CSSC, the world's No.3 shipbuilder and parent of Guangzhou Shipyard, is expected to raise US$800 million in a Hong Kong initial public offering next year.It is spending US$2 billion initially to set up the Changxing Shipbuilding Base in Shanghai and Longxue Shipbuilding Base in the southern city of Guangzhou. The group's annual capacity is expected to rise to 14 million dwt by 2015 when the bases are completed. It built 5.13 million dwt of ships last year.