The Shipping Blues for China’s Small Builders

Today’s WSJ reports on the impact of the economic slowdown across the shipping industry, from railroads and cargo ships to trucks and package delivery firms. In the first nine months of this year, the number of containers entering the U.S. via its top 10 container ports was 7.2% lower than in the same period last year, the report notes.

The impact is being felt as far afield as China, where a building boom among small, privately owned ship makers seems set to come to an end. The global financial crisis and fears of recession were topics of conversation at a recent forum on ship financing in Shanghai, the China Securities Journal reports.

Large shipbuilders such as China State Shipbuilding Corp. stand to benefit from industry consolidation (Photo by Imaginechina via AP Images)

In recent years, small shipbuilders have proliferated in China, buoyed by a revival in river transport from inland China. Despite the limited technology available to these builders, their eagerness to secure customers led some firms to build unordered boats first and then market the finished product to potential buyers.

Now these firms are seeing cancellations and falling orders, leading to speculation that a major industry consolidation will come next. Larger private shipbuilders and state-owned enterprises are better positioned to weather an economic downturn, since they have more advance orders lined up and generally receive up front payments of 70% to 80% of a ship’s cost, which can run $30 to $50 million for smaller boats and up to $200 million for a large ship.

“What buyer would risk losing the advance payment by canceling an order?” Tan Zoujun, the general manager of China State Shipbuilding Corp., a large state owned firm, asked reporters. “Right now, the industry is certainly looking at a pretty major economic adjustment, but we are definitely not the worst off,” Tan said, according to the China Securities Journal. “At the most difficult time for everyone, we can still eat some big hairy crab,” he said, referring to the Chinese seasonal delicacy.

Tan said his firm would consider acquiring smaller shipbuilders.