shipping market report china
TRANSCRIPT
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Shipping and ship nance
The China eect
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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
Foreword
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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)
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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.
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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
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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,
Socit Gnrale Corporate
and Investment Banking
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
Shipping and ship nance /09
$5.4bnbulker vessel sales 2012
$3.4bntanker vessel sales 2012
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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.
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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
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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,
Socit Gnrale Corporate
and Investment Banking
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JUHO RANTA-AHO
Senior Associate, Asset Finance
T: +65 6571 [email protected]
Shipping and ship nance /17
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
Partner, Asset Finance
T: +44 (0)20 3400 [email protected]
DAVID BROTHERTON
Partner, Asset Finance
T: +65 6571 [email protected]
SIMON SPELLS
Associate, Asset Finance
T: +44 (0)20 3400 [email protected]
KIERAN HEALY
Associate, Asset Finance
T: +44 (0)20 3400 2270
ANNA BURY
Associate, Asset Finance
T: +65 6571 6606
JAMIE WISEMAN-CLARKE
Partner, Asset Finance
T: +44 (0)20 3400 [email protected]
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
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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
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