Dive Brief:
- The Chinese government has announced that roughly 1/3 of the country's few remaining shipyards will close due to a glut of over-production, the Wall Street Journal reported last week.
- The number of shipyards in China able to produce massive vessels is half what it was in 2013, down from approximately 140 to just 70. Countless smaller shipyards have disappeared.
- Only state-funded yards will survive, although Beijing has up until now slowed the industry's disintegration through $25 billion in assistance.
Dive Insight:
When an industry falls, the ripple effects travel in all directions regardless of the source. The heavier the item, the larger the splash — and ships are notoriously heavy. The downturn in the shipping industry has caused chaos both downstream and upstream, and shipyards, it seems, are suffering.
Shipyards can be thought of as the supplier for the shipping lines, while ports are the buyers. In a well-documented arms race, the carriers sought to upgrade their fleets ordering a new class of mega-vessels and more vessels to increase capacity and remain competitive. Part of it was a race for market share, part a bid to remain standing as a top, modern carrier, but when all the top carriers did it ... it created a bubble.
Granted, bubbles do not create themselves. High market expectations, new opportunities and technology spurred this race. In turn, shipyards — overloaded with orders — grew and new sites were built. A look at the past five years' orderbooks, based on Alphaliner figures, can help illustrate this boom. As of July 2013, 152 ships were ordered by the top 10 lines. As of February 2014, the number had grown to 164, and the next year, the number fell again to 156. But, by February 2016, the top ten lines, which included Hanjin Shipping, had 195 vessels pending delivery. Today's figures show the number has receded to its normal levels, with 164 ships ordered.
Given the year-over-year rise in orders, suppliers expanded operations. After all, the other end of the chain was expanding, too, in the form of dredging projects and new cranes — surely, the rise was a boom, not a bubble. But the bubble burst mid-last year, and now, every link is facing the damages.
Ports are still expanding, but amid increased consolidation and renetworking by lines, are seeing their terminals consolidate to retain leverage amid larger alliances. But shipyards' closures show the more damaging effects an industry's decline can have on the suppliers. Customer is King — the customer can cease to buy at any point, or at least cease to promote growth. So while shipping lines need ports for their services, the industry held together so much excess stock suppliers are seemingly expendable.
While in general this is a good sign for the industry, showing the whole chain is reorganizing to correct an overcapacity that increases industry-wide instability, it also serves as a warning sign to the often-unbalanced supplier-buyer relations. The whole chain is in part responsible for maintaining an industry healthy, especially when looking to scale. After all, if something goes wrong, the whole chain suffers.
