The outbreak of the COVID-19 pandemic in early 2020 has had a huge impact on global economic trade, production, and daily life. It is expected that as the industrial chain continues to transmit, the impact of the pandemic on the operating performance of shipbuilding enterprises will gradually become apparent. Although the fundamentals of the shipbuilding industry have improved significantly compared with previous years, shipbuilding enterprises still need to pay attention to the liquidity crisis of shipping companies and the possible adverse effects of a sharp short-term reduction in new ship orders. In particular, they should closely follow the direction of national macroeconomic policies, seize order opportunities oriented toward domestic demand, and replenish working capital as much as possible to successfully weather this crisis.
1. Impact of the COVID-19 Pandemic on the Production and Operation of China's Shipbuilding Enterprises
During the period when the domestic epidemic was relatively serious, China's shipbuilding industrial enterprises mainly faced problems such as the inability to resume work and production in time, which may lead to delays in ship production, and some ship orders could not be started or delivered according to the time nodes required by contracts or international conventions. As the domestic epidemic was effectively brought under control, the resumption rate of the 75 key enterprises under the monitoring of the China Association of the National Shipbuilding Industry has reached 100%, and the production order has been restored to a large extent. At the same time, with the joint efforts of China's shipbuilding industry authorities and maritime authorities, the 'Unified Interpretation on SOLAS Convention II-1/3-10 concerning Unforeseen Delays in Ship Delivery' submitted by China to IMO, and the proposal 'Comments on the Unified Interpretation of "Unforeseen Delays in Ship Delivery" under SOLAS Convention II-1/3-10' submitted by the China Association of the National Shipbuilding Industry to IMO through the International Active Shipbuilding Experts Alliance (ASEF) have gained support from IMO, providing strong support for resolving the delayed delivery of some non-GBS ships.
As the epidemic spreads globally, its impact on China's shipbuilding industry has gradually shifted from internal resumption of work and production problems to the impact of shrinking external market demand and supply chain disruptions.
First, there are many difficulties in securing new ship orders. From the demand perspective, the pandemic has had a huge impact on the global economy and international trade. The shipping market outlook faces great uncertainty; the BDI remains at a low of around 700 points, the idle rate of container ships has exceeded 12%, and ro-ro passenger ships and luxury cruise ships have largely ceased operations. Against this backdrop, some shipowners are too busy dealing with the pandemic and deteriorating business conditions to place orders, while others have suspended or even canceled new ship investment plans due to concerns about the economic outlook. From a competition perspective, South Korea, as the main competitor of China's shipbuilding industry, has been relatively less affected by the pandemic; its shipyards' production has not been significantly impacted, and securing orders is also a current priority for them. With extremely limited market orders, Chinese shipyards face a very severe competitive situation. In addition, even if a small number of shipowners have specific needs, shipyards will encounter impacts such as border closures and other epidemic prevention measures during marketing and business negotiations, making progress very slow and subject to many uncertainties.
Second, difficulties in ship delivery are beginning to emerge for certain ship types. The COVID-19 pandemic has first had a major impact on luxury cruise ships, ro-ro passenger ships, and other tourism and personnel transport equipment, as well as container ships. At present, cruise giants such as Carnival, Royal Caribbean, and Norwegian Cruise Line have suspended operations. The European ro-ro passenger ship industry has seen a sharp drop in passenger traffic due to the pandemic, and the idle rate of container ships has exceeded the worst period in 2009. The bulk carrier shipping market has still not shown obvious improvement after the Spring Festival, but shipowners are hoping that China's economic restart will drive a rapid rebound in the bulk carrier shipping market; oil tankers are widely used for offshore oil storage, and freight rates are currently at a high level. It is foreseeable that container ships, ro-ro passenger ships, and cruise ships will be the hardest-hit areas for delivery difficulties this year. At present, China's shipbuilding industry holds a global market share of about 40% in the container ship segment, and its share of the ro-ro passenger ship market exceeds 70%. Shipbuilding enterprises whose products are concentrated in these two fields may face greater delivery risks. In addition, the sharp decline in international crude oil prices may further increase the difficulty of reducing inventory in China's offshore engineering equipment sector.
Third, the cash flow crisis of some shipowners may be transmitted to shipbuilding industrial enterprises. If the pandemic lasts too long, shipowners of container ships and ro-ro passenger ships may face greater liquidity crises, and at that time there may not only be delays in taking delivery of ships, but even the possibility of abandoning ships. At the same time, for shipowners such as bulk carriers, the continued pandemic and economic recession will cause them to continue to cut investment in new shipbuilding, and some shipowners with high leverage ratios may even go bankrupt. For shipbuilding industrial enterprises that are about to emerge from the trough, their overall financial strength is still relatively weak. Some shipbuilding enterprises with relatively concentrated ship products and high debt ratios face greater liquidity risks, which may further transmit to ship supporting enterprises.
Fourth, the production organization of shipbuilding enterprises has been continuously disrupted. At present, China's shipbuilding industrial enterprises still need to import some core equipment such as automation systems, communication and navigation systems, as well as some core components of domestic supporting industries, from Europe. At present, European countries have strict epidemic prevention and control measures, a large number of ship supporting enterprises have stopped work, and orders for ship supporting products are difficult to be delivered normally. This will have an extremely adverse impact on the normal production and on-time delivery of ships by Chinese shipbuilding enterprises. In addition, under the background of normalized epidemic prevention and control in China, the labor supply, personnel mobility, and business exchanges of shipbuilding enterprises are affected to varying degrees by numerous epidemic prevention links, resulting in increased production cycles and rising costs.
Second, discussion on the medium- and long-term impact of the pandemic on the ship market.
As the pandemic continues to prolong, concerns across society about the possibility of a long-term economic recession have intensified. Therefore, it is necessary to compare it with the 2008-2009 financial crisis to assess the potential impact of this pandemic on the shipping market and the shipbuilding industry.
From the perspective of the global economy and trade, the short-term impact of the COVID-19 pandemic is even greater than that of the financial crisis, and it may even cause a sustained recession. In April 2020, the IMF predicted that the COVID-19 pandemic would cause global GDP to contract by 3.0% in 2020 and international trade to decline by 11%, both exceeding the damage caused by the financial crisis to the global economy and trade in 2009. Similarly, countries around the world have introduced various monetary and fiscal policies, with stimulus intensity no less than in 2009. The IMF believes that if the global pandemic is effectively controlled in the second half of 2020 and economic activities fully recover, the global economy in 2021 will rebound strongly driven by countries' macroeconomic policies. However, if the pandemic lasts longer, the global economy and trade will suffer a greater impact.
From the perspective of the shipping market, the pressure of overcapacity caused by this pandemic will be significantly less than that during the previous financial crisis. Considering that global trade may contract sharply, Clarksons predicts that global seaborne trade volume will decrease by 5.1% in 2020, a larger decline than the 4.1% in 2009. However, from the perspective of capacity supply, at the beginning of 2009, global ship orderbook accounted for as high as 52% of the fleet capacity, resulting in huge pressure on capacity growth; while at the beginning of 2020, the global orderbook accounted for only 9.2% of the fleet capacity, the lowest level in nearly 20 years. In addition, due to the Ballast Water Convention that came into effect in 2017 and the requirement effective in 2020 that ship fuel sulfur content should not exceed 0.5%, some ships will be arranged to shipyards to install environmental protection equipment or directly leave the market, which will further alleviate the current pressure on capacity supply.
From the perspective of newbuilding market demand, the pandemic will cause a sharp short-term decline in demand for new ships, but the market will steadily recover to normal levels. Affected by the financial crisis, global new ship orders fell by 70% to 57.64 million deadweight tons in 2009, and new ship prices dropped significantly by 30%; under the influence of economic stimulus policies in various countries, new ship orders rebounded to 157 million deadweight tons in 2010, many of which were speculative orders backed by financial capital. Over the past 10 years, the shipping market has generally been depressed, speculative newbuilding activities have gradually decreased, and orders have mainly come from the real demand of the shipping market. In the short term, new ship orders may decline significantly due to the pandemic. Clarksons forecasts that global new ship orders in 2020 will be around 30 million deadweight tons, a decrease of 50% from 2019; however, considering the current relatively sound fundamentals of the shipping market and the replacement demand under new rules and regulations, the newbuilding market is expected to rebound to around 90 million deadweight tons in 2021.
From the perspective of the competitive structure of the shipbuilding market, the current shipbuilding industry capacity has been significantly reduced, and market supply-demand relations have clearly improved. After a decade of cyclical adjustment, especially since 2015, when a large number of shipbuilding enterprises went bankrupt and major shipbuilding groups underwent mergers and reorganizations, the concentration of the shipbuilding industry has risen substantially. According to Clarksons data, global active shipbuilding capacity is currently estimated at about 110 million deadweight tons, lower than the 150 million deadweight tons in 2009 and nearly 50% lower than in 2011. In addition, the combined order book of the world's top ten shipbuilding groups now accounts for 70% of the total, significantly higher than the 50% in 2009, and the linkage among shipyards under the same group has improved markedly. Therefore, both market supply-demand relations and the bargaining power of shipbuilding enterprises have improved considerably compared with 2009. Even if global new ship orders fell to 30 million deadweight tons in 2020, newbuilding prices would not experience the same cliff-like drop as in 2009.
Overall, in 2008-2009 the shipping and shipbuilding industries were at the turning point of an industrial cycle moving from extreme prosperity to recession, while the current period is at the start of a new cycle after a prolonged depression. Given that shipbuilding capacity has already been substantially reduced, even if market demand declines, it would be difficult to see a situation like the financial crisis, with severe supply-demand imbalance in the shipbuilding market and widespread bankruptcy of shipbuilding enterprises.
III. Relevant recommendations for shipbuilding enterprises
Although the industrial structure of the shipbuilding industry has improved considerably, the financial strength and capital reserves of major enterprises are still insufficient. Therefore, it is necessary to fully assess the difficulties and risks that the pandemic has brought to enterprises and take necessary measures to ensure that enterprises can successfully weather the impact of this pandemic.
First, assess the risks of orders on hand and shipyards' own response capabilities, and formulate risk response plans. It is recommended that shipbuilding enterprises focus on orders on hand and orders under negotiation, especially container ship and ro-ro passenger ship orders, and assess customers' cash reserves, near-term maturing debts, financing capabilities, etc. Under hypothetical scenarios where the pandemic lasts for one or two years, assess its impact on freight rates and operating cash flows of target ship types, and identify high-risk orders. For high-risk orders on hand, properly handle relevant documentation, fulfill notification obligations to shipowners and insurance companies at important milestones in a timely manner, and while giving shipowners necessary understanding and support, formulate contingency plans for different default scenarios by shipowners. Shipbuilding enterprises also need to assess whether they have sufficient financial strength, feasible measures, and market channels to resolve risks if high-risk orders default.
Second, make good use of various support policies introduced by national and local governments to reduce enterprises' operating costs. In order to mitigate the impact of the pandemic on the real economy, the state has intensively introduced a variety of support policies, including supporting corporate financing, reducing and exempting taxes and fees, and refunding social insurance premiums. Local governments have also introduced a series of support policies during the pandemic. It is recommended that shipbuilding industry enterprises seize opportunities for policy support according to their own circumstances to minimize the losses caused by the pandemic.
Third, grasp the key points of the national macroeconomic policy and pay attention to the ship demand derived from expanding domestic demand. The meeting of the Political Bureau of the CPC Central Committee held in April characterized the impact of this epidemic on China's economic development as an "unprecedented challenge." In order to stabilize the "economic fundamentals" and hold the bottom line of people's livelihood, the central government proposed "offsetting the impact of the epidemic with greater macroeconomic policy intensity" and firmly implemented the strategy of expanding domestic demand. It can be expected that, in addition to "new infrastructure," conventional infrastructure construction projects will also gradually increase, thereby supporting the bulk carrier market; and the "firm implementation of the strategy of expanding domestic demand" is also conducive to stabilizing the market demand for various coastal and inland river ships. In addition, the current low international oil price is a favorable opportunity for the country to continue expanding strategic petroleum reserves and commercial reserves, which is conducive to Chinese tanker owners expanding their business; recently, the National Development and Reform Commission and other departments issued the "Implementation Opinions on Accelerating the Construction of Natural Gas Storage Capacity," which is a certain positive for LNG carriers. Therefore, it is recommended that China's shipbuilding industry enterprises strengthen cooperation with relevant shipping companies to jointly explore market opportunities brought by national macroeconomic policies, including bulk carriers, tankers, LNG carriers, and domestic trade ships.
Fourth, strengthen cooperation in the industrial chain and increase the market share of domestic marine equipment suppliers. Due to significant performance barriers, products from China's self-owned brands in marine equipment have always faced difficulties in being installed on ships, which has also caused China's shipbuilding industry's self-supply rate to remain lower than that of South Korea and Japan for a long time, posing a major threat to the security of China's shipbuilding industry chain. The outbreak of the pandemic this time has shown that the interruption of European marine equipment supplies highlights the importance of a complete self-owned marine equipment industry chain to China's shipbuilding industry and shipbuilders. In particular, the recent meeting of the Political Bureau of the CPC Central Committee elevated "ensuring the stability of the industrial chain and supply chain" to the level of "stabilizing the overall situation," which requires China's shipbuilding industry to break through bottlenecks in core supporting equipment and key components. It is recommended that China's ship assembly enterprises and supporting equipment enterprises strengthen communication with shipowners, especially cooperation with Chinese-funded shipping companies and financial shipowners, adopt domestic self-owned brand supporting products as much as possible, and jointly safeguard the industrial chain security of the shipbuilding and shipping industries.
Fifth, continue optimizing internal resource integration and capacity building. In recent years, the integration of several major shipbuilding groups at home and abroad has continued to advance, and the competitive landscape of the global shipbuilding industry has become increasingly clear. In the future, competition among shipbuilding enterprises will be competition in overall comprehensive strength. It is recommended that major domestic shipbuilding groups continue to optimize internal resources, especially fully leverage the synergy among final assembly, design, supporting supply, capital, and trade, so as to truly demonstrate their comprehensive strength in international competition. In addition, it is recommended that major shipbuilding enterprises, in light of the national "new infrastructure" initiative, utilize the facility and funding resources of the "new infrastructure" in various regions, further improve the level of intelligent manufacturing, strengthen R&D of intelligent and green products, and continue advancing the high-quality development strategy amid epidemic prevention and control.
