The COVID-19 pandemic that broke out in early 2020 has had a huge impact on the global economy, trade, and production and daily life. It is expected that as the impact continues to transmit through the industrial chain, the pandemic's effect on the operating performance of shipbuilding enterprises will gradually become apparent. Although the fundamentals of the shipbuilding industry have already improved significantly compared with previous years, shipbuilding enterprises still need to pay attention to the adverse effects that may be brought by the liquidity crisis of shipping companies and the short-term sharp 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 in order to successfully weather this crisis.
I. Impact of the COVID-19 pandemic on the production and operation of Chinese shipbuilding enterprises
During the period when the domestic pandemic was relatively severe, Chinese shipbuilding enterprises mainly faced problems such as being unable to resume work and production in a timely manner, which could lead to delays in ship production and cause some ship orders to fail to start construction or be delivered at the time nodes required by contracts or international conventions. As the domestic pandemic has been effectively controlled, the resumption rate of the 75 enterprises specially monitored by the China Association of the National Shipbuilding Industry has reached 100%, and production order has been restored to a large extent. At the same time, through the joint efforts of China's shipbuilding industry authorities and maritime authorities, China's submission to the IMO of the "Unified Interpretation of SOLAS Regulation II-1/3-10 on Unforeseen Delay in Ship Delivery", as well as the proposal submitted by the China Association of the National Shipbuilding Industry through the International Association of Classification Societies' active shipbuilding experts' alliance (ASEF) to the IMO entitled "Comments on the Unified Interpretation of SOLAS Regulation II-1/3-10 on 'Unforeseen Delay in Ship Delivery'", have received IMO support, providing strong support for resolving the issue of delayed delivery of some non-GBS ships.
As the pandemic spreads globally, its impact on China's shipbuilding industry has gradually shifted from internal problems of resuming work and production to the shocks brought by shrinking external market demand and supply chain disruptions.
First, there are many difficulties in undertaking new ship orders. From the demand perspective, the pandemic has had a huge impact on the global economy and international trade, and the outlook for the shipping market faces great uncertainty. The BDI remains at a low level of around 700 points, the idle rate of container ships has exceeded 12%, and ro-ro passenger ships and luxury cruise ships have largely suspended operations. Against this background, some shipowners are busy responding to the pandemic and deteriorating operating conditions and are unable to place orders, while some shipowners, out of concern about the economic outlook, have suspended or even canceled new ship investment plans. From the competition perspective, South Korea, as the main competitor of China's shipbuilding industry, has been relatively lightly affected by the pandemic, and its shipyards have not suffered obvious shocks to production. Undertaking orders is also an important task for them at present. With market orders extremely limited, Chinese shipyards face a very severe competitive situation. In addition, even if a small number of shipowners have specific needs, shipyards will encounter impacts from countries closing their borders and other epidemic prevention measures during marketing and business negotiations, so progress will be very slow and subject to many variables.
Second, difficulties in delivering certain ship types have begun to emerge. The COVID-19 pandemic first dealt a relatively large blow to tourism and passenger transport equipment such as luxury cruise ships and ro-ro passenger ships, 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 passenger traffic plummet due to the pandemic; and the idle rate of container ships has exceeded the worst period of 2009. The bulk carrier shipping market still has not shown obvious improvement after the Spring Festival, but shipowners hope that the restart of China's economy will drive a rapid rebound in the bulk carrier shipping market; a large number of oil tankers are being used for offshore oil storage, and freight rates are currently at a high level. It can be foreseen 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 has a global market share of about 40% in container ships and more than 70% in ro-ro passenger ships. Shipbuilding enterprises whose products are concentrated in these two fields may face relatively large delivery risks. In addition, the sharp decline in international crude oil prices may further increase the difficulty of destocking China's offshore engineering equipment.
Third, the cash flow crisis of some shipowners may be transmitted to shipbuilding enterprises. If the pandemic lasts too long, shipowners of container ships and ro-ro passenger ships may face relatively large liquidity crises, and by then they may not only delay taking delivery of ships but even abandon them. At the same time, for shipowners of bulk carriers and other ships, the continued pandemic and economic recession will lead them to continue cutting investment in new shipbuilding, and some highly leveraged shipowners may even go bankrupt. For shipbuilding enterprises that are about to emerge from the trough, overall financial strength is still relatively weak, and some shipbuilding enterprises with relatively concentrated ship products and high debt ratios face relatively large liquidity risks, which may further be transmitted to ship supporting enterprises.
Fourth, the production organization work of shipbuilding enterprises has been continuously disrupted. At present, Chinese shipbuilding enterprises still need to import some core equipment such as automation systems and communication and navigation systems from Europe, as well as some core components of domestically produced supporting equipment. At present, European countries have strict epidemic prevention and control measures, and a large number of ship supporting enterprises have suspended work, making it difficult to deliver ship supporting orders normally. This will have an extremely adverse impact on the normal production and on-time delivery of Chinese shipbuilding enterprises. In addition, under the background of normalized domestic epidemic prevention and control, the labor supply, personnel mobility, and business exchanges of shipbuilding enterprises are more or less affected by numerous epidemic prevention procedures, leading to increased production cycles and rising costs.
II. Discussion on the medium- and long-term impact of the pandemic on the ship market
As the pandemic continues to last longer, society's concern that it may cause a long-term economic recession continues to intensify. Therefore, it is necessary to compare it with the 2008-2009 financial crisis in order to judge the possible impact of this pandemic on the ship market and the shipbuilding industry.
From the perspective of the global economy and trade, the short-term shock caused by this COVID-19 pandemic is even greater than that of the financial crisis, and may even cause a sustained recession. In April 2020, the IMF forecast that the COVID-19 pandemic would cause global GDP to shrink by 3.0% in 2020 and international trade volume to fall 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 activity fully recovers, the global economy can rebound strongly in 2021 under the impetus of macroeconomic policies in various countries; but if the pandemic lasts for a long time, the global economy and trade will suffer even greater shocks.
From the perspective of the shipping market, the overcapacity pressure caused by this pandemic will be significantly smaller than in the previous financial crisis. Considering that global trade may shrink sharply, Clarksons forecasts 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 the global orderbook as a share of capacity was as high as 52%, creating enormous pressure for capacity growth; while at the beginning of 2020 the global orderbook as a share of capacity was only 9.2%, the lowest level in nearly 20 years. In addition, due to the Ballast Water Management Convention that took effect in 2017 and the requirement that took effect in 2020 that the sulfur content of ship fuel not exceed 0.5%, some ships will be arranged to enter repair yards to install environmental protection equipment or will directly exit the market, which will further ease the current pressure on capacity supply.
From the perspective of newbuilding market demand, this pandemic will cause a short-term sharp decline in newbuilding demand, but the market will steadily recover to a normal level. Affected by the financial crisis, global new ship transaction volume fell by 70% to 57.64 million deadweight tons in 2009, and new ship prices fell sharply by 30%; under the influence of economic stimulus policies in various countries, new ship transaction volume rebounded to 157 million deadweight tons in 2010, many of which were speculative orders with financial capital backgrounds. Over the past 10 years, the shipping market has generally been in a depressed state, and speculative activity in new shipbuilding has gradually decreased, with orders mainly coming from real demand in the shipping market. In the short term, new ship transaction volume may decline sharply due to the pandemic. Clarksons forecasts that global new ship transaction volume in 2020 will be around 30 million deadweight tons, a decrease of 50% compared with 2019; but considering the relatively stable fundamentals of the current shipping market and replacement demand under new rules and regulations, it is expected that the newbuilding market will rebound to around 90 million deadweight tons in 2021.
From the perspective of the competitive structure of the shipbuilding market, current shipbuilding capacity has already been substantially reduced, and the market supply-demand relationship has improved markedly. After a cyclical adjustment lasting 10 years, especially the bankruptcy of a large number of shipbuilding enterprises and the mergers and reorganizations of major shipbuilding groups since 2015, the concentration of the shipbuilding industry has increased significantly. According to estimates based on Clarksons data, global active shipbuilding capacity is currently about 110 million deadweight tons, lower than 150 million deadweight tons in 2009 and nearly 50% lower than in 2011. In addition, the combined orderbook share of the world's top ten shipbuilding groups has now reached 70%, significantly higher than 50% in 2009, and the linkage among shipyards under the same group has improved markedly. Therefore, whether in terms of market supply-demand relations or the bargaining power of shipbuilding enterprises, conditions have improved greatly compared with 2009. Even if global new ship order volume falls to 30 million deadweight tons in 2020, newbuilding prices are unlikely to experience a cliff-like drop similar to 2009.
Overall, in 2008-2009 the shipping and shipbuilding industries were at an inflection point where the industry cycle moved from extreme prosperity to recession, whereas now they are at the starting point of a new cycle after a long depression. With shipbuilding capacity already substantially reduced, even if market demand declines, it is difficult for a situation like that in the financial crisis—where the supply-demand relationship in the shipbuilding market was severely unbalanced and shipbuilding enterprises went bankrupt on a large scale—to recur.
III. Relevant recommendations for shipbuilding enterprises
Although the industrial structure of the shipbuilding industry has already improved to a large extent, the financial strength and capital reserves of major enterprises are not sufficient. Therefore, it is necessary to fully estimate the difficulties and risks that this pandemic will bring to enterprises and to take necessary measures to ensure that enterprises can smoothly weather the impact of this pandemic.
First, assess the risks of orders on hand and the shipbuilding enterprises' 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, assess customers' cash reserves, near-term maturing debt, and financing capacity, and, under assumed scenarios in which the pandemic lasts for 1 or 2 years, assess its impact on freight rates and operating cash flow for the target ship types in order to identify high-risk orders. For high-risk orders on hand, do the relevant documentation work well, timely fulfill the obligation to notify shipowners and insurance companies at important time nodes, and, while giving shipowners necessary understanding and support, formulate contingency plans for different forms of shipowner default. Shipbuilding enterprises also need to assess whether they have sufficient financial strength, feasible measures, and market channels to resolve the risks if high-risk orders default.
Second, make good use of the various support policies introduced by the national and local governments to reduce enterprise operating costs. In order to reduce the impact of the pandemic on the real economy, the state has intensively introduced various support policies, including supporting enterprise financing, reducing or exempting taxes and fees, and refunding social insurance. Local governments have also introduced a series of support policies during the pandemic. It is recommended that shipbuilding enterprises, according to their own circumstances, seize policy support opportunities to reduce the losses caused by the pandemic to enterprises as much as possible.
Third, grasp the focus of national macroeconomic policies and pay attention to ship demand derived from expanding domestic demand. The Central Politburo meeting held in April characterized the impact of this pandemic on China's economic development as an "unprecedented challenge". In order to stabilize the "economic fundamentals" and secure the bottom line of people's livelihood, the central government proposed to "offset the impact of the pandemic with greater macroeconomic policy intensity" and firmly implement 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 providing support for the bulk carrier market; and "resolutely implementing the strategy of expanding domestic demand" will also help stabilize market demand for various coastal and inland waterway vessels. In addition, international oil prices are currently at a low level, which is a favorable opportunity for the country to continue expanding its strategic petroleum reserves and commercial reserves, and is conducive to Chinese oil 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 Reserve Capacity," which is somewhat favorable for LNG carriers. Therefore, it is recommended that Chinese shipbuilding enterprises strengthen cooperation with relevant shipping companies to jointly explore market opportunities brought about by national macroeconomic policies, including bulk carriers, oil tankers, LNG carriers, and domestic trade vessels.
Fourth, strengthen industrial chain cooperation and increase the domestic market share of ship supporting enterprises. Due to significant performance barriers, Chinese independent-brand ship supporting products have always faced difficulties in being installed on vessels, which has also caused China's shipbuilding industry's independent supporting rate to remain lower than that of South Korea and Japan for a long time, posing a major threat to the industrial chain security of China's shipbuilding industry. After the outbreak of this pandemic, the interruption of European ship supporting product supplies demonstrated the importance of a complete independent ship supporting industrial chain to China's shipbuilding industry and shipbuilding enterprises. In particular, the recent meeting of the Political Bureau of the Central Committee elevated "ensuring the stability of industrial chains and supply chains" to the height of "stabilizing the overall situation," setting requirements for China's shipbuilding industry to break through bottlenecks in core supporting and key components. It is recommended that Chinese ship assembly enterprises and supporting equipment enterprises strengthen communication with shipowners, especially cooperation with Chinese-backed shipping companies and financial shipowners, adopt domestic independent-brand supporting products as much as possible, and jointly safeguard the industrial chain security of the shipbuilding industry and shipping industry.
Fifth, continue to optimize internal resource integration and carry out capacity improvement. In recent years, the integration of several major shipbuilding groups at home and abroad has continued to advance, the competitive landscape of the global shipbuilding industry has become increasingly clear, and future competition among shipbuilding enterprises will be competition in comprehensive strength. It is recommended that major domestic shipbuilding groups continue to optimize internal resources, especially to fully leverage the synergies among assembly, design, supporting, capital, and trade, and truly demonstrate comprehensive strength in international competition. In addition, it is recommended that major shipbuilding enterprises, in light of the progress of the country's "new infrastructure," utilize the facility resources and funding resources of "new infrastructure" in various regions to further enhance the level of intelligent manufacturing, strengthen research and development of intelligent green products, and continue to advance the high-quality development strategy amid pandemic prevention and control.
