China blocks STX shipyard

Plans by Korean shipbuilder STX to build its new shipyard in Dalian, northern China, is being challenged by the Chinese government’s restraint on building large ships. STX began construction on the $1-billion shipyard near Dalian in March but regulations on foreign firms are barring the firm from digging a dry dock which is essential to building and floating large and more profitable ships.

The company first made the decision to have a shipyard there after talking with the city of Dalian, but the central government in Beijing refused to give permission to dig, a source in Dalian said. “Shipbuilding is a strategic industry for China so the government is very fussy about foreign firms,” the source said recently, refusing to be identified. “Worries have been growing that there is an oversupply of shipyards in China, so it is unlikely that Beijing will allow STX to do so.”

STX said that the situation had already been taken into account when it started building its new facility and, although large vessels need a dry dock, smaller ships can be constructed on dry land. “Under the current conditions, it is difficult to get a permission to build big ships,” a spokesperson said. “But as for bulk carriers of medium size, there is no problem. We are very experienced in building ships on the dry ground, we will be able to start production in the second half of 2008 as we planned.” Under current technology this method only makes it feasible to build ships up to a maximum of 100,000 DWT. However, profitable ships such as container carriers and LNG carriers tend to exceed this limit.

STX had a grand groundbreaking ceremony at the site in Changxing Island, north of Dalian, in March. Chairman Kang Duk-soo then said that the company was expecting annual revenue of $3 billion from the Changxing shipyard in five years, which is almost double the sales the whole firm had last year. The calculation made sense at the time considering the site is about 3.8 square kilometres, four times the size of STX’s shipyard in Jinhae, South Korea, and the complex is to include a ship block factory and engine assembly plants. But without a dry dock, the goal does not look as attainable.

It will be a hard blow to STX if the Dalian shipyard does not work as anticipated, considering the firm’s aggressive and often risky management style. With a series of mergers and acquisitions, STX Group has increased its revenue by 34 times and its market capital by 16 times since 2001. With a mere 16 billion won ($17 million) of operating profit from 2006, it is an audacious bet to spend $1 billion in building a new shipyard that has no dry dock.

Sales have been brisk however and STX says it has already received orders for 33 ships, worth $1.7 billion, for the Dalian yard until August although there could be a problem of delivering these newbuildings on time.