Chinese yards losing money on newbuildings

Shanghai Waigaoqiao Shipbuilding, China’s newest shipyard, will lose money on newbuildings because the price of steel used has doubled. The price of steel plates used to build tankers and bulk carriers rose by as much as $700 per tonne, up from $300 a year ago, according to shipyards such as Waigaoqiao and Hudong- Zhonghua. The price shipowners pay for their new vessels is fixed when the contract is signed which can be up to three years before the ships are delivered.

Steel prices in China rose to record levels this year as economic growth boosted demand for office blocks, cars and refrigerators. High steel prices are causing greater losses for China’s shipbuilders than their competitors abroad because Chinese shipyards lack the protection of long-term steel supply contracts of builders such as Korea’s Hyundai Heavy Industries and Japan’s Universal Shipbuilding Corp.

Waigaoqiao specializes in building Capesize bulk carriers and, with each ship requiring 20,000 tonnes of steel plate, the cost of building has increased by at least $6 million per vessel since the price of steel doubled. This year, the shipbuilder will deliver Capesizes to a number of owners including Compagnie Maritime Belge and China’s Cosco Bulk Carrier. These were ordered two years ago when the price to build a Capesize ship was about $36 million while, today, it costs more than $59 million to order a Capesize.

China State Shipbuilding Corp (CSSC), the company that owns all the major shipyards in and around Shanghai, said the high steel price would change the way that it buys steel.

“Previously our subsidiaries purchased steel they used, now we plan to set up a central procurement department,”‘ said Li Ping, secretary-general of the party committee at CSSC. “The steel price is a big threat to the industry.”

While prices of some steel products have fallen in China since the government announced measures earlier this year to slow economic growth, steel plate prices are still rising because of a lack of production capacity, Li said. The situation may improve after Baoshan Iron & Steel Co., China’s biggest steelmaker, starts operation of a new steel plate plant in February 2005, he said. Baoshan Iron has said it will increase steel capacity by 80% by 2006, making products including ship plates.