Chinese Shipbuilder Cancels Eight Orders

SHANGHAI—One of China’s largest shipbuilders said Wednesday that it canceled eight shipbuilding contracts during the second quarter because customers failed to pay, demonstrating the tough conditions that face China’s shipbuilders and international shipping companies.

Yangzijiang Shipbuilding Holdings Ltd. also said its second-quarter net profit declined 8.9% as operating expenses nearly doubled and the privately owned company reaped fewer gains from currency translations.

The Singapore-listed company said the cancellations included six dry-bulk carriers with a capacity of 82,000 deadweight tons and two with a capacity of 34,000. Such vessels are often used to carry commodities such as iron ore. The company said it confiscated the deposits on the vessels, which amounted to about 15% of their total value. The smaller vessels are worth about $24 million each.

Yangzijiang said it managed to resell the two smaller vessels and one of the larger ships. A spokesman for the company said it is “actively sourcing for buyers for the remaining vessels.”

The announcement is the latest in a string of woes to hit China’s shipbuilders, which could face consolidation and closures amid a shipbuilding capacity glut and trade volumes weakened by global economic uncertainty. China benefited most from the order rush of new ships that peaked in 2009 and 2010, when shipowners—spurred by high freight rates—turned to Chinese yards for competitively priced vessels. To cope with demand, new shipyards mushroomed while old ones expanded capacity.

But as freight rates plummeted and struggling shipowners stopped ordering, Chinese shipbuilders began to feel the pinch. “Consolidation of the shipbuilding industry is still under way and we do expect the near future to be a challenging one considering the global uncertainties and growing market competitiveness,” Yangzijiang Executive Chairman Ren Yuanlin said in a written statement.

In late July, another privately owned Chinese shipbuilder, Hong Kong-listed China Rongsheng Heavy Industries Group Holdings Ltd., issued a profit warning to shareholders, saying first-half orders and prices of ships fell “sharply.” The company said that it expected its unaudited net profit for the period to “decrease significantly” compared with a year earlier.

“Shipyards in China are most definitely challenged by overcapacity that they themselves introduced over the years,” said Steen Brodsgaard Lund, managing director of the Asian-Pacific region for Germanischer Lloyd, a ship-classification provider.

Market observers estimate that as much as half of China’s shipbuilding capacity isn’t needed and that between 30% to 50% of shipbuilders, including makers of oceangoing vessels, could fail during next two years. Still, consolidation could benefit the remaining shipbuilders.

Yangzijiang said its second-quarter net profit fell to 878.1 million yuan ($137.9 million) from 963.9 million yuan a year earlier. Revenue increased 13% to 3.9 billion yuan from 3.5 billion yuan.

The company had orders totaling $3.8 billion on its books at the end of June, down from the $6.9 billion it had in early 2009.

Matthew Flynn, managing director of Worldyards.com Pte. Ltd., said that compared with other Chinese shipbuilders, Yangzijiang is still faring well.

“They have a track record of getting and keeping clients,” said Mr. Flynn, whose company advises the shipping, cargo and finance sectors.

He added that vessel cancellations at Chinese yards probably have peaked. “We will see less cancellations rather than more going forward,” Mr. Flynn said.

-By Colum Murphy. Copyright 2012 Dow Jones & Company, Inc.