Shipyards Incentivized: Expect Yards to Expand Orderbook and Maintain Production

A view of the Rongsheng Heavy Industries shipyard is seen in Nantong, Jiangsu province December 4, 2013. (c) REUTERS/Aly Song

Shipowners, investors and analysts, who have been expecting for some time to see the dry bulk orderbook, as well as the overall shipping orderbook, to decline and see less ships delivered, may be waiting quite a while longer. We have said many times that shipyards are not capitalist endeavors, but are socio-economic entities. These enterprises should be considered to organizations that are more associated with a government’s political objectives relating to employment and job growth than profit.

Shipyards in China represent this fact, along with supporting the government’s objective to see the economy benefit from cheap transportation.

China’s Finance Minister Lou Jiwei, stated on March 6th that China’s recently announced economic growth targets (“GDP”) are flexible and that the jobs target is ”the most important” target. While the Chinese government has indicated this year it would seek a GDP target of 7.5%, Mr. Lou indicated the government may tolerate a GDP rate that is lower. Speaking at a new conference on the sidelines of the National People’s Congress on Thursday, he said the official phrasing on this year’s economic targets all carry the word “about”, which implies the targets are not rigid. For example he stated, “If GDP grows by 7.2% or 7.3%, we can also say the GDP target of “about 7.5% is met”.

He further went on emphasize that “whether the eventual [GDP growth rate] is above or below 7.5% isn’t particularly important, but employment matters more“. While the Chinese are aiming to create 11 million new jobs this year, Mr. Lou stated more can be achieved.

The dry bulk shipping orderbook has grown from 122.7 million deadweight tons (“dwt.”) at the end of 2012 to 133.3 million dwt. as of December 31, 2013. In January 2014, the orderbook grew nearly 6 million tons to 139.0 million dwt.

Looking for more insight on the dry bulk sector? Follow the Castalia Group Blog.

The dry bulk fleet at the end of 2012 was 672.8 million dwt. and by the end of 2013 it rose to 709.8 million dwt., an increase of 5.5%. In January 2014, the dry bulk fleet rose to 717.8 million dwt. or an increase of 8.0 million dwt. or 1.1%.

If Mr. Lou is to achieve his objective of increased employment growth, shipowners, investors and analysts should not expect the orderbook and deliveries to decline, but actually increase. One can expect shipyards to remain aggressive in seeking orders in order to insure job growth and employment. These are high paying jobs that support large scale employment and are the type of jobs the Chinese government is seeking to create. The Chinese government is achieving exactly what it seeks from the shipping markets, high employment and low transportation costs. It is a marketplace where the Chinese have become “price takers”.

If this were a poker game, who would have the label of “sucker” on their forehead?

Jay Goodgal can be reached at [email protected]

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