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Sea sick

5 July 2013 By John Foley

In 1433, China abandoned its costly maritime ambitions, forfeiting for centuries its chances of oceanic dominance. It is unlikely to make the same mistake again. While the tribulations of China Rongsheng show that the country’s modern shipping industry is in trouble, a sector with such strategic and symbolic importance can stay afloat long after its financial appeal has run dry.

Rongsheng, China’s biggest non-state shipbuilder, announced on July 5 it would seek emergency funding, including an interest-free loan from its biggest shareholder, and report a first-half financial loss. That’s not entirely unforeseen. Rongsheng had 15.6 billion yuan ($2.6 billion) of borrowings due within a year at the end of 2012, but only 5.7 billion yuan of cash and unused bank lines. Its shipbuilding costs for the year exceeded its revenue, after stripping out reported state subsidies.

China’s target of being the world’s biggest shipbuilder has been too successful. Its shipyards produced 60.2 million deadweight tonnes of shipping in 2012, according to official data, but only received new orders for a third as much. That has global ripples: in dry bulk, including commodities like coal and iron ore, total shipments were 5.8 times total capacity in 2012, against a historical average of 7.6, according to Barclays.

For Rongsheng, further restructuring and equity raising now look inevitable. But it would be a mistake to think that a sector leaking cash can’t stay seaborne. Chronic overcapacity in shipping has even helped China by pushing down freight rates. It used to cost $75 to ship a tonne of iron ore back from Brazil, for example – now that’s closer to $20. Shipping also soaks up some surplus capacity in other industries like steel.

That means the supertanker will turn slowly at best. Until then, the government can always pump money into operators like China Cosco and China Shipping so that they can keep placing orders, or ask state-owned enterprises to commit to long, uneconomic shipping contracts. It’s bad economics, but that’s unlikely to stop China’s planners from fighting the tide.


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