Risks are brewing for state-owned shipbuilders as collapsing crude prices begin to bite the offshore oil drilling rig market, in which the shipyards have amassed massive orders over the past two years in a bid to move up the value-added chain.
China leapt to the second-largest rig-building nation by value last year, a sector dominated by more tech-savvy South Korean and Singaporean firms.
Top-tier mainland shipyards, specialised in building cargo ships, have long been eager to foray into the offshore engineering equipment segment. When crude prices were rocketing and deep-sea oil drilling was a safe bet, they would often accept orders, even on rigorous payment terms, to find a toehold in this new market.
As of the end of last year, top-tier mainland shipyards, mostly state-owned, had combined orders of US$18 billion, accounting for almost a third of the global market, according to official data.
The orders were contracted at tough terms, with 5 to 10 per cent down payment followed by a heavy tail upon delivery.
“[State-owned shipyards in the past few years] took whatever orders came their way,” said Bao Zhangjing, director of the China Shipbuilding Economy Research Centre.
With crude plunging 40 per cent in the past five months to about US$65.50 per barrel and offshore oil output scaling down, the industry is now dotted with red flags. Most deep-sea drilling projects were contracted when crude was at or above US$100 per barrel.
China International Marine Containers (CIMC), for example, is under pressure to find takers for its deep-sea semisubmersible rigs due for delivery next year, according to two sources at state-owned financial institutions.
CIMC is the world’s largest manufacturer of dry freight marine containers and dabbles in a variety of industries such as transport and logistics facilities. Through its subsidiary, CIMC Raffles, in Yantai, Shandong province, the firm is a leading offshore drilling equipment maker on the mainland, having delivered 16 drilling rigs since 2010 and carrying an order book of US$5 billion as of the end of June.
But some of the orders were placed by its own in-house finance division, CIMC Leasing, which hunts for charterers for the costly rigs as they are being built. “As oil price dives, marketing pressure is building up for CIMC Leasing, which is struggling to sell or lease out the rigs,” said one source.
When contacted by the South China Morning Post, CIMC spokesman Yu Yuqun dismissed such claims, saying: “We are not worried at all.”
Cosco Shipyard, part of China Ocean Shipping Group, is feeling the heat too. Singapore-listed Cosco Corp, which holds a 51 per cent stake in Cosco Shipyard, has since July announced order cancellation or delivery deferment by Western buyers for three drilling rigs and components amounting to US$1.4 billion. Losses will eventually be absorbed by the state.
Most of these speculative orders were backed by policy financing from the Export-Import Bank of China, with the credit risk insured by the China Export and Credit Insurance Corp, also known as Sinosure. Both are wholly owned by the Ministry of Finance.
Low Pei Han, an analyst at OCBC Investment research, said most rigs currently on order were scheduled to be delivered towards the second half of next year.
“That’s when we can see more distress in the market if oil prices continue to be under downward pressure.
“Even if oil prices recover to US$80 we could see some speculative owners walking away from their rigs,” said Low, who holds a sell rating on Cosco Corp, which is trading at 55 Singaporean cents (HK$3.23), a 52-week low.
Source: South China Morning Post
