Shipbuilding Industry Economic Performance Analyzed for H1 2019

China Association of the National Shipbuilding Industry (CANSI)

I. Basic Information of Economic Operation

A. National Three Shipbuilding Indexes A Mixed Bag

National shipbuilding completion reached 19.66 million dwt in H1， up 4.2%YOY; new ship orders reached 12.06 million dwt， down 46.9% YOY; by the end of June， handheld ship orders had reached 81.72 million dwt， down 10.3%YOY and down 5% from the end of 2018.Export ships accounted for 92.9%， 91.5%and 90.8% of national shipbuilding completion， new ship orders and handheld ship orders respectively.

B. Major Economic Indicators of Shipbuilding Industry

During the January-May period，national shipbuilding industry enterprises above designated size amounted to 1027 and realized main business revenue of RMB158.8 billion， up 5.7% YOY. The shipbuilding manufacturing sector earned RMB104.7 billion， up 3.9% YOY; the marine equipment manufacturing sector earned RMB21.3 billion， up 9.2% YOY;the ship repair sector earned RMB7.1 billion， up 8.8% YOY; the ship demolition sector earned RMB5.07 billion， up 52.7%YOY; the offshore engineering equipment manufacturing sector earned RMB18.1 billion， up 2.2% YOY.

Affected by the low base in the same period last year， shipbuilding industry enterprises above designated size realized total profit of RMB7.04 billion， up 241% YOY. The shipbuilding manufacturing sector realized profit of RMB3.24 billion， up 248% YOY; the marine equipment manufacturing sector realized profit of RMB760 million， up 25.1% YOY; the ship repair sector realized profit of RMB280 million， up 550%; the ship demolition sector realized profit of RMB290 million， up 203%YOY; the offshore engineering equipment manufacturing sector realized profit of RMB700 million， up 4.9% YOY.

II. Characteristics of Economic Operation

A. High Quality Development Pays off， Marine Product Mix Optimization Continues

In the first half of the year， Chinese backbone shipbuilding enterprises closely moved around the main line of high quality development， stepped up investments in tech R&D， strove to improve the management level， and continuously optimized the structure of ship products. The three mainstream ships entered the new era of “Intelligent Ship 1.0”， and the world's first 400000 ton intelligent VLOC， 300000 ton intelligent VLCC， 13800TEU intelligent container ship were delivered smoothly.New breakthroughs have been made in the R&D and construction of high-end ship types， with 85000 cubic meters of very large ethane carriers (VLEC)， 49000 tons of duplex stainless steel chemical tanker and 64000 tons of large sawdust carrier delivered to shipowners， domestic polar adventure cruise， Yamal project 174000 cubic meters of LNG carrier completed sea trial，7500 Cars LNG-powered PCTC， Antarctic krill boat， non-official hospital-ship， the world first universal FPSO was successfully undocked. New achievements have been made in the construction of special vessels， with the first independent construction of the polar research icebreaker， the new-type deep and high sea integrated scientific investigation vessel and the marine fishery comprehensive scientific survey vessel delivered for use. Construction of China's first 10，000-tonnage maritime patrol vessel， large-scale floating LNG-FSRU was kicked off， large-scale domestic luxury cruise ship construction project was actively promoted.

B. Carry out the Integration of IT Application with Industrialization， and Intelligent Manufacturing Engineering is Advancing Steadily

In the first half of the year， the backbone ship enterprises overcame difficulties brought about by sharply shrinking global new ship orders， low prices of new ships and continuously rising shipbuilding costs， continuously strengthened production management，tried to improve the shipbuilding efficiency， continuously promoted the intelligent development of the shipbuilding industry， and improved the shipbuilding quality， efficiency and benefits. Jiangnan Shipbuilding(Group) Co.， Ltd. delivered the world's first ship built paperless through threedimensional experience platform digitalization， the shipbuilding efficiency was improved by 30%， the error rate was reduced by 60%， and the loading cycle of the ship-building berth was shortened by 2 months. The breakthrough of the localization “zero” was realized by the intelligent manufacturing assembly line of the ship developed and manufactured by the Shanghai Shipbuilding Technology Research Institute， which can effectively improve the product quality， reduce the energy consumption by 30%， reduce the proportion of manual operation by 40%，and improve the production efficiency by 50%. The first intelligent unmanned production line of ships in China was put into operation in Wuchang Shipbuilding Heavy Industry Group Co.， Ltd.， and the production capacity of the production line was increased by 15%. Through the automation and intelligent transformation of the production line， DACKS increased the production efficiency of the corresponding process by 40%-400%，and shortened the product construction cycle by 15%-20%， thus ensuring the sustained and stable growth of the enterprise benefit.

C. The Central Enterprise Group has Developed Steadily and its Strategic Reorganization has been Carried out in an Orderly Manner.

In the first half of the year， demand in the international new ship market shrank sharply， and orders for new ships in major shipbuilding countries fell sharply compared with the same period last year. Amidst various international and domestic risk challenges and obvious increase of uncertain factors， Chinese main shipbuilding groups withstood the pressure and continued to play a good role of stabilizer and ballast of central enterprises. Statistical data show that from January to June， three shipbuilding indexes of the four central enterprise groups CSSC， CSIC， COSCO Shipping and China Merchants Group accounted for 58.9%， 56.4% and 62.2%， respectively.Currently， the contradiction between insufficient demand and overcapacity still exists. Under the joint action of market anti-driving mechanism and policy guidance， the strategic integration of central enterprise groups is advancing steadily. China Merchants Industrial Group Co.， Ltd. manages Changhang Group Jinling Shipyard and Jiangdong Shipyard， merged and integrated Catic Ship Weihai Shipyard. CSSC and CSIC are planning a strategic restructuring.

D. Offshore Engineering Market has Improved， and Shipbuilding Enterprises have Taken a Lot of Measures to Destock.

In the first half of the year， the price of international crude oil basically remained above US$60 per barrel， and the fundamentals of the marine engineering equipment operation market improved.China's backbone marine equipment enterprises stared closely at market changes， and adopted the form of “l(fā)easing，transferring， selling， and joint marketing”to promote the “destock” of idle marine engineering equipment so as to defuse the risk of orders at hand. Remarkable results have been achieved. CSSC delivered 1 jack-up drilling platform and resold 1 wind power installation platform;CSIC delivered 3 jack-up operating platforms in 2 types by means of financial leasing; and China Merchants Industry resold 2 jack-up drilling platforms and leased 2 jack-up drilling platforms;Cosco Shipping Heavy Industry Co.，Ltd. delivered 1 semi-submersible accommodation platform， leased 1 drilling platform， and resold 5 marine engineering auxiliary ships.

E.Environmental Protection Demand Has Seen Explosive Growth， and Efficiency of Ship Repair Enterprises Has Improved Markedly.

In the first half of the year，the Convention on Ballast Water Management and the sulfur emission restrictions issued by the IMO made the demand for the modification of ship ballast water treatment systems and ship desulphurization units explosively increase， the output value of ship repair per ship increased sharply compared with the same period last year， and the utilization rate of shipyards in backbone ship repair enterprises exceeded 95%.The backbone ship repair enterprises made full use of the opportunity of market recovery to continuously improve the high-end modification and repair ability， and completed the first batch of 130，000 cubic meters large LNG carrier repair project in China， the world's first super-large container ship lengthening and heightening and desulphurization installation integrated modification project， the first luxury cruise ship fullship renovation general contract project in China， the world first 10000TEU container ship LNG power system modification project. The ultra-high pressure water operation equipment of Zhoushan Wanbang Yongyue Shipbuilding Co.， Ltd. completely replaced the traditional sandblasting operation equipment， and the application of more than 300 ships has led the Chinese ship repair industry to usher in a new era of green ship repair.Statistical data show that from January to May， the main business income of Chinese ship repair enterprises above the scale was 7.12 billion yuan， a YOY increase of 8.8%， and the profit was 280 million yuan， an increase of 550% YOY.

Ⅲ. Problems with Economic Operation

A. The Demand of New Ships Slumps， and Continuous Production of Ship Enterprises is Facing a Severe Challenge.

In the first half of the year， under the influence of international trade frictions and geopolitics， the main shipowners were not confident in economic growth and took a wait-andsee attitude in ordering new ships. Global new ship orders ended two consecutive years of growth to take a downward trend，much more than expected， with the exception of luxury cruise ships， orders for all major ship types fell sharply. The new orders in China were only 12.06 million DWT， which was the lowest since the outbreak of the international financial crisis.

B. High Tech Ship R&D Capacity of Backbone Ship Enterprises Need to be Improved Urgently.

At present， the world economic pattern is changing， the international ship market demand presents new characteristics， the market share of the three mainstream ships is declining， and the demand for LNG ships and passenger ships (including luxury cruise ships)is increasing. Statistics show that from January to June， the structure of new orders in the world presents a new pattern in terms of CGT. The proportion of bulk carriers， oil tankers， container ships， LNG carriers and passenger ships (including luxury cruise ships) was 23.2%， 17.9%，10.3%， 20.4% and 16.4% respectively.In addition to maintaining certain advantages in the market of bulk carriers and regional container ships， Chinese shipbuilding enterprises received fewer orders in the field of high technology and high value-added ships.

C. The High-End Brain Drain and Labor Shortage in Shipbuilding Enterprises are Becoming More and More Obvious.

In the first half of the year，backbone ship companies say that the industry's inaccessible employment and unaffordable labor cost has become the main corporate problem， and the highend personnel of ship enterprises drain to other industries and labor shortage are becoming more obvious. On the one hand，the adjustment cycle of the international ship market is too long， the industry benefits continue to be weak， the attraction to high-end talents is weakened，lacking professional personnel，especially senior management personnel， R&D designers and scientific and technology leaders.On the other hand， shipbuilding enterprises are mostly located in coastal areas along the river，with high labor intensity and high living costs in the region， fewer young people willing to engage in shipbuilding business， and the overall age structure of frontline workers tends to deteriorate.Due to the lack of systematic professional and technical training，the comprehensive quality of the workers engaged in shipbuilding business can hardly meet the employment needs of shipbuilding enterprises， and the shortage of labor force， especially the serious shortage of skilled workers through professional training， has become a bottleneck hindering the development of the shipbuilding industry.

IV. Market Predictions

In 2019， due to international trade frictions and geopolitical factors， global economic growth continued to be weak， shipowners were more cautious in ordering new ships. New demand for bulk carriers， oil tankers and large container ships remains depressed，but demand for luxury cruise ships，LNG ships and regional container ships is expected to remain active.It is estimated that in 2019， the shipbuilding completion in China will be about 36 million DWT，the number of new orders will be basically the same as that of last year， and the handheld order will be maintained at about 80 million DWT by the end of the year.

V. Policy Suggestions

A. The R&D and Manufacture Competitiveness of High-Value-Added Ships to be Improved Continuously.

At present， the demand for new international ships continues to be at a low level， and the new ship structure is gradually transferred to high-tech and high-valueadded ships. The new orders in China are still dominated by three mainstream ships， especially bulk carriers. There is still a certain gap in LNG ships and high-end marine equipment and other high-tech and high-value-added products with the main competitors. The backbone shipbuilding enterprises should continuously step up R&D of“double high” ship types， make intelligent manufacturing， do a good job of ship type technology reserve，closely connect with shipowners，strengthen market development，break the competitive bottleneck of “double high” ship types， and cultivate new competitive advantages in the market.

B. Overall Layout of LNG Transport Equipment Construction

With the steady growth of China's demand for clean energy， LNG industrial chains such as LNG carriers， LNG filling ships and LNG terminals have the opportunity to develop rapidly. It is suggested that the relevant national departments shall， on the one hand，coordinate the negotiation of natural gas source projects， accelerate the construction of China’s own natural gas fleet and ship equipment， and support capable shipping enterprises to carry out the construction and technical R&D of LNG ships in combination with the national energy strategy. On the other hand， intensify research and preparation of relevant specifications and standards for inland river vessels， speed up the construction of inland LNG filling stations， promote the upgrading of inland river LNG ships， and promote domestic market demand.

C. Marine Enterprises to Attach Great Importance to the Shortage of Labor Force

At present， the problem of labor employment has seriously affected the development of the industry， and the key enterprises should pay great attention.On the one hand， the enterprise should strengthen the management of the outsourcing team， cultivate a stable and efficient workforce by increasing the quantity of local workers， raising their salaries， improving the working environment， improving the training system of the workers' skills， and so on.On the other hand， the enterprise must continue to improve the production efficiency， in particular to improve the weak links of production and design，and to hedge the negative effects of the shortage of labor through the means of information and intelligence.