On the eve of the Dragon Boat Festival, the midday weather was stifling and irritating. On Mingde Road in Wujie Town, Tongzhou District, Nantong, a welder surnamed Wang leaned against the wall of a shipyard, his brow furrowed. He lit a cigarette and took a deep drag: "I have to find a new job after the holiday! The factory hasn't received any orders this year; the current work is all from last year."

Mingde Road is home to many shipyards, including Hailong Steel Structure and Jinde Steel Structure. Looking around, the reporter saw that some shipyards' open-air shipbuilding areas were vacant, and only a few workers were walking around inside the factory buildings. This is a microcosm of Nantong's current shipbuilding industry: Nantong, the "ship valley" that accounts for 1/6 of the country's shipbuilding output, is facing a period of hardship and choices.

Order Drought and Overcapacity

According to the latest data from the Jiangsu Shipbuilding Industry Association, the backlog of orders at shipyards in the province is continuously dwindling. At the end of April this year, Jiangsu's backlog of shipbuilding orders was 984 ships with a total deadweight tonnage of 51,207,000 tons, a year-on-year decrease of 28.2%. Nantong's backlog of orders was 226 ships with a total deadweight tonnage of 21,228,000 tons. In January last year, Nantong's backlog of orders was nearly 400 ships with a total tonnage exceeding 30 million deadweight tons.

Since February this year, the Baltic Dry Index (BDI), which reflects the international dry bulk freight rate, has also hit an all-time low of 647 points, and has since remained sluggish. The extremely low shipping market has also led to an "order drought" in the shipbuilding industry. Under the "order drought," news of the closure of small and medium-sized shipyards in Nantong has been continuously reported: just a few months ago, Nantong Huigang Shipbuilding closed down, and Qidong Qiya Shipbuilding declared bankruptcy.

"Not only Nantong, but the entire Chinese shipbuilding industry was overheated. South Korea and China are the world's first and second largest shipbuilding countries, and the capacity of these two countries alone exceeds global demand. It takes a period of time to consume excess capacity, and this predicament will last for three to four years." Yang Yichuan, deputy general manager of Nantong COSCO Kawasaki Ship Engineering Co., Ltd., frankly told the reporter that between 2002 and 2007, a large number of shipyards were built domestically, and many small and medium-sized shipyards could only build bulk carriers, but at that time, market demand was strong, masking the problem of overcapacity, which only became apparent after the financial crisis.

"2007 was the golden age for ship repair; the profit margin in the ship repair industry was outrageously high at that time. When everyone rushed into ship repair, the crisis naturally came. In the first quarter of this year, the national ship repair industry was in a state of loss. Now, our company's ship repair business is not profitable, orders are not active, prices are no longer attractive, and shipowners have stricter requirements for product quality." Wang Yongqing, director of the general manager's office of Nantong COSCO Shipbuilding Engineering Co., Ltd., said that although the company's ship repair business currently accounts for less than 10% of its total business, it can still feel a chill in the industry.

The Risks of Advance Payments for Orders

Shipyards that cannot receive orders are closing down, while those with orders also have their worries. Even if shipowners have a demand for orders, shipyards dare not take on too many, because both shipowners and shipyards are short of money.

"The advance payments from shipowners are getting smaller and smaller! Shipyards are forced to provide advance funding for shipbuilding." A person in charge of a small shipyard in Nantong revealed to the reporter that a small ship costs millions of dollars, larger ones tens of millions of dollars, and offshore engineering projects require hundreds of millions of dollars. In the past, after the shipyard and the shipowner signed a contract, the shipowner would generally pay 20% of the ship price as a deposit, and then pay the remaining amount when the ship was completed and delivered. However, now, some small shipyards, in order to offset some of their fixed costs, are taking orders even at a loss, with shipowners only paying 1%-2% of the deposit. Once the shipowner delays receiving the ship or even abandons it, the impact on the shipyard is huge.

Wang Yongqing told the reporter that after the European debt crisis, many shipowners in Western countries experienced significant financial difficulties. They hope that the builders will provide financing, and they will only pay after the project is completed; some shipowners may even delay payment for several months. The huge financial pressure is shifted to the shipyards, which have to seek bank loans. "Commercial bank interest rates are very high. Our company is still doing well, and we can obtain financing from state-owned policy banks, but it is difficult for some small and medium-sized shipyards. If the market for their products is not good, it is impossible to obtain bank loans." Wang Yongqing expressed sympathy for many small and medium-sized shipyards that are struggling to survive due to financial problems.

Transformation: Ship Parts or Offshore Engineering?

How can shipyards survive the turbulent waves? Some shipyard managers told reporters that the current ways for shipyards to escape the predicament are: firstly, to continue to provide supporting services for large shipyards with good profitability, and secondly, to switch to offshore engineering.

"Foreign supporting services are particularly good. For example, when steel plates are unloaded from the ship, the last piece is the first piece needed for the shipyard to start work, while domestic supporting manufacturers often just load them together, and we still have to find someone to sort them out." A person in charge of a large joint-venture shipyard in Nantong told the reporter that it is not easy for shipyards to transform into supporting services. In addition to requiring refined management, products must also pass classification society certification. It takes a long time to develop new products and obtain approval from the classification society. Considering the research and development costs, enterprises have to introduce foreign patents, but even when the market was good in previous years, shipbuilding powerhouses such as Japan and South Korea were unwilling to transfer advanced technologies. In addition, ships travel all over the world, and you never know when a component will fail, so after-sales service for all supporting products must be globalized. For many Chinese companies that only produce supporting products such as anchor chains, this is not something that can be achieved overnight.

"The demand for oil in emerging countries is strong, even if the oil price falls to $80 per barrel, it doesn't matter; as long as the oil price is above $4 per barrel, offshore oil extraction is profitable." In 2007, Nantong COSCO Shipbuilding began to transform into the construction of offshore drilling platforms. Wang Yongqing is very fortunate about the company's rapid transformation. Now, COSCO Shipbuilding has 11 platforms under construction in Qidong, and orders have been received until the year after next.

Although the market is profitable, Wang Yongqing said that for some small and medium-sized shipyards that rashly turn to the offshore engineering market, the explosion of the drilling platform in the Gulf of Mexico shows that the risks in this industry are extremely high.

"We cannot all rush into the offshore engineering market just because the shipbuilding industry is in crisis. But having said that, the severe market situation is also a good opportunity for the shipbuilding industry to be restructured and integrated." Wang Yongqing said.