By: Our Correspondent

The current trade war focus may be on the US and China, most recently
over tires. But hanging over trade relations between China and its
immediate Asian neighbors Japan and Korea is what could be at least as
divisive issue: shipbuilding.

China has swamped the world with
shipbuilding capacity without an eye either on the global picture or on
profitability. Even without the global economic recession, the
shipbuilding industry was heading for an even deeper trough than the
early 1980s plunge. Then, the heat was felt mainly by shipowners who
had over-ordered as a result of easy financing when trade was growing
and Korea competing with Japan for new orders.

This time around
the owners – or most of them – are in deep trouble thanks to
over-ordering, particularly of container vessels and bulk carriers.
However the situation of the yards could be even more dire,
particularly for those mainland ones which are still adding capacity,
have limited order backlogs and lack the technology to build some of
the more sophisticated ships such as LNG carriers.

shipbuilding boom seems incongruous in the face of the global
macroeconomic picture. Lloyd's Marine Intelligence Unit reported in
August that nearly 10 percent of the world's merchant fleet is idle
because of the collapse in global trade. The Baltic Dry Index fell by
more than 90 percent in the second half of last year and, although it
has recovered slightly, it remains at about 25 percent of its peak.
Philippe Louis Dreyfus, the outgoing president of the European
Community Shipowners' Associations, has called for the industry to
scrap significant bottoms to shrink the surplus tonnage. The only
bright spot China's continuing appetite for Australian iron oil and

China has come from almost nowhere a decade ago to take
about 35 percent of ship orders on hand and a higher and growing
building capacity. Four years ago it was estimated that Chinese
capacity would reach 40 million deadweight tons a year by 2010. But
already capacity is put at 66 million dwt, double current production
levels, and could reach 80-90 million in 2010 if current projects are
completed – which seems likely as government stimulus packages push
finance for every conceivable project, viable or not.

It also
looks likely that the yards are going to carry on building even in the
face of order cancellations and slumping ship prices. The reason is
that money will continue to be available to keep yards busy and workers
in work. It helps of course that the giant umbrella of the China State
Shipbuilding Corp is a central state enterprise. Funding will also
likely continue to be available from provincial and even city
governments which have been behind part of the capacity surge.

has created a particular problem for the non-state Korean yards, headed
by Hyundai and Daewoo, which compete most directly with China.
Currently they have, according to Morgan Stanley research, 176 million
tons of orders on hand, or slightly more than China. But the question
of who is going to finance the estimated $90 billion said to be needed
to finance just the $165 billion of bulk carriers on order, let alone
container vessels which face equally daunting problems?

sure, China's fast expanding merchant fleet will absorb some of the
extra capacity and the slump will enable speeding up of replacement of
single-hull tankers and some older vessels with high operating costs.
But the willingness of the likes of Cosco – big parts of which are
listed on stock exchanges – to carry the shipbuilders' burden when
their own profits have been plunging is limited. Cosco's Singapore arm
has already cancelled several bulk carrier orders.

suggests that capacity shrinkage on a massive scale and refusal of
cheap credit to keep yards win business are necessary to bring
shipbuilding and shipping back into equilibrium. But China is unlikely
to take a lead and Korean taxpayers could well also have to take a hit
as the government is pressed to help the yards with cheap financing.

reality, notably in China, will likely ensure that they keep building
even as shipping companies walk away from orders they are neither
willing nor able to finance.

Whichever way one looks at it,
subsidies are going to make the ship price slump far longer than it
would have been if Chinese yards were subject to market forces. For
sure, China was always going to succeed in increasing its share of
global ship demand, mostly at the expense of Japan and Korea, as its
skills improved while its labor costs remained low. However, if ever
there was an example of China's over-reach and use of government money
to grab global market share, this is it.