China’s Two Biggest Shipyards Set To Merge, Create World’s Biggest Builder

China’s two biggest shipyards, which serve the People’s Liberation Army Navy among other clients, are set to merge their resources. This move is in response to government instructions to streamline operations, enhance management, and accelerate industry development.

China CSSC Holdings announced plans to issue yuan-denominated shares to acquire China Shipbuilding Industry Company (CSIC). This information was disclosed in a Shanghai Stock Exchange filing on Tuesday, though the terms of the merger were not revealed. Prior to the announcement, both stocks had declined before trading was suspended.

Both shipyards are subsidiaries of China State Shipbuilding Corp, the world’s largest shipbuilding conglomerate, which commands one-third of the global market based on shipbuilding orders.

The forthcoming merger will result in a shipyard with combined annual sales of 122 billion yuan (US$17.1 billion/HK$133.1 billion), nearly twice the size of South Korea’s Hyundai Heavy Industries. The merged entity will be capable of constructing a range of vessels, including warships like aircraft carriers and commercial ships such as container carriers, very large crude carriers, and even passenger liners.

China’s growing share of the global shipbuilding market

Analysts state that the consolidation would optimize the business structure and enhance the ability to secure orders for more advanced vessels. He also noted that China’s growing share of the global shipbuilding market is likely to benefit the new entity’s earnings.

This merger will complete the restructuring of China State Shipbuilding Corp’s key manufacturing assets, aiming to drive new growth in vessel construction and maintenance as well as marine engineering. China, currently the world’s largest builder of merchant ships, has seen this growth fueled by a surge in global trade since joining the World Trade Organization in 2001.

The Beijing-based conglomerate had previously merged with China Shipbuilding Industry Corp in 2019 as part of China’s effort to consolidate the two state-controlled shipbuilders. Prior to this merger, they operated separately, with the former handling the eastern and southern regions, and the latter focusing on the northern and western regions.

In recent years, they have constructed hundreds of military vessels as the Chinese navy rapidly modernizes. These vessels included aircraft carriers, Type 055 destroyers, Type 075 amphibious assault ships, and Type 094A nuclear submarines.

On Tuesday, China CSSC Holdings saw a 9 percent drop to 34.9 yuan before the trading halt, resulting in a market capitalization of 156 billion yuan. Meanwhile, CSIC’s value fell by 6.4 percent to 4.98 yuan, bringing its market capitalization to 113.5 billion yuan.

If CSSC were to acquire 100 percent of CSIC through a stock-based purchase, it would need to issue 330 million new shares, increasing its capital base by 42 percent based on current market prices.

Consolidating state-owned enterprises

China’s effort to merge its two leading shipbuilding firms aligns with its broader goal of consolidating state-owned enterprises across various sectors to create more robust entities and lessen competition among local businesses. This initiative mirrors previous consolidations such as the merger between China COSCO Shipping Corporation and China Shipping Group in 2016, and the integration of China Merchants Group and Sinotrans CSC the following year.

The merger, referred to as “major assets restructuring,” is intended to accelerate the high-quality development of the ship assembly business, standardize competition in the industry, and enhance the operational quality of listed companies, according to CSSC’s statement in a Shanghai Exchange filing. It was also mentioned that this merger would not alter the ultimate control of either company.

Share trading for both entities has been suspended since Tuesday, with the halt expected to last up to 10 days.

Rea More: Zelenskyy Says Russian Missile Strike On Ukraine Military College Kills 41, Scores Wounded

Chinese shipyards under scrutiny

Global shipowners are racing to increase scrutiny of Chinese shipyards as the soaring demand for liquefied natural gas (LNG) carriers compels them to turn to inexperienced manufacturers in the world’s second-largest economy.

Shipping groups worldwide are seeking to tighten control over these shipyards to ensure they adhere to global standards for LNG vessel construction.

The groups are focusing on conducting more thorough on-site inspections and are demanding involvement in the regulatory process to address their concerns about Chinese manufacturers’ capability to build these complex vessels properly.

This trend underscores shipowners’ growing reliance on Chinese shipyards, despite their limited experience with LNG vessels. The surge in demand for super-chilled fuel has left more established South Korean shipyards unable to meet the need for new vessels, prompting the industry to seek alternatives.

The increased demand persists despite the potential for Washington to impose tariffs on China’s shipbuilders, who already dominate the production of container vessels and oil tankers.

Read Also: Russia-Ukraine War: Why is Russia Changing It’s Nuclear Doctrine Amid War?