China's shipyards brace for leaner times due to crude prices slide

A shipyard is silhouetted against the rising sun in Dalian, Liaoning province, Janaury 28, 2014. [Photo/Agencies]

For China's shipyards, the oil rig market that was supposed to be a blessing is in danger of becoming a curse.

As crude prices slide, oil producers are slashing new project spending. With a near 40 percent slice of a global market worth tens of billions of dollars, Chinese rig builders that offered juicy financing terms and discounts to leapfrog Asian rivals in recent years are now the most exposed to a slowdown.

Diversifying to pull out of a downturn in traditional shipbuilding, China's state and privately owned yards have lured orders away from regional peers, building scores of rigs for down payments of as little at 1 percent. Many haven't yet been chartered by oil explorers, industry watchers say.

Some in the industry fear that rig builders are now heading toward a slowdown, possibly with cancellations and price cuts, that could persist longer than the oil market's slump. Even if oil prices recover enough to stoke exploration, an inventory of ready-made rigs will be on hand, delaying new construction.

"Future cancellations will depend on the market going forward and unfortunately we are looking at a real risk for yards in this respect," said Joachim Skorge, regional head of investment banking in Asia for DNB Market.

Chinese yards are scheduled to supply 37 new 'jackup' rigs - used in shallow-water exploration - this year, according to Nomura research, none of which has contracted customers to date. The most widely used drilling platforms, a jackup rig typically carries a price tag of around $200 million.

"We're having a big headache because there are no orders," said an official at a large state-backed Chinese shipyard, speaking condition of anonymity. He cited a lack of rig order enquiries for the year 2016 and beyond.

Earlier this month, COSCO Corp, one of China's biggest shipyards, said it has decided to terminate building an offshore platform known as Octabuoy after failing to find buyers.