China Dry Bulk Shipping
Waiting for the next government handout
● Shanghai Securities News reports that the plan to resolve overcapacity in the shipping sector has been submitted to the State Council and its official release is imminent.
● A new subsidy programme to encourage scrapping under the banner of an environmental initiative and tax relief is likely to form the key elements of the policies. Containerships are probably not covered by the programme, owing to young average vessel age.
● This would provide upside surprise to our scrapping estimates next year. Chinese flagged vessels older than 20 years represent 1.5% of global dry bulk fleet and their deletion would drive global dry bulk tonnage growth to below 3% in 2014E. The positive impact would be greater if convenience-flagged ships were also covered by the programme.
● The support policies are expected to focus on resolving the overcapacity that plagues the dry bulk and wet bulk sectors. Any development ought to benefit companies with bulk exposure, including China Shipping Development, Sinotrans Shipping and, to a lesser extent, China COSCO. Maintain OVERWIGHT.
New scrapping subsidies but scope and scale likely limited
The government's proposed new scrapping policies include; (1) the abolition of disposal gains tax on selling old vessels; (2) direct subsidies to ship owners for scrapping inefficient ships earlier than their planned economic life; and (3) new regulatory and monitoring requirements imposed on older vessels.
A cash subsidy for scrapping is the key component of the proposal and also the most controversial because it will give the public an impression that the government is backtracking on its commitment to market reform. Chinese ship owners are hoping that vessels registered outside China will also be included in the programme and that they will not be required to order new ships at state-owned shipyards as a condition of receiving the subsidies.
However, we don't think the plan will cover all type of ships. It is expected to target vessels older than 20 years old and only the capesize/panamax/VLCC segments, where the overcapacity problems have been the most pronounced. Since the tonnage-weighted China-flagged containership fleet age is only 10.8 years, we don't think there will be any meaningful new scrapping subsidy for the liner sector.
To avoid controversy, the subsidy is likely to be implemented as an "environmental initiative", with the clear objective of reducing carbon emissions.
New rules are being proposed to alleviate shipping companies' tax burdens:
● the value-added tax currently levied in Shanghai to be gradually extended to other regions.
● Salaries for seafarers working outside the country should no longer be subject to Chinese tax.
● With listed shipping companies registering most of their vessels outside China, the tax benefit will be limited to their domestic operations, including coastal shipping and shipping-related logistics.
Operational tie-up between shipping companies
New initiatives will be rolled out to facilitate the tie-up between shipping companies, in order to enhance their bargaining power. The government is expected to encourage the formation of more new vessels pools and we believe that the plan could help bulk shipping companies to better handle their excess capacity.
Positive impact on the global dry bulk market
It is not yet clear whether the scope of the scrapping policy will cover vessels registered outside China. However, Chinese-flagged vessels older than 20 years represent 1.5% of global tonnage. In the bull case, global dry bulk supply growth could fall below 3% if all of these vessels were to be scrapped by end-2014.
Although the magnitude and timing of the state support remains uncertain, we think the government's impending statements will be positive for the sector. We reiterate our preference for Chinese companies exposed to dry bulk shipping (including China Shipping Development and Sinotrans Shipping), although the removal of tonnage from such a global business ought to have a positive impact on other operators, such as Mitsui OSK Lines and Nippon Yusen of Japan.
Source/Extract/Excerpts/来源/转贴/摘录: Credit Suisse