Chinese shipyards have seen steel nearly double in cost over the past year, adding to their woes of few contracts and rock-bottom newbuilding prices. Depressed demand for newbuildings hit shipyards hard in 2016 with orders falling by 63% from the previous year to just 419 contracts worth $30.9bn, according to London broker Clarksons. Those yards are now also having to cope with the rise in the cost of steel plate, by far the most expensive item on the shipbuilding materials list.

According to a Chinese shipyard official, the price of Chinese steel plate has soared from CNY 2,000 ($287) per ton early last year to CNY 4,200 per ton. The sharp increase is being linked to the closure of private steel mill suppliers in the country. A major concern is whether yards will be able to turn a profit on recent orders with newbuilding prices already at low levels.

“Newbuildings that were contracted from the second half of 2015 and the whole of 2016 will be mostly affected as shipyards normally start procuring building materials for new ships 10 months to one year after signing the contract,” a yard official said. One industry player believes the construction of nine medium-range (MR) tankers ordered by Maersk Tankers at Samsung Heavy Industries Ningbo will cost the shipyard an extra CNY 10m ($1.4m) per ship. About 10,000 tons of steel plate is required for building each of the 50,000-dwt tankers. “We understand shipyards normally peg the price of steel plates at CNY 3,000 per ton when they quote newbuilding prices,” said the source.

Analyst Chong Hui Ru of broker Banchero Costa (Bancosta) says the hike in the price of steel plates is bad news for Chinese shipbuilding, which saw far fewer new orders in 2016. “Chinese shipyards had only 27 new orders for dry bulk carriers last year (as of our data extracted at the start of December 2016). This compares to 98 new orders for dry bulk carriers in China the previous year, and the high of 579 Chinese new orders seen in 2013,” said Chong.

“Newbuilding prices have generally also slid down between 8% and 15% year-on-year, adding further pressure to yards’ margins. With the dry bulk shipping industry still struggling to recover, and tankers possibly facing oversupply next year, newbuilding prices are likely to remain low into 2017. With fewer orders, low newbuilding prices, and higher material costs, Chinese shipbuilders have been facing added pressure to lower costs. Such conditions have set the framework for cost-cutting measures, one example of which would be the Cosco shipyards merger. Chinese shipyards don’t really have many options left for them, with a lot of factors working against their survival: few new orders, low newbuilding prices, shrinking of down payments from 30% to 10%, and the unwillingness of banks to provide refund guarantees for especially the small and medium-sized shipyards. It also doesn’t really help that China is on an overall drive to cut excess industrial capacity, so government support is expected to be limited, if there is any, to state-run yards. As it is, we have already seen news this year of Chinese shipyards going bankrupt, with estimates that half to three-quarters of the shipyards that China had in the peak years may have, or will be closed,” Chong said.

One shipbuilding observer says the hike in Chinese steel plate prices has erased the cost advantage of Chinese yards compared with Korean shipbuilders. But all that could change with other shipbuilding countries also facing potential increases in steel plate costs. “Generally Chinese shipbuilding prices are around 10% less than the Koreans because of the building material costs and labour costs,” said the same source. “However, there is talk that Korean steel mills may also jack up the price of shipbuilding steel plate.”