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Corporate Information : Interview With Vice Chairman And President

(*extracted from Annual Report 2015)

1. What affected the performance in FY2015?

The continuing depressed state of crude oil prices, the slump in the shipbuilding market and the languid dry bulk shipping market have brought great pressures to the Company's core businesses.

Fragile economic conditions had severely weighed down oil prices and consequently, operations of many drillers, operators and offshore builders. Many yards in our industry faced the harsh realities of project rescheduling and contract cancellations. Our marine engineering segment had not been spared.

The Company's shipyards incurred higher costs for a few delayed projects as well as significant write-downs of certain inventory and provisions for impairments of trade receivables for contracts, which are deferred or may potentially be cancelled.

Our performance continues to suffer from the cut in deployment of equipment for offshore oil exploration and production, and the overhang of surplus tonnage of bulk carriers.

With capital expenditure in the global oil and gas industry being curtailed, it was inevitable that newbuild orders were limited.

2. With the market expected to remain depressed in 2016, what are the main downside risks for the year?

The International Monetary Fund (IMF) in its World Economic Outlook released on 19 January 2016 had aptly reported that "risks to the global outlook remain tilted to the downside and relate to ongoing adjustments in the global economy: a generalised slowdown in emerging market economies, China's rebalancing, lower commodity prices, and the gradual exit from extraordinarily accommodative monetary conditions in the United States. If these key challenges are not successfully managed, global growth could be derailed". Further, the World Bank had in January 2016 lowered forecasts for 37 out of 46 commodity prices, and said that "low prices for oil and commodities are likely to be with us for some time".

There is a multitude of downside risks facing the offshore marine, shipbuilding and shipping industries – the core markets where we operate.

According to industry estimates, the drastic drop in oil prices since 2014 had led to upstream capital expenditure of about US$540 billion (public listed oil companies) in 2015, which represents an approximate 25 per cent drop from 2014. Capital expenditure deferments, headcount paring and many drastic cost cutting measures have become increasingly ubiquitous among the oil majors. As oil companies struggle to stay afloat, we expect to see further budget cuts, project deferments and order cancellations across the offshore marine industry.

The shipping and shipbuilding segments have been hit hard as well. The Baltic Dry Index (BDI), a benchmark of the dry bulk shipping industry and an indication of the price of moving major raw materials by sea, has continued to record historical lows as the shipping industry grapple with weak commodity prices, excess capacity and lower charter rates. The BDI had at one point fallen below 300 in January 2016. The bleak outlook for the shipping sector has forced many ship owners to reduce capital expenditure, resulting in the softening demand of newbuilds.

On the capital markets space, financing costs have also risen markedly. Lenders have also been increasingly cautious in extending loans to shipyards that have already been badly hit. Moody's had in a January 2016 report said "weak growth and commodity price declines will interact with foreign currency volatility to raise credit risk across the region". Volatility in the financial markets, especially with many currencies getting weaker against the US dollar is another cause for concern.

3. What is the Company doing to cope in this difficult time?

At our shipyards, we are working relentlessly to optimise our organisational resources and production processes, and also augment our quality control, productivity, and R&D capabilities.

On the cost aspect, we will further improve our cost-control measures without compromising the quality of our projects and longer term goals. We will do this by monitoring the entire chain of operation to further increase productivity and efficiency. At the same time, we will further maximise savings from bulk purchase of materials and resources.

More importantly, every business segment will continue to focus on meeting scheduled milestones and on-time delivery, so as to make sure no delayed delivery is caused by internal factors. That said, if our clients approach us for any discussions on rescheduling, we are prepared to co-operate and work together with them to reach an amicable solution, without sacrificing the commercial interests of our company. We will focus on strengthening the ties with our existing clients to tide through this time of adversity.

On the risk management front, we will further strengthen our risk control efforts in all business aspects, from client due diligence to accepting new orders; production, purchasing of materials; to managing client payments and minimise operational risk.

Without any clear signs of recovery in sight, we continue to tread with great caution, be more determined to improve cost control, streamline production efficiency, augment risk management and win orders.

4. How is the existing market condition affecting your perception of the future?

As one of the bigger players in China, our six shipyards in Dalian, Guangdong, Nantong, Qidong, Shanghai and Zhoushan have a combined dry dock capacity of 990,000 DWT and floating dock capacity of 1,135,000 DWT. Our shipyards have the capacity and synergy to build, convert, repair and service various types of cargo vessels and a wide variety of offshore engineering requirements.

Over the years, we have been continually sharpening the skills and capability of our workforce and improving the effectiveness of our facilities to cater to the increasingly sophisticated needs and demands of our customers.

In 2015, we successfully secured for the first time a contract to build seven containerships of 3,600 TEU (20-foot equivalent). This shipbuilding order from Maersk Line, the world's largest container shipping group, is an important contract for us. It is a significant follow-up to the previous year's success in securing a US$470 million contract from Maersk Supply Service AS, another member of the Moller-Maersk Group, to construct four subsea supply vessels scheduled for delivery in fourth quarter 2016.

In addition to the Maersk deal, we received newbuild orders for two cargo transfer vessels, one research vessel, one module carrier, one tanker assist / emergency response / rescue / field support vessel, two oil tankers, one shuttle tanker, one product oil tanker and one FPSO conversion.

While the broad environment is challenging in the near term, we believe there will still be niche demand in the market for offshore construction vessels, floating production units and underwater construction units. We need to focus our marketing efforts and channel our resources to capture such opportunities and further diversify our portfolio for the future.

Pressing forward, we must keep our fingers firmly on the pulse of the market, remain agile and leverage on our strengths and competitive advantages to tide through this difficult time.