Maritime recession

The shipping industry has yet to recover from being mauled by the 2008 global financial crisis, which triggered what the International Monetary Fund called the "Great Trade Collapse".

The Baltic Dry Index .BADI, the benchmark for the freight market and an indicator of global economic activity, plummeted more than 94 percent in 2008 from a record high of 11,793 points. This week, it was trading above 1,100.

During a maritime recession, shipbuilding is usually the first and hardest hit sector as global ship owners delay or cancel orders for new vessels to save capital reserves.

But in China, the world's biggest shipbuilder by volume, government intervention helped the industry defy the norm.

Debt-laden shipyards that otherwise should have gone bust were allowed to stay afloat thanks to easy credit, which stemmed from government efforts to bolster foreign exchange reserves to protect the economy from the crisis.

Lending to the overall shipping industry shot up more than 500 percent year-on-year to nearly $4 billion in 2008, according to loan market information service Thomson Reuters LPC.

The huge expansion in Chinese shipyards, which currently hold about half the world's new ship orders, helped create a glut of low-tech vessels that has kept freight rates low and prolonged the agony for ship owners across the globe.

As these foreign firm struggle, orders have declined and financing has become problematic, prompting Beijing to turn its back on what has now become an unprofitable business.

Credit has also dried up as the government tries to cool the economy, falling more than 87 percent from 2008 to around $501 million last year.

New orders to Chinese shipyards tumbled 52 percent last year to 36.22 million deadweight tonnes, the China Association of National Shipbuilding Industry says. This year, new orders are down about 40 percent year-on-year in January-February.

Survival of the fittest

Only the largest Chinese shipyards such as China Shipbuilding Industry Corp ( 601989.SS), China Rongsheng Heavy Industries ( 1101.HK) and Yangzijiang Shipbuilding, are expected to survive this round of consolidation.

In the government's five-year economic forecast, China's 10 largest shipbuilders are expected to hold at least 70 percent of the domestic market by the end of 2015, compared to less than 50 percent in 2010.

A short drive from the Qiligang Shipbuilding yard in Zhejiang, two unfinished oil tankers stand in the once bustling dry dock owned by struggling Dongfang Shipbuilding ( DFSB.L).

The shipyard, which had employed more than 600 workers just over a year ago, could become another scrap yard if the company fails to find a more profitable way to survive. China is one of the world's leading ship recycling nations.

"At the end of this year, you could see many shipyards turn into scrap yards," said Venkatesh Narayanaswamy, the former chairman of Dongfang Shipbuilding. "This would be the worst case scenario, because the profit margins are much lower."