Past Contracts: Where Are They Now?
Monday, 06 February 2012 | 00:00
2011 was a poor year in terms of contracting, as the number of vessels ordered fell by 47.9% y-o-y and only just exceeded the number contracted at the height of the recession in 2009. Weak sentiment in recent months has led to continued low levels of contracting, to the detriment of yards which need to fill their orderbooks.During the boom period in the middle of the last decade, extra demand for new ships led to most capacity at existing shipyards being used up. This led to a growth in the number of new yards. From 2005 to 2007, a greater proportion of contracts were placed at yards which had received their first contract within the previous three years (these will be termed here as newer yards), as shown by the white bars on the Graph of the Month. The combination of these yards getting older, and fewer new yards being built, due to a lack of demand for more shipbuilding capacity, explains why the proportion of contracting at newer yards has fallen since 2008.
High Prices Benefit Newer Yards
As the graph shows, newer yards won 29% of all contracts (in CGT) in 2007 and 25% of contracts in 2008. They were beneficiaries of high newbuilding prices. The value of the newbuilding price index stood at 184 points in 2007, compared to around 140 points from 2009 onwards.
If Vessels Are Built
In order for the yards to benefit fully from higher prices, these vessels need to have been built. The onset of the global economic downturn and its impact on the shipping markets gave owners an incentive to try to extricate themselves from contracts signed for ships during the boom period, when benevolent markets were expected to continue indefinitely. In this context, delays in delivery, for instance, which might be expected to affect newer yards to a greater extent, could have provided grounds for cancellations.
Certainly, cancellations of vessels at newer yards were much higher, proportionately, than those at older yards. 24.9% of the tonnage (in CGT) ordered at newer yards in 2007 was cancelled compared to 11.3% at the older yards. A similar pattern can also be seen for vessels ordered in 2008, as 26.6% of tonnage was cancelled at the newer yards compared to 18.0% at the older yards. However, the level of cancellations of vessels ordered in 2009, 2010 and 2011 was much lower (below 5%) at both types of yard.
It may be that fewer vessels contracted in 2009-11 have been cancelled because those contracts placed are more likely to have been ordered with more secure finance, whilst owners will also have been aware of the current economic difficulties when ordering. Moreover, now that newer yards are becoming more used to delivering ships, the potential to use their teething problems as a way out of contracts may be reduced.
However, despite this trend, cancellation may remain an issue. Current freight market weakness might give owners the incentive to consider cancellation, even if better performing yards do not give them an easy get-out clause. Given the current reduction in new contracting and the scale of cancellation in the past, this would be an even more unwelcome prospect for shipyards of all ages.