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Shipbuilders face up to a bleak future

Friday, 03 February 2012 | 00:00
Spare a thought for the shipyards. Amid all the hand-wringing and soul-searching by ship owners bemoaning their terrible lot, there have been fewer analyses of the prospects for shipyards, or indeed their performance in recent years.Such a task has been completed by Paul Millbank of Steel Business Briefing in an Insight Paper which makes for interesting, if fairly depressing, reading. SBB examines the issue from the point of view of impact on the steel industry and given its findings, there is limited cheer for either buyers or suppliers.
Vessel deliveries are thought to have achieved an all-time peak of about 160m DWT in 2011, though if deliveries are viewed on a compensated gross tonnes basis, Millbank reckons the market peaked in 2010. Either way, going forward both measures look set to show a marked decline in the coming years.
Data on delivered tonnage shows that China has enjoyed top producer status for the last two years, followed by South Korea and Japan. In 2011 these three accounted for close to 95% of world shipyard cgt deliveries, according to data from Clarkson Research Services.
China overtook long-time leader South Korea in deliveries in 2010, having passed Japan the previous year but it is worth recalling that less than 10 years ago China’s output was below that of Europe.
Clarksons reports that Chinese shipbuilders delivered over 1,000 vessels for the second year in succession – the largest ever by one nation in a single year. 2011 was a top year for Korea’s shipbuilders – the first time they delivered more than 50m DWT in a year.
Elsewhere, the picture is far less rosy, with Europe’s modest output declining for the third year in a row and the even smaller US shipbuilding sector is as Millbank puts it “bumping along the bottom” – its 2011 deliveries a fraction of Europe’s.
The main issue for China is that, despite its dominance in terms of absolute share, the relative value of its orders reflects its position as the commodity shipbuilder rather than the made to measure provider of choice.
Two thirds of the tonnage delivered by China in 2011 was bulk carriers but output in Korea was more evenly split between the three major ship types. South Korea also remains the leader in building specialised and complex vessels such as LNG carriers, seismic vessels and drillships, factors which tilt the balance heavily in its favour in terms of order value.
New orders in 2011 at Korean shipbuilders were a combined 13.55m cgt whereas Chinese shipbuilders received 9.2 million cgt. Order values – Korea’s at USD 48.16 billion and China’s at USD 19.2 billion demonstrate the quality difference.
China says it is working to close this quality gap and indeed the country has already successfully built a number of LNG carriers as well as FPSOs and drillships. The Ministry of Industry and Information Technology has previously stated that the country will be building advanced ships by 2015.
Although delivered vessel tonnage by deadweight is thought to have hit an all-time high globally in 2011, the number of vessels delivered fell by more than 20%. Tanker deliveries were 33% lower while the number of specialised vessels dropped by 35%, according to Clarksons. By contrast, 2011 was the first year in which more than 1,000 dry bulk carriers were delivered, with total tonnage, around 95 million DWT, up almost 20% on 2010.
The volume of orders placed has been falling since 2007 and at around 115 million cgt at the end of 2011, global orderbooks were about 55% of their size in 2008. Meanwhile, the number of ships scrapped has followed a sharp upward trend, from 6 million DWT in 2007 to more than 40 million DWT last year. Even so, the level of new deliveries since then means the overall fleet size has been steadily increasing to reach over 85,000 vessels last year.
Taken together and overlaid with the general economic outlook, Millbank concludes these trends indicate that shipyard orderbooks will not regain their former health for some time. Total vessel orders placed around the world during 2011 were down by about 50% year-on-year, with bulker orders dropping by 70%.
Measured by cgt, new orders in 2011 were about 70% of 2010, a fall-off in orders which has left the shipbuilding industry facing the prospect of significant overcapacity. With the large number of deliveries in 2010 and 2011 and those planned for 2012, global capacity utilisation remains high – as much as 75% in 2012 but could be set to fall as low as 40% in 2013.
The combination of Europe’s sovereign debt crisis, the US deficit and the worldwide economic slowdown means that the outlook for the shipbuilding industry is very poor, with some pessimists predicting the current downturn to continue 2016. The shipping industry is already struggling to secure funding from European financial institutions and the paucity of orders will increase competition amongst shipyards after the expansion of capacity pre-2008. Struggling shipbuilders could be weeded out within two years, knocking on to suppliers and service providers.
Cutbacks in capacity are already putting smaller shipyards out of business, according to some analysts. South Korea, with its broad portfolio of high value ship types is probably best able to weather the downturn and there are opportunities in constructing added -value ships with greater energy efficiency or more technically complex designs as well as offshore vessels and rigs for the more specialised yards.
Millbank concludes that though opportunities could emerge – as noted last week, shipping industry people are naturally optimistic and this seems true of steel folk too – the general trend is certain to be of orderbooks running down and not being replenished quickly.
Source: BIMCO
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