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Ship owners newbuilding ordering appetite unabated; reliability and quality their main objectives

With the current newbuildings orderbook at huge levels, ship owners could very well use the expertise of consulting and services companies, which know their way around ship yards and can provide valuable assistance in all stages of a newbuilding ordering

and taking delivery process. From negotiating with yards, to determining ship specifications to project management, companies like P&P Marine Consultants, which has built more than 50 vessels for various shipowners, often make the difference between failure and success.
In an interview with Hellenic Shipping News, Mr. Harilaos Petrakakos, Senior Naval Architect and Shipbuilding project leader with P&P, talks about the company’s services and projects, about ship owners’ mentality prior and after the crisis and offers a valuable insight in the shipbuilding business. Mr. Petrakakos has over 30 years of shipping experience. Since 1995 Mr. Petrakakos has been a partner in P&P Marine Consultants Inc and currently a Resident Consultant of P&P Marine Consultants in China. He was and is the Project Manager of various new building projects of diverse vessels from Chemical tankers and Floating Docks to Capesize Bulk carriers, VLCC tankers and LNG carriers.

First of all, could you let us know about P&P Marine’s core of activities and services offered?

P&P Marine Consultants Inc. was established in 1977 in New York in order to cover the need of qualitative services in the marine industry. The core activities of the company are New building Management & Supervision, Repair Management and Supervision, Claims Handling and Advanced Design Consultancy. Currently the company is the New Building Project Manager for Alpha Tankers & Freighters and AVIN International SA amongst others. Since our establishment we have built more than 50 vessels of diverse type and size and handled over than 600 claim cases and repairs with more than 100.000.000$ in adjusted claims. In addition our experienced team of Naval Architects offers services of design optimization (propeller optimization, design modifications, hydro analysis etc.) in order to provide our clients with the most efficient solutions for their vessels. The company has presence in Piraeus and Ningbo, China and also operates representative offices in Tuzla, Turkey, Durban, South Africa and New York, USA and can provide its extensive know how in any place in the world.
It must be mentioned that our company was a keynote speaker on “œNew Building Contract & Negotiations” in the 2nd Annual Shipping Finance China Summit, which was held in Shanghai in August 2011, and we are planning to present our tailored workshops on New Building Contract Negotiations and on Quality in Ship Building in future venues as well.

Since the crisis of late 2008 until today, the face of global shipping is safe to say has changed radically. Based on your experience how have ship owners reacted to the glut of the global orderbook?

One should go back to the onset of the 2008 crisis and examine what were the orders that followed. The owners brought the new orders to zero. That did not last long. As the market started improving so did the new orders.
Unfortunately I do not believe that the shipping world, and ship-owners mentality has changed as much as it needs to since the crisis. The old crisis is gone and a new one is looming.
So we now see that two major changes have taken place. The first one is how owners now look for reliability and quality (some owners always did look for quality) and the second one the new way of funding for their projects up non traditional lanes, an area where we are active in and assist our clients given our exposure in China.
Owners are unfortunately still overly optimistic, regardless of the reality of the influx of newbuildings in all large ship sizes. Owners and brokers still remember the good times a bit too vividly, which creates an illusion.
Traditionally the “œgood-reliable ““ shipping houses of old”, place orders to renew their fleet which consists mainly or solely of own built ships, irrespective of market conditions. But many smaller owners that somehow now had or have access to capital via private placement or through the capital markets are eager to place orders.
Brokers and analysts continue to show high growth rates for BRIC countries, and show 40-50% cancellations and delays to newbuild deliveries, pushing owners to believe the turning point is “œjust around the corner”. Parts of the industry is still influenced too heavily by day-to-day emotional changes, and not actually by logic and farsighted planning.

Which are you main clients?

One must say that our main clients are the shipowners of good reputation who care sincerely for high quality ships to be delivered from the Chinese or indeed the Korean shipyards. We have also insurance companies as our clients including P&I clubs of repute. As you have seen our scope of services is quite diverse and we pride ourselves to offer and deliver top class services in all the sectors we are involved.

Newbuilding ordering picked up pace lately, not as hot as 2010, as a result of lower pricing and aggressive marketing strategies by yards looking to fill up berths. Would you say that this trend is now coming to an end?

We do not believe the ordering activity will subside anytime soon, and is a strategy, which primarily China is implementing. China with the abundant labour force, which acquires skillsΒ  primarily through the shipbuilding industry, has to keep the yards working. This has been evident by the placing of the VLCC orders by local ““ Chinese that is ““ owners. Apart from these orders in China the majority of orders is in the bulk carriers and containers sector. Korea has thus far successfully evolved into the high value projects. This is why we see the LNG orders heading to Korea rather then China. Japan is following but with labour getting older it seems to follow the route of the likes of the Northern European brethren, that is specialized ships and innovative designs.
We believe China will ramp up its strategy of assisting out its larger stated owned yards and state owned ship owners, to keep social unrest at bay and continue to strengthen its position of gaining control of their own freight needs.
We feel that newbuilding prices still have room to drop especially from the Chinese private shipyards. In the Government owned shipyards the new pricing will not necessarily be profitable. The key to go that way, is a few years ahead of us of aggressive pricing and limited losses while keeping everyone employed, is better for many yards and for their governments than seeing unemployment rise.
Moreover, many owners are cash rich or can find equity investor partners who are willing to see the long term savings. Newbuildings, although tie up cash reserves in a critical time like the present market, do offer great returns down the line given where secondhand prices are today.

The large orderbook in most segments of the shipping industry has caused many concerns and forced some owners to cancel orders. According to your experience how is this process conducted?

Firstly, we would like to point out that many of these cancellations are not cancellations in the first place. Some of what is reported cancelled is actually projects that never in fact materialized in the first place, or were options not exercised, and others were simply converted to different types or sizes of ships now showing up as new orders. Most cancellations have been in the smaller sizes, where both owners and yards are typically smaller and more likely to lose their funding and have to cancel. Some were only ships on speculation by the smaller shipyard owners who had to cancel the construction following the crisis of 2008 because of lack of buyers.
The process is governed by the shipbuilding contracts and can be summed up in very few words. The buyers see that the value of their order has at times been halved at post crisis valuations. The deposit ““ normally of 20% – represents a smaller loss rather then if the vessel was to be constructed.
The buyers approach through their broker or through companies such as ours ““ knowledgeable of the shipbuilding market ““ to negotiate the old contract.
The two parties then would typically lower the price in the absence of any other buyer.

After an order is cancelled, which is the usual approach from a shipyard?

The order cancellation is dictated by the shipbuilding contract.
If the owner wishes to cancel the contract, he will have to face the consequences stipulated there.
The shipyard may choose to continue building and at the end to place the vessel for sale and the proceeds to be applied towards the contract price. If buyers have given a corporate or bank guarantee for all the installments, the shipyard will try to call on this guarantees.
If the owners and the shipyard have a long term relationship, the approach from the shipyard would be to delay the construction in agreement with the buyers until a better market condition arrives. This is what we often see.
In the Chinese market, the government issued a stimulus program with which many government owned shipping companies took over where the foreign owners left , it may be an option that the shipyard and owners agree to change the type of vessel, which is evident in the post 2008 era.

How do you expect newbuilding ordering activity to shape up during 2012?

As mentioned already, we expect it to ramp up in China despite the fears for continuing global economic downturn and increasing strength of FEast currencies.
There is still a lot of room in the smaller bulker sizes for new orders, something many Chinese yards are starting to look at despite the lower margins. This is where we see China moving into more heavily next year. This is justified as with the crash in 2008, most infrastructure projects that were in the pipeline have been put on ice or cancelled, thus preventing many ports from being able to handle larger sizes, maintaining the global efficiency and need for the smaller sizes far longer into the future. Moreover, as with every economic downturn, new entrants always rise up to take advantage of opportunities, most of which are smaller scale and thus not able to support the larger size ships.
LNG and mega Containers will continue to dominate the Korean market as investors will try to enter. LNG is creating a lot of hype in the finance industry at the moment generating increasing interest, whereas on the Container side, many owners will play follow the leader and order mega containers just so they are not left behind by competition on economies of scale, despite the fundamentals pointing otherwise.

Is currency exchange rate a major factor when an owner is considering placing an order to a shipyard in Asia?

I will not say so. The orders are placed in USDollars ““ mainly ““ and the shipyards and their banks take up the currency risk.

So far we’ve seen many Hellenic ship owners preferring to return to shipyards in order to acquire modern vessels, instead of opting for second hand vessels. In your opinion why do owners adopt this approach?

As long as commodity prices remain high due to demand, and in turn keeping scrap prices high, and owners not willing to execute fire sales, the secondhand prices will remain high. The new buildings will on the other side, with aggressive shipbuilders lowering prices, attract owners, and keep their laborers working. You see, the yards have been spoiled to a certain degree and need to be kept fed.
Owners who were frugal and didn’t overextend themselves in the boom period, who have sufficient cash reserves, are in a position to have greater foresight and examine the benefits of the new buildings vs. secondhand, in this low market as opposed to the expected higher market down the road. Most traditional Hellenic owners have indeed followed this model, having been conservative and having exited the market timely.

With rules and regulations regarding shipping activity and transportation becoming increasingly complex, do you believe that maritime services companies can only grow?

We must stress that unlike the older times, the Hellenic Shipping offices are currently manned with educated and well-trained personnel. Our company and similar ones, are in need in special markets such as China and Korea in the new building sectors but also in the secondary stages of the ships lives that of the special surveys. As consultants we keep our staff well trained and accustomed in the new rules in order to be in a position to assist our clients worldwide.

Nikos Roussanoglou, Hellenic Shipping News Worldwide

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