Thursday, November 13, 2008
Shipbuilding cancellations don't translate in a decrease of the orderbook says Worldyards
Thursday, 13 November 2008
With the dry bulk shipping industry in dire straits and everybody hoping for a market rebound as soon as possible, many eyes are turning towards shipbuilding activity, or rather shipbuilding inactivity, thus ship cancellations. The equation is simple: less tonnage on the market, rates increase. This of course, provided that cargoes will start flowing back into the market. Some analysts and researchers have estimated that ship cancellations are now at about 200 vessels, which is equal to a little more than 2 percent of the global orderbook. With credit availability deteriorating and some yards facing liquidity problems, not to mention the poor state of the freight market, analysts suggest that this percentage could jump to anywhere between 30 and 50%.
But could this scenario actually materialize, or is it pure fiction and fuels further uncertainty in the market? Worldyards, a research company specializing in shipbuilding released a report early in the week, in an attempt to set things straight. It said that “it is completely wishful thinking to expect that cancelled orders are equal to cancelled capacity”.
That is because one cannot cancel an effective contract, unless very specific sets of conditions are met. “Only after a contract is effective, actions are taken, consequences are created which affects the supply and demand of ships. Yards will lodge deposit for key equipments (established yards do not necessarily order main engines on back-to-back basis with orders for ships because they intend to build a long series of standard vessels; but most of the greenfield yards will only pay their suppliers only after they receive the first instalment; all yards will order equipment after firm contract if the equipment in question is highly specialised, or for one-off projects, such as 300mt heavy-lift cranes). Owners will arrange financing (only possible by assigning the R/Gs) and fix charters. In other words, what distinguishes signed contracts from effective contracts is whether money has changed hands” says Worldyards.
It moves on further by stating that instead of asking what is the cancellation rate to the orderbook (of a given shipbuilder or the whole), the correct questions to ask are:
i) how many orders will not become effective (any dated contracts for which no R/Gs have been issued are highly unlike to become effective in today's market);
ii) how many orders will be “abandoned” by the buyer who has paid initial instalments (orders with tail-heavy payment terms are at higher risk);
iii) how many “cancelled” or “abandoned” orders will be completed and resold to third party buyers (in the last shipping crises almost all ships contracted were eventually built and delivered, which is why one shipowner suggested to us that owners/banks should get together to pay the yards for not completing the “cancelled” and “abandoned” vessels).
Whoever has answers to the above questions will clearly have a heads-up in trying to foresee the future prospects of the market.
As adapted from Hellenic News
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