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Monday, July 13, 2009

BIMCO: Shipbuilders face up to a brave new world

Monday, 13 July 2009

The shipbuilding supercycle of the past four years is rapidly drawing to a close at a time when yards are not yet halfway through an unprecedented drought in newbuilding orders  News that 9% of the world fleet of ships engaged in international trade, or 1,400 vessels, are currently idle is sending another shiver down the spines of the major shipbuilders. This laid-up fleet comprises primarily container ships, bulk carriers, tankers, refrigerated cargo vessels and car carriers. Shipbuilders look at the inevitable reactivation of this pool of resting vessels combined with the entry into service of their present record newbuilding orderbooks and know they are in for a long, lean patch once their existing workloads are complete.
Following the credit crunch and the onset of the global economic recession in September 2008, very few new ships have been ordered anywhere in the world in the last 10 months. And even though orders for 357 ships, including 281 bulk carriers, have been cancelled since last Autumn, the size of the shipbuilding orderbook is still so large that overtonnaging in many sectors of the fleet is likely to last at least until 2013. That means that the world’s leading shipbuilders, which will complete the majority of ships they are contracted to build by early 2011, face an unprecedented lull in activity early in the next decade.
The tanker example
The tanker sector provides a good example of why overtonnaging will be an inescapable fact of life for the next four years and why shipbuilders need to prepare for a reversal in their recent fortunes. Tanker shipping is one segment of shipping where the removal of a certain percentage of existing cargo-carrying capacity is actually mandated.
Some 59 million tonnes deadweight of single-hull tankers over 10,000 DWT are required to be removed from service over the next few years under international rules. However, the current tanker orderbook, buoyed by an expected continued rise in demand for oil, stands at 146 million DWT; these new tankers will be delivered through 2011. Thus, the tanker fleet is poised for a net expansion of almost 90 million DWT at a time when the demand for oil, contrary to earlier forecasts, is currently in decline.  In the optimum case scenario - a rebound in the demand for oil to a level of 4% per annum commencing in 2010 - the surplus of tanker tonnage would not be whittled down to zero until 2014. However, most industry watchers do not believe that oil consumption growth will ever recover to a 4% rate and many now also question the ability of oil producers to increase their output by such a level.
Easing back on the throttle
The slowdown in global economic and industrial activity has filtered through to shipbuilders. In the new post-September 2008 world it suits shipowners and shipyards to step back from the previous frenetic pace of ship construction and to defer delivery dates in a number of cases. Some 85% of newbuilding tonnage is completed at shipyards in Korea, Japan and China, while Korea is home to seven of the world’s top 10 shipyards. Most Asian shipbuilders, whether in Korea or elsewhere, are open to negotiations on rescheduled commissioning ceremonies.
As part of its own response Hyundai Heavy Industries, the world’s largest shipbuilder, is introducing a 16-day paid Summer vacation for all its employees this year, the longest such break in the yard’s 30-year history. Other Korean shipbuilders are similarly extending their traditional Summer closedowns this year, despite objections from their suppliers and sub-contractors about disruptions to their own businesses.
China’s recent success in gaining newbuilding orders is rapidly becoming a distant memory. The country's yards received orders for 1.18 million DWT of new ships in the first five months of 2009, a decrease of 96% compared to the same period last year.
Offshore structures
As part of efforts to minimise the impact of the dramatically reduced number of new ship orders, major shipbuilders are looking to the offshore sector to bring some respite. Interest in offshore vessels and structures stems from the declining output from onshore oil and gas fields, and the need to develop offshore reserves to maintain production levels. The yards are bidding on contracts to build drill ships, semi-submersibles, floating production storage and offloading (FPSO) vessels and various offshore platforms.
The major Korean yards, for example, having achieved impressive performance records in the construction of liquefied natural gas (LNG) carriers, are now quoting for a number of proposed LNG FPSOs. Samsung has made a breakthrough in this respect, having secured orders for four LNG FPSOs, the world’s first orders for such vessels. The price of the largest LNG FPSOs proposed so far can be over 10 times the cost of a conventional LNG carrier.
When it comes to orders for new offshore vessels and structures, Korean shipbuilders believe that their advantages in terms of technological expertise, yard facilities and human resources put them ahead of their rivals in other countries. Numerous project-specific alliances are being established between shipyards and the engineering companies able to provide the sophisticated topside processing units required for the offshore vessels.
Slim pickings to persist
As numerous smaller shipyards in Europe file for bankruptcy or inch towards insolvency, the simple fact is that orders for new ships will not resume until the global economy recovers and the financial market stabilises. Most shipyard managers believe that such a rebound in their fortunes will not occur until 2011. Even then, the level of contracting will be tempered by the aforementioned need for the world shipping fleet to assimilate an existing surplus of tonnage and a large orderbook.
While deferred deliveries can work to the mutual benefit of shipowners and shipbuilders, the cancellation of 357 newbuilding orders since late last year shows that many owners are unable to secure the necessary financing for the ships they have contracted. To mitigate the risks of ship cancellations and possible cut-throat price reductions, shipyards are seeking some form of coordinated government financial support for newbuildings that does not compromise global competition norms.
The slim pickings that will persist for shipbuilders for at least the next 18 months in terms of new orders will, of course, also apply to engine manufacturers and the providers of ship equipment. All participants in ship construction are having to confront the fact that, while their recently expanded facilities and workforces are currently extremely busy with vessels contracted several years previously, orders for new ships are down by almost 95% compared to 12 months ago.
Brave new world
World shipbuilding is poised for a sea change in the years ahead and, while doubts about the future abound, yards can be confident of two certainties. First, the supercycle in ship construction that has characterised the past four years will not be repeated to anything like the same magnitude. Second, the survivors amongst the world’s yards will be those best able to construct the new generation of efficient, environment-friendly and innovative vessels rapidly becoming de rigueur.

Source: Bimco