Shipbuilding – Down but Not Out

16 December 2009 (Last Updated December 16th, 2009 18:30)

Predictions may be bleak for European shipbuilders as Asia becomes a growing force but that does not mean gloom for all. Barnaby Black looks at current market trends and how the shift towards green could save the industry yet.

Shipbuilding – Down but Not Out

According to projections by UK-based Drewry Shipping Consultants, the newbuild requirements needed to satisfy increases in ship demand and the need to replace scrapped ships over the next four years amounts to 97 million compensated gross tonnage (cgt). The current orderbook, on the other hand, is significantly more than that, with 197 million cgt of new tonnage due to be delivered by the end of 2013.

Some of these vessels will not see the light of day, and Drewry says that about 14% of the orderbook – some 20 to 30 million cgt – could be at risk of cancellation. Slippage or the phasing in of tonnage may help but ship demand over the next five years will not be enough to absorb anything more than a small percentage of the tonnage currently on order. The implication of this is that more shipbuilders will find it increasingly difficult to survive and further yard closures are inevitable.

In August AP Moller-Maersk announced that the historic Odense Steel shipyard is to discontinue shipbuilding activities in 2012 after completing its contracted orderbook of five bulk carriers, seven Ro-Ro ships and three frigates.

Workers at STX Europe’s shipbuilding facilities at Saint Nazaire, France, and at Turku, Finland, enter the holiday season facing the prospect of redundancy, and, in Germany, the Schichaus Seebeck shipyard, Cassens Werft and the Lindenau shipyard have entered administration.

The German situation is particularly bleak. The German Shipbuilding and Ocean Industries Association (VSM), which represents the interests of German shipyards, marine equipment suppliers and ocean industries, said in May that the downturn in the entire maritime sector has been faster and more dramatic than expected. Orders declined to their lowest level since 2001. VSM chairman Werner Lüken said that statistically, German shipyards have work on a cgt basis for the next two to three years. But this order backlog is accounted for by only a few companies. Many shipbuilders will soon no longer be able to achieve full capacity utilisation.

Asia – a shipbuilder’s new port of call?

Since much of Europe’s shipbuilding business is geared towards specialist ship markets, such as cruise ships and offshore vessel segments, recovery could be relatively fast if and when financial resources become available again, but with significant lead time needed to launch projects, many yards in Europe urgently need new orders. If not, and with increased competition from South Korean shipbuilders looking to build more sophisticated tonnage, Europe’s shipbuilding domain could find itself in a precarious position.

China, however, has now surpassed Korea as the world’s number one shipbuilder, five years before its target year of 2015. The nation’s shipyards have an order backlog amounting to 54.96 million cgt, 1.34 million cgt more than Korea’s 53.62 million cgt, placing the Chinese ahead of South Korea for the first time with a global market share of 34.7%.

But Asian shipbuilders have by no means been immune to the global downturn and South Korean shipyards have been hit particularly hard.

"Larger shipyards will probably shift their focus to more high-end premium vessels in order to survive competition from Chinese shipbuilders."

The order intake in the first nine months of 2009 was 92.7%, down on the same period during 2008, with just 47 orders placed, leading government officials to offer a stimulus package intended to revive, if not restructure, its shipbuilding industry.

According to local reports, state subsidies totalling Krw500bn ($431.7m) will allow Korean shipbuilders to revitalise and diversify into other market segments, such as high-value tonnage including LNG vessels, cruise ships and container ships, offshore segment vessels, marine leisure craft, and ship repair and conversions.

It is predicted that Korea, however, will find it difficult to recover fast enough. Banks and other creditors have carried out risk assessments on a number of small and midsize shipbuilders and these are likely to be the ones that will diversify into related businesses.

Larger shipyards will probably shift their focus to more high-end premium vessels in order to survive competition from Chinese shipbuilders. Indeed, it is rumoured that Korea’s Samsung Heavy Industries is close to inking a $1.1bn cruise ship deal with US operator Utopia. The shipbuilder has already signed contracts to build up to ten LNG FPSOs for Royal Dutch Shell.

Green future

But such is the concern with the changing fortunes in world shipbuilding that delegates at the 18th meeting of JECKU, the roundtable of senior executives from the leading shipbuilding companies in Japan, Europe, China, Korea and the US that met at the end of October in Berlin, concluded that environmentally friendly and sustainable shipping could offer a ray of light in an otherwise gloomy market.

The participants outlined their expectations that the effect of the crisis will impact the global shipbuilding industry for several years. In order to minimise this damage, careful and disciplined adjustment of shipbuilding capacity based on market principles will be required. While low demand is likely to intensify competition, all attendees shared the view that a focus on sustainable operation should drive the activity of all shipyards.

Representatives at the meeting shared the view that with new generations of environment friendly ships, the industry could make significant contributions to the reduction of greenhouse gas emissions. The efforts of the IMO to push for higher requirements in this regard are generally welcome because a global industry such as shipbuilding must be able to rely on globally applicable rules that support environmentally friendly ships.

One market area that may deliver a fillip to hard pressed ship owners, particularly those in China and Korea, is the market for small coasters up to 20 000dwt for domestic markets.

There are a significant number of small bulkers and general cargo vessels trading around the Chinese coast that are more than 25 years old and therefore nearing the end of their operational usefulness. Fleet renewal and future proofing programmes in a number of segments, particularly the ferry business, could prove a boon to European shipbuilders.