SIW1086The level of forward cover can often be a useful indicator as to the health of the shipbuilding industry. When times get tough, yards can find the race for the limited amount of cover available very difficult. In today’s tough market environment, just how limited is that?

Long Jump

The last decade has been a roller-coaster for shipyards. At the height of the ordering boom in Q3 2007, 43.8m CGT of vessel orders was placed in a single quarter. In response to the ramp up in ordering, yards expanded and new yards popped up. In China, there were 52 active shipyards in 2000 and 282 in 2008. The more established South Korean yards expanded through a mixture of subcontracting and more intensive production processes and added around 20% extra capacity this way. In 2008 the orderbook was running at more than five times 2007 output levels (over 60 months of forward ‘work’ cover).

Short Run

The financial crash brought an abrupt end to the euphoria. Q3 2008 saw 26% q-o-q decline in ordering and in 2009 only 30m CGT was placed. Although 2010 brought some relief, it was mainly in the dry sector, which kept Chinese yards focusing on bulkers. In 2010 Chinese builders took a 27% market share of orders and Korean yards just 19%.

However, with prices trending downwards, interest in the specialised sectors picked up. Korean yards attracted business and pushed their share up to 27% in 2011. By 2012 the Chinese and Korean shares realigned but forward cover in Q3 2012 fell to the lowest level since the early 1990s at just 23 months.

Back In The Blocks?

1H 2013 saw a slight uptick in ordering with 31m CGT placed. The spiral of declining orders and plunging prices hit many yards hard – already this year 62 yards have come to the end of their orderbook. Consequently capacity levels have reduced (there are 137 fewer active yards than in 2008) and forward cover has improved to around 25 months.

The pie chart gives an idea as to the state of the 40 largest yards. Two yards have less than 12 months of work, 2 more have less than 18 months whilst 15 yards have between 18-24 months. The yards with the shortest orderbooks are vulnerable and in need of work. However, the shift in product mix means other yards, who were able to focus on specialised tonnage, are faring better. In fact almost half of the largest yards have over 24 months work. This is a better position and these yards have a little more scope to wait for pricing levels to trend upwards.

Race Not Run

Nevertheless, global forward cover still remains way down on levels during the boom. But interestingly it’s not too far from the levels seen in the late 1990s and early 2000s. Undoubtedly it’s tough for builders today, but if capacity levels continue to retreat and ordering levels eventually improve then their race isn’t run just yet.