SIW1111Shipbuilding is an extraordinary business. Over a century the epicentre has moved from the UK, which once built 60% of the world’s ships, to Europe, Japan, South Korea and now China. Incumbent yards don’t welcome newcomers who have to fight for market share, usually by offering rock bottom prices. Good for shipowners, but the battle often brings shipyard capacity problems in its wake.

Adjusting to the Cycles

Today’s newcomer, China, built market share much faster than its predecessors. In 2000 China only produced 1.3m CGT (a capacity measure, see graph) of new ships, but by 2010 production had surged to 19.4m CGT, exceeding Korea’s 16.0m CGT. To put this in perspective, Korea launched into shipbuilding in the early 1970s, but took 30 years to overtake Japan in 2003. It helped China that yards were quick to embrace new methods, but the real difference was the market. Korea’s launch ran through the 1980s shipbuilding depression, whereas China launched into a super-boom, with owners queuing up for contracts at fancy prices.

Back to Reality

That’s history and today’s big question is “How much of the 53m CGT peak production capacity does the industry need?”. Shipyards have already cut back from their 2010 peak output by 30% to 37m CGT. This involved reducing the active yards worldwide from around 1,200 to 700 and slowing throughput, so the capacity has probably fallen by about 20%.

It Takes Two to Tango

But the real “driver” of shipyard capacity going forward is the ship investment community. In the shortterm they seem very responsive to earnings. In 2010, when bulker earnings picked up, total orders were placed for 46.9m CGT, enough to fill peak capacity. Then as the market wound down in 2011-12 orders halved to 25m CGT. But when bulker earnings improved again in 2013, total orders doubled to 50m CGT. In 2010-13 orders averaged out at 40m CGT pa, 75% of the peak output.

Positive Signals, Negative Drag

Will today’s reduced capacity be needed going forwards? The usual methodology is to estimate trade growth, calculate the ships needed to carry it, and add demolition. Last year trade grew 350mt, creating demand for about 60m dwt of ships. Meanwhile demolition was 45m dwt, so that’s 105m dwt “demand”. Since 2010 orders have averaged 113m dwt pa, pretty close to the requirement.

Limbo Dancing

So, taking one year with another, ordering trends for new ships are not far out of line with demand. But this leaves the issue of clearing the existing surplus capacity, which could be as much as 25% of the fleet. Until this happens, the shipping markets will be caught in limbo and vulnerable to the next “wobble” in the world economy. Not a life-threatening scenario, but not much fun either, so it’s a challenge. Have a nice day.