Archives for posts with tag: Chinese yards

The mobile offshore orderbook reached its lowest level since 2005 at the start of August. Furthermore, a significant portion has been on order for a number of years, with a large share of these units having already been launched. As uncertainty continues to cloud the future for many of these vessels, this month’s Analysis investigates the nature of the offshore orderbook in more detail.

For the full version of this article, please go to Offshore Intelligence Network.

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It has been well documented that newbuild orders have slowed substantially in 2015, with 857 contracts recorded at yards in the first three quarters of the year, down 45% from 2014 on an annualised basis. However, it’s also clear that builders in the big three shipbuilding countries have experienced differing fortunes. Looking beyond the aggregate trend, what has driven the divergent outcomes?

Hardened Times

In 2015 so far, the newbuilding market has seen subdued ordering activity. In the first three quarters, shipyards globally took orders equivalent to 24.3m CGT (compensated gross tonnes, a measure of shipyard ‘work’ or capacity). This compares to a total of 43.9m CGT in full year 2014. However, the big three builder countries have experienced significantly different fortunes. Chinese yards have been hit extremely hard, with new contracts in CGT terms down by 49% on an annualised basis. New contracts at Japanese yards, meanwhile, have dropped by a more moderate 14%, whilst ordering in Korea has fallen by 7%, not too bad when global contracting is down by 26%.

Exposed To A Changing Mix

What explains the difference? Many factors are at play but foremost is the ‘product mix’ – the type of units ordered. And even more so, it’s the mix in the context of the ‘exposure’ or track record that each builder nation has in the key vessel sectors. The graph illustrates ordering in selected sectors in the major builder countries alongside their ‘exposure’.

The bulker sector lies at the heart of Chinese yards’ fortunes this year. Global bulker orders of 2.6m CGT (152 units) are down by 77% on an annualised basis (to 11% of orders globally). In 2014 China took 9.2m CGT of bulker orders, but in 2015 ytd has taken only 0.5m CGT. This accounts for 8% of total Chinese orders of 6.3m CGT this year, but over the previous five years bulkers have accounted for 57% of contracting in China (and 39% of contracts globally). China’s exposure to bulkers comes at a price now that the product mix has shifted.

Anyone Well Set?

Boxships and tankers have accounted for 61% of global ordering in the ytd, and Korean builders’ exposure to these sectors (23% and 28% respectively in 2010-14) has stood them in good stead. These types have accounted for 71% of the total 8.8m CGT of contracts placed in Korea in the ytd, with the major yards more focussed on boxships and medium-sized builders on tankers. In Japan, meanwhile, product switching has helped. Japanese builders have historically been highly exposed to bulkers (64% in 2010-14, and 29% even in 2015 ytd) but an increased focus on tankers and boxships (23% and 29% in 2015 ytd respectively), and support from domestic ordering, has allowed them to plug into today’s product mix, taking  6.0m CGT of orders in the ytd.

Monitoring The Exposure

So, aggregate building trends tell part of the story but product mix developments can be critical too. As every good trader knows, understanding your exposure is important. Sometimes this can be managed, and sometimes not, but it generally explains a lot. Have a nice day.

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The level of ‘forward orderbook cover’ is one indicator of the state of global shipbuilding. When times are tough, yards can find the race for the limited amount of ‘cover’ available difficult, but when times are better ‘forward cover’ can seem very supportive. In the face of slowing ordering volumes, the shipbuilding industry might take a look at this indicator as part of its regular health check.

Medical History

‘Forward cover’ shown in the graph (see graph note for the exact calculation) reflects the number of years ‘work’ yards have on order at recent output levels. In the 1990s yards averaged 2.5 years cover but following the ordering boom of the mid-2000s forward cover rose to over 5 years. The onset of the global recession saw ordering levels decrease significantly and orderbook cover had dropped below 2.5 years by 2012. But with yard output having adjusted downwards, a pick-up in ordering in 2013 helped cover expand to 3.5 years. However, investment slowed again in 2014, instigating a downward trend, and by early 2015 orderbook cover had adjusted to around 3 years.

Chinese Check-Up

Chinese yards have seen the most dramatic reduction in forward cover. As capacity created to meet boom demand came online between 2009 and 2011, output doubled. But investment levels decreased, the orderbook declined, and China’s forward cover briefly fell below that of its competitors in Korea and Japan in 2012, as Chinese yards were not as able to attract the increased ordering in the more specialised sectors. However, cover has since increased as active capacity has adjusted downwards and Chinese yards have regained the majority share of orders, slowly diversifying their product mix. Although overall cover has returned to pre-boom levels (3.6 years today), the situation varies substantially. Whilst state owned yards and a handful of private yards have a strong orderbook cushion, the vast majority of smaller local yards have limited cover.

Offshore Emergency

South Korea and Japan did not expand shipyard capacity to the extent as China, and their industries are much more consolidated across fewer yards. As such their forward cover did not swing so dramatically. The largest Korean yards responded to the downturn in merchant vessel ordering by entering the high value offshore market (the ‘big three’ Korean yards grew their offshore orderbook to around two-thirds of the value of all units they had on order). Yet whilst this provided relief for yards in 2011 and 2012 the downturn in offshore ordering in 2014 has contributed to forward cover at Korean yards (2.7 years today) falling below that of Japanese yards (3.0 years) for the first time. Japanese yards have been slowly improving forward cover partly due to a revival in export ordering backed by the depreciation of the yen against the dollar.

Today, whilst a long way from boom time highs, ‘forward cover’ looks more comfortable than two years ago. However, that’s not the only part of the health check and global shipbuilding has been through a period of immense turmoil and financial pressure. Moreover, with output stabilising and ordering currently suppressed, builders could well be checking their orderbook cover closely once again.

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As in the case of most areas of shipbuilding, the contracting boom of the mid-2000s allowed Chinese shipyards to gain market share in the OSV sector. Initially, however, this was limited to relatively simple units. More recently, Chinese yards have begun to construct more sophisticated vessels, with broader global appeal. At the same time, they have grown market share (53% of the OSV orderbook, versus 36% in 2008).

AHTS Demand Dries Up

Back in the boom years, although Chinese yards took many orders, the majority of these were from Asian owners for use in the benign waters of the East. Asian-designed ‘commodity’ AHTSs of around 5,150 bhp made up the bulk (55%) of these orders. Chinese yards were assisted in gaining a market share by
build-to-stock intermediaries, such as MAC, Coastal or Nam Cheong, which outsourced orders to Chinese yards with the prior intention of resale close to delivery. Meanwhile, European owners tended to restrict their ordering to established yards, for instance those in Norway, whose designs they knew and trusted.

In Asia, working for NOCs like Petronas, Pertamina and PTTEP, whose operations are mostly near-shore, these small OSVs could find a market. But both Chinese yards (keen to diversify their product mix) and Asian owners (keen to expand their business into new geographies) had an incentive to change approach.

PSV Purchasing

In an effort to climb the value chain, Chinese yards began to licence OSV designs from European companies, such as Rolls-Royce, or Ulstein for example. Subsequent ordering of such designs has been focussed on larger PSVs – in 2013, 82% of orders for Chinese built PSVs 4,000+ dwt had European designs. Demand for these vessels outpaced that for AHTSs, as more deepwater and far-from-shore fields entered development, with PSVs being the vessel of choice for these remote operations. The yards’ previous (Asian) clients transferred their attention to these vessel types, keen to gain a slice of the action in areas like the North Sea, or West Africa. At the same time, non-Asian owners were encouraged to order at yards now offering designs which they recognised, at prices 20-30% lower than those offered by European shipyards. Between the start of 2010 and 2014, China’s OSV orderbook rose nearly fivefold, to 382 units (53% market share).

Future Demand

Of course, the trend towards China can only last if the vessels which they deliver meet with acceptance in the Atlantic oil producing regions. However, the signs are encouraging, with Chinese built vessels making up a large proportion of deliveries into internationally operated areas (33% in 2013). Of all Asian-built PSVs with European designs currently active, around 30% are employed in West Africa, whilst 30% of PSVs >3,000 dwt are working in NW Europe.

This is an evolving situation, which will become clearer as the large PSV orderbook delivers. For the time being, however, Chinese yards look to have risen to the challenge of becoming builders of OSVs attractive for global operations.

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