Archives for posts with tag: shipyard

In 2016 the shipping industry saw significant supply side adjustments in reaction to continued market pressures. For shipbuilders this meant a historically low level of newbuild demand with fewer than 500 orders reported in 2016, and the volume of tonnage on order declined sharply. Meanwhile, higher levels of delivery slippage and strong demolition saw fleet growth fall to its lowest level in over a decade.SIW1256

Pressure Building Up

2016 was an extremely challenging year for the shipbuilding industry. Contracting activity fell to its lowest level in over 20 years with just 480 orders reported, down 71% year-on-year. Domestic ordering proved important for many builder nations and 68% of orders in dwt terms reported at the top three shipbuilding nations were placed by domestic owners last year. Despite a 6% decline in newbuild price levels over 2016, few owners were tempted to order new ships, especially with the secondhand market offering ‘attractive’ opportunities. Only 48 bulkers and 46 offshore units were reported contracted globally last year, both record lows, and tanker and boxship ordering was limited. As a result, just 126 yards were reported to have won an order (1,000+ GT) in 2016, over 100 yards fewer than in 2015.

A Spot Of Relief

However, a record level of cruise ship and ferry ordering provided some positivity in 2016. Combined, these ship sectors accounted for 52% of last year’s $33.5bn estimated contract investment. European shipyards were clear beneficiaries, taking 3.4m CGT of orders in 2016, the second largest volume of orders behind Chinese shipbuilders’ 4.0m CGT. Year-on-year, contracting at European yards increased 31% in 2016 in terms of CGT while yards in China, Korea and Japan saw contract volumes fall by up to 90% year-on-year.

Further Down The Chain

In light of such weak ordering activity, the global orderbook declined by 29% over the course of 2016, reaching a 12 year low of 223.3m dwt at the start of January 2017. This is equivalent to 12% of the current world fleet. The number of yards reported to have a vessel of 1,000 GT or above on order has fallen from 931 yards back at the start of 2009 to a current total of 372 shipbuilders.

Final Link In The Chain

Adjustments to the supply side in response to challenging market conditions in 2016 have also been reflected in a slower pace of fleet growth. The world fleet currently totals 1,861.9m dwt, over 50% larger than at the start of 2009, but its growth rate slowed to 3.1% year-on-year in 2016. This compares to a CAGR of 5.9% between 2007 and 2016 and is the lowest pace of fleet expansion in over a decade. A significant uptick in the ‘non-delivery’ of the scheduled start year orderbook in 2016, rising to 41% in dwt terms, saw shipyard deliveries remain steady year-on-year at a reported 100.0m dwt. Further, strong demolition activity helped curb fleet growth in 2016 with 44.2m dwt reported sold for recycling, an increase of 14% year-on-year.

End Of The Chain?

So it seems that the ‘market mechanism’ has finally been kicking into action. A more modest pace of supply growth might be welcome news to the shipping industry but further down the chain shipbuilders are suffering. Contracting levels plummeted in 2016 and the orderbook is now significantly smaller. Even with the ongoing reductions in yard capacity, shipbuilders worldwide remain under severe pressure and will certainly be hoping for a more helpful reaction in 2017.

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As in many sectors of economic activity, provision of just the right amount of capacity is a tricky business, and the shipbuilding industry is no exception. As a result, in stronger markets the ‘lead time’ between ordering and delivery extends and owners can face a substantial wait to get their hands on newbuild tonnage, whilst in weaker markets the ‘lead time’ drops with yard space more readily available.

What’s The Lead?

So shipyard ‘lead time’ can be a useful indicator, but how best to measure it? One way is to examine the data and take the average time to the original scheduled delivery of contracts placed each month. The graph shows the 6-month moving average (6mma) of this over 20 years. When lead time ‘lengthens’, it reflects the fact that shipyards are relatively busy, with capacity well-utilised, and have the ability, and confidence, to take orders with delivery scheduled a number of years ahead. For shipowners longer lead times reflect a greater degree of faith in market conditions, supporting transactions which will not see assets delivered for some years hence. Longer lead times generally build up in stronger markets. Just when owners want ships to capitalise on market conditions, they can’t get them so easily. But lead times shrink when markets are weak; just when owners don’t want tonnage, conversely it’s easier to get. The graph comparing the lead time indicator and the ClarkSea Index illustrates this correlation perfectly.

Stretching The Lead

Never was this clearer than in the boom of the 2000s. Demand for newbuilds increased robustly as markets boomed. The ClarkSea Index surged to $40,000/day and yards became more greatly utilised even with the addition of new shipbuilding capacity, most notably in China. The 6mma of contract lead time jumped by 49% from 23 months to 35 months between start 2002 and start 2005. By the peak of the boom, owners were facing record average lead times of more than 40 months. In reality, as ‘slippage’ ensued, many units took even longer to actually deliver than originally scheduled.

Shrinking Lead

The market slumped after the onset of the financial crisis, with the ClarkSea Index averaging below $12,000/day in this decade so far. Lead times have dropped sharply, with yards today left with an eroding future book. The monthly lead time metric has averaged 26 months in the 2010s, despite support from ‘long-lead’ orders (such as cruise ships) and reductions in yard capacity. Of course, volatility in lead time recently reflects much more limited ordering volumes.

Taking A New Lead

So, ‘lead times’ are another good indicator of the health of the markets, expanding and contracting to reflect the balance of the demand for and supply of shipyard capacity. They also tell us much about the potential health of the shipbuilding industry. In addition, even if shorter lead times indicate the potential to access fresh tonnage more promptly, unless demand shifts significantly or yards can price to attract further capacity take-up quickly, they might just herald an oncoming slowdown in supply growth. At least that might be one positive ‘lead’ from this investigation. Have a nice day.

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Despite the many domestic and market challenges facing the Hellenic ship owning community, Greece has continued to strengthen its position as the largest ship owning nation in recent years. As the shipping community begins to gather for another Posidonia, Greek owners today control some 18% of the world fleet, with a 333m dwt fleet on the water and a further 40m dwt on order.

Greek owners continue to top the league table of ship owning nations with a 196m GT fleet and global market share of 16% (by GT), followed by Japan (13%), China (11%) and Germany (7%). In recent years this position has in fact been consolidated, with the Greek fleet growing by over 7% in 2015 – the most significant growth of all major owning nations. Aggregate growth since 2009 is even more significant; some 70% in tonnage terms. The big loser in market share in recent years has been Germany, while China’s aggressive growth in the immediate aftermath of the financial crisis has slowed (the Chinese fleet doubled between 2009 and 2012 as solutions were found to distressed shipyard orders). Athens/Piraeus also features as the largest owning cluster globally, with Tokyo, Hamburg, Singapore and Hong Kong/Shenzhen making up the top five.

Punching Above Their Weight!

Greek owners remain the classic “cross traders”, developing their market leading position as the bulk shipping system evolved in the second-half of the twentieth century. Today, the Greek owners’ share of the world fleet at 16% compares to a seaborne trade share for Greece of less than 1%. By contrast, Chinese owners control 11% of the world fleet relative to the Chinese economy contributing to 16% of seaborne trade.

Sticking With Wet And Dry

Although a number of Greek owners have diversified into other shipping sectors, Greek owners have generally retained a focus on the “wet” and “dry” sectors. Today, the Greek fleet is largely made up of bulkcarriers (47% by GT) and tankers (35%) with this combined share hovering around 85% for most of the past twenty years. There has been some development of the Greek owned containership fleet (up to an 11% share) and gas carriers (up to a 4% share) but this is still generally limited. By contrast, Norwegian owners have trended towards more specialised vessels (e.g. offshore, car carriers) and the German fleet has remained liner focused.


Asset Players

Greek owners have also retained their role as shipping’s leading asset players and today operate a fleet with a value of some $91 billion (actually third in the rankings behind the US due to the value weighting of the cruise fleet). In 2015, Greek owners were the number one buyers (followed by China) and number one sellers (followed by Japan and Germany) in the sale and purchase market. Greeks have not been quite so dominant in the newbuild market recently and in 2015, Greek owners ($6.9bn of orders) trailed Japan ($13.1bn) and China ($10.7bn) in the investment rankings.

So despite facing many challenges, Greek owners continue to “punch above their weight” as the world’s leading shipowners for yet another year!

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In the last four months dry bulk orders have fallen to 0.4m dwt per month, the lowest level since the 1990s. This is a massive 98% reduction from the 23m dwt peak in orders in December 2007, and probably the sharpest decline in recent decades. Not really a surprise in a market where Capesize bulkers are struggling to earn $4,000/day, but a timely relief to investors with ships on the orderbook.

Investment Fever

This investment collapse marks the end of a remarkable phase of bulkcarrier history. During the last decade, 724m dwt of new bulkers have been ordered, around 70m dwt/year. Just to put that in perspective, during the previous decade ordering averaged about 20m dwt/year.

The 5 years from 1996 to 2001 were disappointing to investors, who ordered only 1.2m dwt/month. At the time this was seen as normal, and included a spike in 1999, when investors snapped up Panamax bulkers for $19-$22m. These were probably the most profitable bulkers ordered in the industry’s post-war history. Upon delivery they sailed straight into the bulk shipping boom. Proof that “crazy investors” are not always crazy.

Softly, Softly

The next phase from 2002 to November 2006 was quite restrained, considering the rise in freight rates. Ordering edged up, averaging 2.8m dwt/month. As earnings eased in 2006, many assumed the boom was over, but they were wrong and what happened next was unprecedented. As earnings escalated owners threw caution to the wind, and the big bulker cash machine drew investors from outside shipping. In December 2007, ordering peaked at 23m dwt, and in 2007 to 2014, investment averaged 6.8m dwt/month (81m dwt/year), an astonishing number for a period mostly in global recession.

Carry On Investing

Despite the onset of the global downturn in 2008, two more bulker investment spikes followed in 2010 and 2013. With surplus bulker capacity, and China’s growth engine easing off, it’s hard to explain this investment on strictly economic grounds. Easier, perhaps, to understand the change in expectations. The memory of spectacular bulker earnings had been fresh in the minds of some investors, but a decade later and that dream is fading.

The collapse in bulkcarrier investment is a particular problem for shipyards. Many builders in China and Japan surfed the wave of bulkcarrier investment and bulkers still account for around half of tonnage on order globally. In today’s sluggish world economy, that is going to be a difficult gap to fill. The fact that bulker prices are around 5% down this year, and ordering has virtually stopped tells its own story.

Big Bulker Investment Boom

So there you have it. The spectacular run of dry bulk investment which kicked off in early 2003 has finally ended. Then China’s imports were growing at 27% a year, a big difference from the 3% growth in 2014. This is disappointing, but as serious shipping investors know, in good markets and bad, there’s still an awful lot of cargo that has to be moved around the world – it’s just a matter of who moves it. 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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In the early 1990s when shipping emerged in a fragile state from the traumas of the 1980s, raising finance was a problem. The shipping banks had taken a battering in the 1980s, and the US financial crisis had taken out the American banks. ‘Basel 1’ made getting a loan over $25m difficult, syndications were rare and the capital markets were unapproachable.

$200 Billion? No Way

Against this background, estimates that the shipping industry would need to raise $200 billion to finance investment during the 1990s seemed an impossible mountain to climb. In fact these estimates of future investment requirement, based on the need to replace the ageing fleet and allow for expansion of the key tanker, bulkcarrier and containership fleets, proved to be on the low side. During the decade investments in new ships added up to about $340 billion. And of course, miraculously, the money appeared. Syndications, club deals, capital market transactions, the German KG market and a few new banks filled the gap.

$1.4 Trillion? No Way

But history repeats itself and today the old problem of “where will the money come from?” is back on the agenda with a vengeance. This time the numbers are bigger. On our rough estimate, the cost of financing the shipping industry over the decade from 2014 to 2023 could be around $1.4 trillion. That’s a massive step up from the 90s (the chart shows investment from 1990 to 2013, with estimates to 2025). But the business has changed dramatically since the early 1990s when it was mostly about tankers, bulkcarriers and containerships. In the coming decade only half the investment (about $760 billion) is to finance the replacement and expansion of these core fleets.

New Investment Era

The other half consists of sectors which, in the early 1990s, had little impact (partly, perhaps, because there weren’t many statistics). Two market segments which look likely to generate a lot of value-added over the coming decade are LNG tankers and cruise ships. These are not newcomers; they have been around for years. But the changing world economy seems likely, in different ways, to boost investment in these segments very substantially, and together they account for about 20% of the projected investment.

The other big segment of potential investment for the shipyards is offshore. In the early 1990s that was, like the proverbial dodo, an extinct entity, with little business on offer. But the relentless pressure on energy supplies, both oil and gas, and the focus on mobile facilities, suggests this might account for as much as 30% of future shipyard investment.

Spend, Spend, Spend

So there you have it. Shipping needs the investment, but where will the money come from? Most analysts agree there’s a tidal wave of cash sloshing around the world, looking for a home with a good story. Unfortunately shipping’s financial story remains a bit patchy, but the reassuring lesson of the 1990s is that there’s always someone who will find a way to do the business. Who will it be this time? Well, that’s the trillion dollar question. Have a nice day.

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