In a market where shipbuilders are forced to accept new contracts below cost levels, a significant share of the building capacity has been withdrawn or removed.
Jørn Bakkelund of RS Platou, ship brokers and investment bankers, sum up the state of the global shipbuilding market as follows:
During the last ten years we have seen a dramatic increase of the building capacity among the world’s shipyards. Deliveries have increased from 18 mill compensated gross tons (cgt) in 2002 to a peak of 44 mill cgt in 2011 from shipyards building tonnage over 30,000 dwt. Last year deliveries were down by 10 percent.
One country distinguished itself as the most eager to expand building capacity, namely China. During this period deliveries from Chinese shipbuilders leaped by 13‐fold and they delivered 40 percent of all merchant tonnage in 2011. This massive growth was mainly a result from physical expansion but also via improvement in productivity. In 2002 we tracked 22 Chinese shipyards and in 2011 this number had increased to 127 and we have roughly estimated an increase of 50 percent in their productivity during this period. These 127 yards are in the forefront of numerous Chinese yards and we should expect a substantial consolidation to take place in the coming years.
Korean shipbuilders have also increased deliveries of tonnage during these years but by a more modest 165 percent. They have managed to maintain a market share of about 35 percent in this period by expanding the building capacity predominantly from better use of existing facilities rather than expanding physical capacity. The number of yards we track in Korea have only increased from 10 to 18 in these years, but the number of employees have almost doubled. More use of subcontractors is the most predominant factor behind this increase. However, they have also managed to increase deliveries due to an estimated 30 percent improvement in productivity during these years. In the last couple of years we have seen a substantial consolidation of yard capacity in Korea. C & HI, Sekwang SB, Shina SB, Daehan SB and 21st Century are examples of yards that have closed down and the Korean banking system are currently a significant shareholder in Korean shipyards.
The third largest building nation today, Japan, has also contributed to an increase in deliveries. The number of shipyards we track were only five more in 2011 than the 52 we recorded back in 2002 and the employment in shipbuilding increased by only 10 percent in this period. The main explanatory factor behind the 50 percent rise in deliveries was an estimated improvement in productivity of almost 30 percent.
Under the prevailing market conditions, where shipbuilders are forced to accept new contracts below cost levels, we have seen a significant share of the building capacity withdrawn or removed. This shows how flexible the building capacity really is. Some yards have closed down and others have reduced capacity by using less overtime, no extra shifts and reduction of employment. We have roughly estimated that about one third of the potential building capacity seen during the peak in 2008 has been withdrawn from the market.
The current estimated capacity of 35 mill cgt is still more than needed in the next couple of years. We expect the overcapacity in the merchant fleet to be some 6 percent this year and in order for this excess tonnage to be absorbed, we need to see deliveries lower than our estimated capacity of 35 million cgt.
Historically there has been a strong correlation between the world GDP growth and tonnage demand growth for the world merchant fleet, which tells us that IMF’s long term GDP growth forecast of 4.5 percent should result in a tonnage demand growth of about 7 percent. Taking into consideration a somewhat lower demand growth in the coming two years as consensus for GDP growth is below this long term trend, we have estimated that there is a need to deliver an average of 30 million cgt in the next four years for the utilization rate of the world merchant fleet to reach a balanced level of 90 percent.
Under a scenario with 7 percent average growth in tonnage demand after 2016 and a need to replace older tonnage, we have calculated that the shipyards will need to deliver an average of about 50 million cgt per year in order to maintain a balanced market for the merchant fleet. This is close to our estimated building capacity at the peak back in 2008. However, we have argued that the building capacity is quite flexible, though some of this capacity may have been “scrapped” rather than just put in “lay‐up” by 2016. Should there be an economic set‐back, the need for further deliveries would obviously be postponed, but the above scenario shows that the current oversupply of building capacity may only last for a couple of years and that the mothballed capacity will eventually be needed.
Source: RS Platou