New ship orders declined in 2016, driven down by overcapacity and sluggish global trade growth, and although devastating for shipyards and their workers, the drop may be necessary if the health of the container liner industry is going to be restored.
Source: Chris Dupin
Orders for new ships have plummeted in 2016 as a result of a slowdown in global trade growth and rampant oversupply of containerships and dry bulk vessels.
Yet the sharp drop in orders for new ships, as devastating as it is for shipyards and their workers, seems like it might be necessary if the health of the container liner industry is going to be restored.
“Many yards are running out of orders, while others are financially stressed by significant postponement and cancellation activity,” said a mid-2016 review of the shipbuilding industry by Danmarks Skibskredits (Danish Ship Finance). “Yards are closing at an unprecedented speed.”
Peter Sand, chief shipping analyst at the Baltic and International Maritime Council (BIMCO), said “2016 looks to set the record for the lowest newbuilding contracts in more than 20 years,” adding that the “low level of contracting is exactly what the shipping industry needs in order to eventually restore the fundamental balance between supply and demand.”
Orders for new ships peaked between 2006 and 2008.
“After a decline from 2010 to 2012, shipbuilding had a rebound in 2013 and was expected to level out over the next few years,” Sand noted. “The reality was a slight decline in 2014 and 2015, but still high levels of contracting measured by compensated gross tonnage (CGT). Since then, shipyards have crashed, as the contracted CGT globally has reached its lowest level on record.”
Compensated gross tonnage is a unit of measurement that takes into account the amount of work needed to make different sorts of ships. For example, a chemical parcel tanker, with its large numbers of tanks and pipes, a containership, or a passenger vessel, is much more complicated to build than a simple bulk carrier.
Market Dominance. In the first eight months of 2016, Sand said the three largest shipbuilding nations – Japan, South Korea and China – all saw the amount of ships contracted (as measured in CGT) fall when compared to the same 2015 period, down 86.7 percent, 86.5 percent and 49 percent, respectively.
Shipbroker and industry analyst Clarkson PLC in October said 88 percent of the global order book for new ships (in CGT) was with shipyards in Asia – 36 percent in China, 24 percent in South Korea, 23 percent Japan and 5 percent in other Asian countries. Ten percent of orders were placed with European yards and two percent with shipyards in other parts of the world, including the United States and Brazil.
According to Danish Ship Finance, “The strong position held by countries in Asia is primarily due to the proportion of labor costs in the overall building process. The more labor-intensive a production process is, the more important it is to have low payroll and other associated costs. In this regard, countries in the Far East have enjoyed a competitive advantage over their counterparts in the western world for a large number of years. This is one of the reasons why shipyards in the Far East have increased their market share steadily since World War II.
“Japan was the first country in Asia to enter the shipbuilding market, and the country held 50 percent of the market in 1969,” the firm added. “Shipbuilding in South Korea grew intensively up through the 1980s, making it a contender for Japan’s leadership position. In the 1990s, China also became a key player in the market, and the country is now the largest shipbuilding nation.”
Still, Korea and Japan do have advantages when competing with China, thanks primarily to their productivity. While the statistics are somewhat dated, a presentation at a seminar on shipbuilding in November by the Organization for Economic Cooperation and Development (OECD) said that in 2012, Korean shipyard workers produced over 100 CGT per year compared with around 70 CGT for Japanese shipyard workers. Chinese workers in 2010 produced 30 CGT annually, according to the OECD presentation.
But Sand said the Chinese shipbuilding industry has changed in the past five years, gaining experience building more sophisticated vessels, such as large containerships and advanced LNG carriers. One advantage China has is that it builds many ships for use by its owners and carriers within the country, and “in that sense, they are slightly cushioned,” he said.
A steep decline in orders for containerships and tankers is the main reason for the decline in new building this year, as containership and tanker contracts were down 84.1 percent and 80.1 percent, respectively.
According to Clarkson research, there were only 200,000 TEUs of new containership capacity ordered in 2016 through the end of the third quarter, a tenth of what was ordered in 2015. A big chunk of that activity reportedly came from a single order with Japan Marine United. The newspaper TradeWinds reported NYK Line exercised an option to increase from 10 to 15 an order for a series of 14,000-TEU ships that would be owned by a special purpose company but time chartered by NYK.
Because of orders made in prior years, however, containerships with an aggregate capacity of 3.3 million TEUs are scheduled to be delivered over the next few years, even if no new ships are ordered. With so much excess capacity, it seems unlikely shipyards will see any significant pickup in new containership orders any time soon.
Thinning Order Cover. Because ships take many months (sometimes years) to build, shipping analysts often measure the health of a country’s shipbuilding industry by looking at how much “order cover” they have. Order cover is a measure of time based on the size of the shipyard’s current order book compared with the previous year’s average monthly output, and Sand characterized the recent decline in order cover as “alarming.”
By that measure, China has seen the biggest change. Its order cover has fallen from nine years back in 2008 to less than three years currently, while in South Korea, order cover has fallen from over five years to less than two years during the same time period. A similar trend has occurred in Japan, where order cover has fallen from over four years in 2008 to a little more than three years, putting it in the best position of the three major shipbuilding nations.
While shipbuilding is a much smaller industry in Europe, shipyards there have seen their order cover increase, from less than two years in 2011 to more than five years today. Sand says the European yards tend to build more ferries, tugs, and cruise ships than the big cargo ships made mostly by shipyards in the Far East, making them less susceptible to the current downturn in the ocean shipping industry. He also noted European yards have trimmed capacity of late and receive minimal support from their governments.
An Inside View. During a visit to the Hyundai Heavy Industries Samho shipyard on the southwest coast of South Korea on Oct. 31, workers were putting the final touches on the first in a series of five new 10,500-TEU containerships the firm is building for German ocean carrier Hapag-Lloyd. The Valparaiso Express was completed several days later, and promptly set sail for its namesake port in Chile, where it was christened on Dec. 7.
Executives said the Hapag-Lloyd ships were part of a diminishing number of containerships being ordered globally. Hyundai Samho had just seven containerships on order – the five from Hapag-Lloyd and two from United Arab Shipping Co. (UASC). Together with its three sister yards at Hyundai Heavy Industries (HHI), the company had only 26 containerships on order, all of which were contracted in 2015 and will be delivered by the end of 2017.
Opened in 1999, the Hyundai Samho yard is a sprawling facility that covers 3.3 million square meters (815.5 acres). About a quarter of the 11,500 or so people that work at the facility are company employees, and the remaining 75 percent work for in-house subcontractors. Use of subcontractors allows for easier adjustment of the workforce to match fluctuating demand for ships. The company expects to complete construction of 44 ships for the full year in 2016 compared with 35 in 2015.
It requires about 600,000 man hours – the equivalent of 288 persons working 40 hours a week for 52 weeks – to build a ship like the Valparaiso Express. In fact, 18 months passed between signing of the contract and delivery of the vessel – 10 months for engineering and eight months for the actual construction work – a very fast track for construction of such a ship. Hyundai officials said 20 months is a more typical timeline.
The design of the ship was optimized for carriage of large amounts of refrigerated cargo between the West Coast of South America and Europe, the trade on which it will be deployed. For example, the vessel features reinforced cell guides that allow high cube containers to be stowed in any position on the ship.
There were 49 ships in some stage of construction at the end of October at the Hyundai Samho shipyard. Some were nearing completion. With others, metal cutting was just beginning. Keels, the longitudinal structure along the center of the bottom of a vessel’s hull on which the rest of the hull is built, had been laid for 15 ships. While the shipyard has filled all of its shipbuilding “slots” for 2017, it is accepting orders for ships to be built in the second half of 2018.
Ships are built from “blocks,” sections of the vessel constructed from steel plates welded together in various parts of the shipyard. Some parts are built in sheds, but as the blocks get larger they are moved around the yard with overhead “Goliath” cranes. The entire bow of a ship could be seen at the Hyundai Samho yard dangling from one of these cranes, waiting to be lowered into place. Eventually, the ships are assembled from blocks in dry-docks, then floated to berths for final outfitting.
The Hyundai Samho shipyard is one of three that Hyundai Heavy Industries operates in Korea. It also has a joint venture in Vietnam.
Source: Chris Dupin
Bigger Issues. To put these numbers in perspective a little, the Samho yard is not even the largest of HHI’s shipyards.
The Hyundai Heavy Industries yard in Ulsan, on the east coast of Korea, opened in 1973 and has 9.3 million square meters of space. It has 26,000 employees, 63 percent of whom work for subcontractors, and is expected to build 70 ships in 2016. It and the Samho yard are capable of building large containerships, very large crude carriers (VLCCs), cape-size dry bulk carriers, and very large natural gas carriers, just to name a few.
In addition, HHI has another yard in Ulsan, Hyundai Mipo, which specializes in the construction of smaller ships, as well as a 65 percent stake in a joint venture in Vietnam, the Hyundai Vinashin Shipyard.
All told, the four HHI shipyards had about 250 ships on order at the end of October, less than the half the 550 on order in 2007-2008.
Ship orders are concentrated among a relatively small group of shipbuilders. According to Clarkson, 25 percent of the order book (as measured in CGT) is with four firms: South Korea’s Daewoo Shipbuilding & Marine Engineering (DSME), HHI, and Samsung, as well as Japan’s Imabari Shipbuilding. Half the work is split by the top 13 firms and 75 percent is with the top 30. Just 10 percent of the order book is split among the smallest 229 yards.
Clarkson said the shipbuilding industry has been characterized by rapid growth in total numbers, followed by steep decline, all within the past decade.
The number of “active” shipyards, defined by Clarkson as one with at least one ship of more than 1,000 gross tons on order, worldwide has more than halved since 2009, when there were more than 900 active yards. By September of this year, that number had fallen to about 400. In China, the number of yards grew 117 percent between 2005 and 2009, with many specializing in the construction of bulk carriers, before crashing to about 140 at present.
“When you look at the rise of China, both private shipyards and government-run shipyards emerged like mushrooms across the country, especially in the northeast, and quite a wave of consolidation is seen across China driven forward by government-backed shipyards,” said Sand.
Yue Xing of Clarkson wrote in October that a “white list” of shipyards China’s government said it wished to support that originally had 71 builders had been reduced to 59 because of bankruptcies or mergers. That number may be further reduced, he noted, because 40 did not win any orders this year and 18 also did not receive orders in 2015.
“If you are a shipyard with no order book, you were certainly doomed,” said Sand. “But it is not as if the shipyard capacity has completely left…the facility simply stands as a ghost yard.”
Globally, Clarkson says many active yards appear vulnerable, with 240 scheduled to deliver the last of their vessels on order in 2017.
Non-container Outlook. Korea builds about 36 percent of the world’s ships, and HHI officials say their yards alone account for about 11 percent of the world total.
The Hyundai Samho yard had a total of 56 ships on order as of the end of October in addition to the seven containerships: 10 car carriers, 34 tankers, three product carriers, four liquid petroleum gas (LPG)/ethylene carriers, four LNG carriers, and one drilling rig.
An uptick in oil prices could lead to more oil tanker orders, unnamed sources told Korea’s Yonhap news agency in early December.
But Tor Morne, head of marine industry at the advisory firm CDI Global, said last year, “During past market downturns, the shipbuilding industry has gone down during a time of huge upturn in oil and gas activity. This time, however, we have seen a reduction in the shipbuilding market at the same time as the oil crisis. This leaves us in the rare scenario of facing a double dip and, as many companies have an interest in both markets, it’s an incredibly complex situation.”
Many rig orders have been delayed due to the precipitous decline in crude oil prices. The outlook is also poor for offshore support vessels, as many are inactive and could be reactivated if demand picks up.
Despite strong demand for natural gas in many developing countries, maritime consultant Drewry says vessel oversupply in the very large gas carrier sector is expected to persist in 2017. Producers of offshore petroleum also face stiff competition from shale oil, which doesn’t need rigs or support vessels.
Korean builders have little choice but to reduce capacity and cut costs. At HHI, functions such as sales and marketing, procurement, and research and development at the various yards are being integrated, salaries are being reduced, and the company is selling off assets not related to its core shipbuilding and rig construction business, such as those related to solar and wind energy.
According to a report from Bloomberg in June, Hyundai, Samsung, and Daewoo are trying to raise a combined $7.3 billion through asset sales.
Shipyards could look to do more conversion work. For example, there will be increased need to install ballast water treatment systems and exhaust scrubbers or LNG fuel systems in order to comply with new sulfur emission requirements from the International Maritime Organization.
But yards in Korea and Japan are likely to face stiff competition from China for such work, and revenues for conversions are minuscule when compared to what yards receive for building new vessels.
At the end of October, South Korea announced that the three leading shipbuilders in the country had agreed to close down 23 percent of their docks and shed about 30 percent of their workforce, according to press accounts. The government also said it would spend about $9.6 billion to help the industry and place orders for over 250 ships.
Several “blocks” that will be assembled into ships at the Hyundai Heavy Industries Samho shipyard in South Korea.
Source: Chris Dupin
Shipbuilding is a key industry in Korea, and is highly concentrated in some areas. For example, both DSME and Samsung, and many of their suppliers, have massive yards on Geoje Island in southeast Korea.
There are some glimmers of hope for shipbuilders.
Several publications have reported Russia’s Sovcomflot might be planning to place orders for oil tankers and LNG carriers. And in early December Islamic Republic of Iran Shipping Lines (IRISL) announced it had signed a contract with HHI to buy 10 ships: four 14,400-TEU containerships and six 50,000-DWT product tankers.
Is there a danger that yards might become so eager for work that they may offer prices on new ships that are so low that carriers would find them irresistible? Clarkson said that the end of September 2016, the price of a 13,000-TEU ship had already fallen to $109 million compared with $166 million in 2008.
“It’s a very relevant question to pose, simply due to the fact that we have enough ships already,” said Sand. “But knock on wood…2016 has been outstanding in the way that owners and investors across the globe have not felt tempted by drops in new building prices.”
Chris Dupin is Maritime and Intermodal Editor of American Shipper. He can be reached by email at cdupin@shippers.com.