Unless they are bullied or bribed into building in domestic yards, shipowners will build ships wherever they can get the best bargains. The cheapest yards competent to build a particular ship type get booked up first, and owners coming into the newbuilding market have to either wait in line, pay a premium for a ship originally ordered by someone else (newbuilding resale), or move on.

Suppliers such as engine builders have to position themselves to meet this situation. So, here in a nutshell is how Wartsila sees the world newbuilding market right now:

"Shipyard capacities in Asia are almost full for the next few years and shipyards with spare capacity for 2008 will be filled up within the next half year. Because of this, the orderbooks of European shipyards have also grown. Demand for marine vessels has remained high despite a rise in prices. As a consequence of full shipyards in Asia, Western European shipyards have received a considerable number of orders despite the strong euro. Western European shipyards are using Eastern European yards as their subcontractors, but recently the Eastern European yards have also received orders for large, demanding vessels such as containerships and RoRo vessels."

"Although there are no signs at present of a decline in ship orders, we still forecast, that a decrease in orders for new vessels can be expected in 2005-2006. The decrease will be due to the high capacity utilization of the shipyards."

If this hypothesis proves correct, it will be a first. Never before has shipbuilding failed to come up with the capacity needed to meet demand. Indeed, what has kept a tight lid on industry profitability has been the seemingly perpetual generation of shipbuilding capacity by countries eager to enter the market during boom years.

Even now, in the midst of a boom, shipbuilding prices remain under pressure, because although yards have managed to get better prices lately, often the improvement in their margins has been eaten away by things like rising steel prices and falling dollars.

While we're riding up towards what may well be the crest of a shipbuilding boom, to quote from the EU's Directorate General for Trade, "shipbuilding is a very cyclical industry with short periods of peaks and long periods of troughs."

As a result, it often suffers from over-capacity, depressed prices and low profit margins. Governments try to maintain capacity through the troughs by wide-spread subsidization, which results in trade distortions.

The alleged subsidies that have had the EU most steamed, of course, are those supposedly paid to South Korean shipbuilders. They have been the subject of a long running investigation by the World Trade Organization. The WTO has now ruled on both an EU case against Korea and a tit-for-tat case brought by South Korea. In practical terms, neither ruling seems likely to have any material impact on anything incentives that shipbuilders are currently offering shipowners.

However, if we look at where shipbuilding orders have been placed in the last five years, it's easy to see why European shipbuilders have seen Korea as a threat.

The real story told by looking at the 2000-2004 picture, though, is the emergence of China as a signicant shipbuilding player and the steady growth in shipbuilding demand.

EMERGING CAPACITY

China, though, is not the only place where capacity is either growing or being regrown.

Right now, for example, the Transpetro energy transportation unit of Brazilian state-controlled oil company Petrobras is engaged in a 42 tanker buy. At the behest of Brazilian President Luiz Inacio Lula da Silva, Petrobras must use only local shipbuilders to build the ships. The yards have teamed with internationally known shipbuilders to respond, but by most accounts, Petrobras/Transpetro will wind up paying around 25 percent above Asian levels for the ships.

The plus side of the equation is that Lula's build-Brazilian mandate, which also covers Petrobras's needs for offshore platforms and supply vessels, is leading to a reinvigoration of the local shipbuilding industry, where employment is now around 25,000 and is expected to double in the next two years--in stark contrast to the situation in the late 1990s when the industry was virtually dead.

Another place where we are set to see either growth or revival, depending on how you view it, is eastern Europe and the former Soviet Union. One significant order that we recently noted on marinelog.com but which seems to have otherwise not received the attntion it deserves, involves Daewoo Mangalia Heavy Industries, Romania.

In April, the Romanian yard booked orders worth $850 million from Germany for 10 containerships. According to JoonAng Daily and other Korean sources, the Black Sea yard is to build four 4,860 TEU containerships for NSB for delivery in March 2008 and six 5,200 TEU containerships for Hamburg Sud for delivery in March 2009. Earlier this year, Daewoo Mangalia president M.K.Lim said the yard would have revenues of $1 billion by 2015. Daewoo Heavy Industries has said that it aims to make the Mangalia yard Europes leading shipyard within 15 years. The thought that Romania could be the next Korea wont come too easily to those observers who have gotten comfortable with idea of shipbuilding moving ever eastward. Under that wisdom, China has already emerged as the next Korea and now Vietnam is seen as the next China.

In fact, shipbuilding, like any industry flourishes where it is given a chance to flourish and most established shipbuilders have gotten used to the idea that competition can come from where you least expect it.

CUBAN YARD DELIVERS FERRY

In the ferries sector, the latest entry in the list of unlikely competitors could just be Cuba, where an offshoot of Hollands Damen shipyards has just finished completing a kit-built fast ferry and is now looking to export to the rest of the Caribbean and South America. Our table shows things in terms of compensated gross tons (cgt)a measure that takes into account the manhours that go into a particular ship type. Another widely used measure is deadweight (dwt)the cargo tonnage a ship can carry.

A GURU SPEAKS

Back in 1988, notes Dr. Martin Stopford of Clarksons, London, in an article posted on clarksons.net, "annual worlld ship production slumped to 15.2 million dwt, earning the tag sunset industry,... Since 1988 shipbuilding production has grown at 10 percent a year, making it one of the world's growth industries. Great news for shipyards, but it leaves a nagging worry that maybe the whole thing has been over done."

Stopford notes that counting growth in deadweight terms creates problems because two of the fastest-growing sectors, container ships and gas tankers, have a very low deadweight for their size."

A better perspective is given by using price ratios: 1 for tankers and bulk carriers; 1.44 for container ships and 3 for gas tankers to measure shipyard deliveries. (Which produces a measure called price weighted dwt (pdwt).

On this basis, says Stopford, since 1990 bulker deliveries have grown by 200 percent, tankers by 300%, and liners increased by 460%. However, the orderbook gives a better indication of the pressure on shipyard capacity. Currently the bulker orderbook is 884 vessels of 71.6 million dwt; the tanker order book is 1,115 vessels of 87.7 million dwt; the containership orderbook is 1,078 vessels of 51.6 million dwt; and gas is 209 vessels of 23 million dwt. So, after applying the weights we have four similar segments 69 million pdwt of gas; 72 mllion pdwt of bulkers; 77.4 million pdwt of containers; and 88 million pdwt of tankers. Stopford sees these ship types as the four pistons of the shipyards. Looking ahead, he says tanker demand will fall due to the lower replacement requirement, but the bulk carrier orderbook looks reasonably in line with past trends. That leaves container ships and gas tankers. Both are rightly regarded as potential growth areas for merchant shipping, and may well support higher investment levels in future. And there could be new markets like offshore. In the 1980s many offshore structures were built in merchant shipyards, and with the offshore market booming, that could easily happen again. So even with Chinese capacity surging, maybe the risk is still not too great.

"So there you have it," concludes Stopford. "Shipbuilding has become a sunrise industry and with prices doubling in the last two years, the sun is certainly shining on the shipyards. Does that mean there could be massive overcapacity just round the corner? Well, not necessarily. Have a nice day."

---

Tell a friend: