An 80-page report from Danish Ship Finance this month sent shudders through the shipbuilding community, exposing how many yards around the world are at risk of extinction as orderbooks dwindle with limited appetite for new tonnage amid a looming recession and unclear future propulsion choices.
The report, helmed by well-respected analyst Christopher Rex, suggested there will be more than 200 yard closures in the coming months and years
We all need to get into bed with buying Chinese ships
Half of active yards have not seen any new orders since 2018 and orderbooks are now petering out for many shipbuilders.
Global yard capacity totals 56m cgt, divided between 281 yards. Since 2013, more than 240 yards with a combined capacity of 16m cgt have left the industry. However, much more capacity needs to close, the report suggests.
Danish Ship Finance has identified a group of 64 yards that represent half of global yard capacity but more than 75% of the current orderbook. The researchers expect these so-called first-tier yards will form the core of the future yard landscape.
“The remaining 217 yards will soon run out of orders. This year, 114 second-tier yards with a combined capacity of 7.5m cgt are expected to deliver their last orders. In 2021, an additional 106 yards with a combined capacity of 16m cgt are set to run out of orders. Combined, these yards represent more than 40% of the current yard capacity. The situation will only worsen after 2021,” Danish Ship Finance warned, noting specifically that most Japanese yards seem challenged with up to 45 of them set to run out of orders.“We all need to get into bed with buying Chinese ships,” quipped one UK-based shipowner on reading the Danish report.
German alarm bells
Germany’s shipbuilding association, VSM, also sounded the alarm bell this month on the diminished outlook.
VSM data shows that globally shipyards have been working at more than 40% below their total production capabilities for the last four years amid muted demand for new tonnage, a situation that will worsen in the coming years thanks to the recession brought about by Covid-19.
“This drop in demand will significantly expand the already underutilised global shipbuilding capacity,” VSM warned in a release. Cancellations of orders already placed could make the situation even more difficult, VSM said, going on to hit out at subsidies being thrown at rivals in Asia, a longstanding bugbear of the association.
Stopford’s worst-case scenario
Dr Martin Stopford, the president of Clarkson Research and the world’s most famous maritime economist, has published a white paper recently with his forecasts for the shipping markets through to 2050.
Stopford’s worst-case scenario for shipbuilding sees a severe recession for shipyards in the early 2020s, due to the deep coronavirus-driven downturn in the world economy. This dark prediction sees sea trade declining by 17% by 2024.
Shipbuilding demand does not recover until 2025, according to Stopford’s worst-case scenario, reaching a peak that year of 160m dwt, roughly the same as in 2011. This peak is due to replacement of the ships delivered in the 2009-2012 boom and the increased deadweight capacity of ships needed by the fleet operating at much slower speeds of 10 knots. In this scenario, if past recessions are any guide, Stopford suggested counter-cyclical ordering by investors or governments will likely play an important part in determining how the early years of this scenario develop for shipyards and owners. Technology driven orders might motivate this sort of activity, Stopford predicted.
“In recent decades shipbuilders and shipping companies needed few research, development and design resources. They could rely on ‘last done’ when tendering. But that is no longer the case. In the coming decade shipyards and their suppliers must be able to offer designs involving new technology,” Stopford wrote in his widely circulated white paper.
Latest data from Clarkson Research shows only 215 vessels reported ordered in 2020 so far, down 49% year-on-year on an annualised basis.
State aid to the fore
Peter Sand, chief shipping analyst at BIMCO, concurs with much of the current shipbuilding analysis, conceding the outlook is “grim” for the sector, and like Danish Ship Finance, he suspects Japanese yards are most exposed to this downturn.
“State aid seems to be the name of the shipyard game. The South Korean and Chinese governments seem to be fighting for that prize,” Sand tells Splash Extra.
Lost demand from the coronavirus crisis will see overcapacity go up again, Sand warns, before adding one silver lining.
“The opportunity here is for designs and innovation to develop the next generation of very low CO2-emitting ships in this vacuum of orders,” Sand says, adding: “Whether it will be grabbed is in the hands of visionary money. Don’t expect existing yards to deliver innovative solutions at their own free will.”
This latter point is something picked up by Hong Kong-based Tim Huxley, an ex-broker who now runs shipping line Mandarin Shipping.
“The winner will probably be the shipbuilding group that can lead the way in technology and achieve the most production efficiencies,” Huxley says.
Khalid Hashim, whose maritime career started in 1978 and whose father and grandfather were also in shipping, says he has seen enough downturns to know how this one will play out. The managing director of Thailand’s Precious Shipping reckons governments will ensure the East Asian triumvirate of Japan, China and South Korea will continue to dominate the shipbuilding business.
“To imagine that the entire Japanese shipbuilding industry would either commit hara-kiri or simply roll over and die a natural death in four years’ time would be difficult, well-nigh impossible,” Hashim says, adding: “The Chinese will certainly be around but after massive consolidation with hardly any private companies left in this field. The Koreans will continue to subsidise their builders who will continue to run up massive billion-dollar-plus losses year after year.”
Summarising the situation, Hashim adopts his best French accent, saying: “Plus ça change, plus c’est la même chose.”