Shipyards will have to fight for survival

Some major market indicators are on an improving trajectory but shipyard prices may have further to fall says Dr Adam Kent from Maritime Strategies International

 A sustained reduction in newbuilding contracts has at last begun to move the orderbook into closer balance with an improving demand picture. But despite the better news, shipyard prices may still fall according to the latest MSI analysis. Too many yards still have too little forward cover and even those considered high quality facilities must be considered at risk of closure.

In terms of earnings, most shipping sectors remain at or near the bottom of the cycle – or are just nudging up to the foothills of improvement. Not surprisingly MSI expects some improvement in one year TC rates – though this may not be evidenced in all sectors for another two years, on an annual average basis.

Fleet supply

After a painful decade in which the shipping industry has suffered from a fundamentally unhealthy supply position, the newbuilding orderbook is finally starting to improve.

Comparing the situation of mid-2015 with the orderbook today, our analysis shows that orderbook levels across all the main sectors has come down significantly. Such growth as there has been, has in the sectors where older tonnage was most needed; the general cargo, Ro-Pax, Ro-Ro and cruise sectors.

Ro-Ro owners in particular have been reticent in ordering new tonnage, due to high newbuilding prices, uncertainty over ECA regulations and lower trade growth, but more orders are now being placed.

In other sectors, the dry bulk orderbook is currently equivalent to all the existing tonnage over 20 years old and is starting to get back into territory where we can see some balance between supply and demand.

In terms of contracting in the dry bulk sector, since Q1 2016 there has only been around 5m GT ordered, quarter-on-quarter, including the Valemaxes ordered last year, which gave a shot to the arm to totals.

This year we’ve seen a lot of VLCC ordering but in aggregate, contracting remains low, and we’re not forecasting contracting to come back to 2015 levels until early next decade.

Looking at fleet growth between 2017 and 2020, for tankers and containers the average annual growth rate is between 2.4% and 2.6%. For dry bulk, MSI is forecasting fleet growth rates to be under 1% on an annual average basis.

Earnings and prices

As to earnings, apart from the crude and product tanker sectors, which are coming down off the peak of the cycle, most other sectors remain at the bottom or are approaching the foothills of a recovery.

Even so, that has been enough just about to cover breakeven costs. A breakdown of the current one year TC rates versus aggregated daily OpEx and part of the financing costs shows that across the board, second hand prices are also at around breakeven levels.

Looking forward, it’s perhaps unsurprising, given the position in the cycle that for most sectors MSI expects to see some improvement over the next two years.

In terms of the historical distribution of earnings, the position of current one year TC rates is in general toward the bottom end of the historical distribution (see chart). By 2019 however, we can see that in all instances, that rate will be above today’s level.

Newbuilding prices are fundamentally driven by the interplay between forward cover; that is the shipyard capacity and shipyard orderbook relationship along with shipyard costs.

By analysing activity at the shipyards, we can see that they will remain woefully underemployed in 2018. The only facilities looking relatively healthy on a historical basis are European, where cruiseship orders placed in the last 12 months will keep them busy for some time to come.

In South Korea, if we express the scheduled output by shipbuilding region as a percentage of the maximum of the last five years, in 2017, the country is at around 100% output. Looking to 2018 – only around six months out – we can see that the country’s Tier One yards are only at around 50% utilization. Those yards remain severely underemployed and will continue to price low to attract new orders.

China is looking a little better at the Tier One yards, though there is still a large swathe of Tier Two yards that have no orders, and the same goes for Japan. There has been a lot of talk about the ‘Chinese White List’ but when we look at these it is apparent that it has been a long time since many of these have taken any orders.

In fact, only around 30 yards on the White List have taken an order within the last 365 days and the vast majority of those yards are state-backed. Those which have not taken an order can probably be factored into a reduction of effective shipyard capacity in the next five years.

Crunching the numbers on individual contracted vessels also supports the idea that the time between placing an order and taking delivery is shortening quite quickly (see chart).

When placing a tanker order at a Korean yard, an owner can expect to wait around 600 days for delivery, whereas this figure was double at the top of the boom markets.

Further to fall 

So where will newbuilding prices go? MSI expects shipyard costs to decline marginally in 2018, largely driven by commodity prices and the reduction in steel plate prices in 2018 before we see some uptick in 2019 and 2020.

But we also think shipyard forward cover will fall further in 2018, as deliveries outstrip contracting and what this means for newbuild prices as a whole, is that we don’t believe the bottom of the price cycle has been reached yet.

On an annual average basis, MSI believes that newbuilding prices will fall by up to 5% in 2018. Obviously this will be partly dependent on the shipyard and the vessel type, but in general, we don’t think the industry has quite hit the bottom.     

Putting this together into the MSI second hand price forecast, we don’t expect to see much of a sustained recovery across the sectors, in terms of second hand prices, until 2019 or 2020.

Where the actual bottom of the second hand price cycle is, is very much dependent on the sector. Based on our quarterly forecasts for second hand prices, we think Capesize vessels will actually come off and the bottom of that cycle will be in Q1, 2018. Tankers will hit bottom a little later but we think we’ve seen the bottom of the second hand price cycle for containerships.

What that means for the best market prospects comes with caveats, but it is possible to run a number of different ship types through the MSI online valuation service, FMV for a forward view of newbuilding and second hand prices, earnings and OpEx.

Assuming that an investor buys a five-year old vessel today and either sell it next year, in 2018 or in 2019 or 2020, based on the current analysis that the best returns are to be found in the Aframax tanker and midsized containership sectors as well as the more specialised car carrier sector.


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