Global shipbuilding capacity still too high – Analyst

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are forced to accept new contracts below cost levels, a significant share of the building capacity has been withdrawn or removed, according to Jørn Bakkelund of RS Platou, ship brokers and investment bankers.
He summed up the state of the global shipbuilding market thus: “During the last 10 years, we have seen a dramatic increase of the building capacity among the world’s shipyards. Deliveries have increased from 18 million compensated gross tons (CGT) in 2002 to a peak of 44 million CGT in 2011 from shipyards building tonnage over 30,000 dead weight.
Last year deliveries were down by 10 per cent. ” According to him, one country, namely China, distinguished itself as the most eager to expand building capacity. “During this period, deliveries from Chinese shipbuilders leaped by 13-fold and they delivered 40 per cent 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 per cent 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,” Bakkelund said.
Noting that Korean shipbuilders have also increased deliveries of tonnage during these years but by a more modest 165 percent, he said that they have managed to maintain a market share of about 35 per cent in this period by expanding the building capacity predominantly from better use of existing facilities rather than expanding physical capacity.
Bakkelund stated: “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, according to him, 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 per cent in this period. The main explanatory factor behind the 50 per cent rise in deliveries was an estimated improvement in productivity of almost 30 percent,” Bakkelund said.
He went on: “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 million CGT is still more than needed in the next couple of years. We expect the overcapacity in the merchant fleet to be some six per cent 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 (gross domestic product) growth and tonnage demand growth for the world merchant fleet, which tells us that IMF’s (International Monetary Fund’s) long term GDP growth forecast of 4.5 per cent should result in a tonnage demand growth of about seven per cent.
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 utilisation rate of the world merchant fleet to reach a balanced level of 90 per cent.
“Under a scenario with seven per cent 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.”

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