Stealing the Market
(Article originally published in May/June 2016 edition.)
Chinese yards “price themselves down” to win orders in a depressed market. New shipbuilding orders are so rare that brokers have taken to reporting deals for small tankers and ferries that would normally only feature in local news, if at all. In 2016, deliveries will outpace new orders by a huge margin, putting massive downward pressure on shipyards, says Stuart Nichol, Director of London consultancy Maritime Strategies International.
Five years ago the offshore industry was hailed as the savior of Asian shipbuilders, especially those in Korea, via drillship and rig orders. However, the boost proved illusory, and losses from many of those deals have been debilitating.
“In 2016, there is no such alternative,” says Nichol. “Offshore is as busted as any traditional shipping sector. Bargain hunters in these sectors are looking at low, once-in- a-generation second-hand prices, not newbuilding investment. Even in the profitable oil tanker sector, nervous investors are holding fire with fewer than 10 new vessels ordered in the first quarter of 2016.”
For Chinese shipyards the biggest concern is the dearth of bulker orders. Even though many Chinese yards have tried to diversify their portfolios since the 2009 crisis, their focus remains the construction of simpler vessels. As it stands, 60 percent of scheduled Chinese output in 2016 are bulkers. More than half of all Chinese shipyards still in business have no orders at all for 2017. “The outlook is bleak,” says Nichol.
According to Denis Petropoulos, President of Braemar Group Asia, one of the biggest problems for shipyards right now is that they are building ships for people who might not pay: “It’s happening more in China. In their eagerness to win the business, they’ve made their terms soft.” The only potential upside is that steel prices, which account for about a third of newbuilding costs, have dropped since the orders were placed.
China has risen through the ranks, but traditional owners have retained relationships with yards in South Korea and Japan. Still, if rumors of VLCC newbuildings for below $80 million are true, the Chinese are now going to extreme lengths to win an ever-greater market share. “China is capable of stealing the market from its competitors because it will win favor by pricing itself down,” says Petropoulos. “If they want the work, China will win the day.”
Financing has become increasingly tight. Shipowners with deep pockets are shrewd shipowners and will drive a hard bargain. “China will compete to win the business,” adds Petropoulos, “and as newbuilding orders do come, the place it will happen will be China.
There are specialized ships like LNG carriers that will still be built in Korea and Japan because of their skill set, but China is already starting to build them, and by 2020 it will be churning them out.
In the meantime, though, with credit more likely to account for 50 percent than 90 percent of costs, the tanker market around 20 percent oversupplied and the dry bulk market around 50 percent oversupplied, there’s fewer shipowners jumping to build ships. Shipowners come and go, but the ships remain, says Petropoulos, who expects an even greater slowdown in shipbuilding activity than there is at present.
Turning a Profit
Debts owed by South Korea’s three major shipbuilders, Hyundai Heavy Industries (HHI), Samsung Heavy Industries and Daewoo Shipbuilding & Marine Engineering (DSME), more than doubled between 2010 and 2015 due in part to heavy “tail contracts” where the buyer makes a bigger payment at a later stage.
However, all three yards returned to the black in the first quarter of 2016. HHI attributes this to a series of drastic and comprehensive restructuring measures and a policy of phasing out low-price shipbuilding contracts. A spokesperson stated, “Although we have turned a profit in the first quarter of this year, we will concentrate more on cutting costs in case of a falling order backlog.”
The group’s subsidiary, Hyundai Mipo Dockyards, saw success when Crowley Maritime in the U.S. took delivery of Louisiana, the third of four new Jones Act product tankers being built by Philly Shipyard. The new 50,000-dwt vessels are based on a proven Hyundai Mipo Dockyards design that incorporates numerous fuel efficiency features and a flexible cargo capability.
General Dynamics’ NASSCO shipyard has delivered the first in a series of three ECO Class tankers to SEA-Vista LLC, a joint venture between SEACOR Holdings and Avista Capital Partners. The new tanker symbolizes an emerging direction in U.S. shipping toward cleaner, more fuel-efficient modes of moving product between American ports. The Independence is an LNG-conversion- ready product tanker with a 330,000-barrel capacity. Designed by DSEC, a subsidiary of DSME, the vessel incorporates fuel efficiency features including a G-series MAN Diesel & Turbo slow-speed main engine.
Elsewhere in the eco-market, Derecktor Shipyards of New York has won another order for a research vessel using its hybrid propulsion system. Following on the highly successful application of battery hybrid electric propulsion on the research catamaran Spirit of the Sound for the Maritime Aquarium, the City University of New York signed a contract for the second vessel.
“There is a very high demand for hybrid systems in the commercial vessel sector,” said Derecktor’s General Manager, Micah Tucker. “In particular, the research vessel market has shown very high levels of interest. Given the versatile electrical source for hotel loads, we have the perfect platform for high electrical demand applications. We also have seen increased interest given the silent operation of the electric motors.” (Ed. note: “Hotel loads” refer to non-propulsion uses of electricity such as lighting, climate control and water desalination.)
Both U.S. and Canadian shipyards are servicing local needs. The tug Ocean Catatug 1, developed by Ocean Group of Canada, was specifically designed to maneuver and mobilize construction barges at the Champlain Bridge, which spans a waterway characterized by shallow waters and currents of up to nine knots. Louisiana-based Main Iron Works delivered the tug Compass Stallion for Next Generation Marine in New Orleans, and Blount Boats in Rhode Island delivered the Atlantic Pioneer, America’s first U.S.-flagged crew transfer vessel, for Atlantic Wind Transfers.
Strategic Marine, with shipyards in Australia, Singapore and Vietnam, is also looking to offshore wind as demand for oilfield service vessels has dropped. The yard builds a variety of vessels including ferries and patrol boats. Ron Anderson, Executive Director, says: “It helps that we have been successfully introducing new lines to our product portfolio, such as modular fabrication and marine and civil infrastructure, for a number of years now. We are ramping up our marketing and R&D activities, rather than scaling them back to cut costs like a lot of companies, and expanding our target markets overseas.”
Singapore-listed Vard, which is majority-owned by Fincantieri, wants to grow its non- oil business in research and naval vessels. “We need to – and we want to – reactivate that and make it a much bigger part of the business now that the oil and gas market is down,” explains Executive Vice President Holger Dilling. Oil and gas made up 80 percent of the business over the past five years, but this could fall to 40 percent over the next two years, he says.
This year Vard signed a letter of intent to build four luxury expedition cruise ships for French company Ponant. Fincantieri also won contracts with Carnival Corporation for the construction of five next-generation passenger ships. They will be delivered in 2019 and 2020 and will operate in the emerging cruise markets of Australia and China.
Fincantieri also signed an exclusive cooperation agreement with Huarun Dadong Dockyard (HRDD) aimed at creating a cruise ship repair and conversion yard to service the growing cruise industry in China and Australia. It would combine the location and capabilities of HRDD with the experience and expertise of Fincantieri.
Meanwhile, Indian shipyards are seeing growth in the ro-ro and ro-pax segments as well as the harbor vessel market as a result of India’s plans to build new ports. C. R. Venugopal, Division Head of Plan Approvals at the Indian Registry of Shipping, foresees a growing presence for Indian shipbuilding: “A great deal of commitment is being made by the Indian government to support shipyards by insisting on the ‘Make in India’ initiative, and we will be able to judge its effects in due course. Subsidies worked well for Indian yards in the 2000s, and a new range of subsidies has been made available since the start of this year.”
The scheme allows yards to claim a subsidy after delivery of the vessel. This is expected to motivate shipyards to improve their production methodologies to meet scheduled delivery timelines. “Coupled with the ease of importing machinery and equipment, Indian yards may once again become competitive and win international tenders,” says Venugopal.
Indian shipbuilders missed the opportunity to capitalize on a growing market during the peak shipbuilding period a few years ago. “While yards managed to secure orders from foreign shipowners,” Venugopal explains, “due to improper planning and management most could not deliver in time. This is the biggest challenge for Indian shipyards and one which they are dynamically and enthusiastically embracing now. At present, due to the low-lying shipping market, there are limited new international orders. However, the government’s focus at this time is on developing and upgrading national inland waterways for cargo movement within the country, and this may become a key economic driver for the domestic shipbuilding industry.”
Meanwhile, globally, yard mergers and consolidations are being explored in an effort to limit losses. – MarEx
Wendy Laursen is News Editor for Asia Pacific.
The opinions expressed herein are the author's and not necessarily those of The Maritime Executive.