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The Shipbuilding Market in 1998 


1998 was marked by several trends.

 1. A slump of about 15 to 30% in the sale prices of most standard ships, depending on their type and their size, but also on the degree of competition between shipyards. The specialized tonnage was also affected by this fall in prices, but in a more diffuse manner, with the notable exception of cruiseships. 

2. Further growth in the world orderbook for newbuilding ships, which increased from 56.6 million gt to 57.7 million gt between the end of 1997 and the third quarter of 1998, its highest level since 1976, despite the gradually spreading economic crisis, a reduction in the growth of world trade and the greater difficulty in financing such investments. 

This led to a significant reduction in the volume of orders compared with the previous year, for all types of ship except containerships, LPG carriers, ro-ro ships and cruiseships, while forecasts of world growth and international trade in 1999 have been continuously revised downward. 

3. Consolidation of the market shares of the two principal shipbuilding countries, Japan and Korea, despite the financial crisis sweeping these countries. The key end-of-year figures are 10/10 and 20/20: 10 million gt of orders, 20 million gt in the orderbooks for each country. The retreat of China and a slight bounce-back by Europe should be noted. 


A large reduction in the orderbook might have been expected in 1998 as a consequence of the crisis that swept through South-East Asia in the fall of 1997. This did not happen, and as a whole shipbuilding was once again particularly active. 

In 1973 the world orderbook reached the remarkable figure of 120 million gt. It is not impossible that the orderbook in the third quarter of 1998 was in fact an all-time record on "adjusted data". One reason is that building a ship at that time required approximately double the time spent today (the Swedish shipyard Kockums, reputed for its productivity, needed about one million hours to build a VLCC which the best Asian shipyards currently produce in a little less than five hundred thousand hours). Another reason is that many orders had been canceled following the first oil crisis. 

 

World orderbook since 1990 in million of gross tonnage
 

South Korea

Japan

China

Western Europe

Eastern Europe

Rest of the world

Total

end 1990

8.7

13.5

1.1

8.3

4.4

4.2

40.4

end 1991

7.8

14.9

1.4

9.2

3.8

3.2

40.3

end 1992

7.9

14.4

2.0

8.4

4.4

3.3

40.4

end 1993

8.6

11.1

2.0

8.1

4.5

2.1

36.4

end 1994

10.9

13.1

1.9

8.2

5.2

2.6

41.9

end 1995

13.9

13.7

2.0

8.2

5.9

2.6

46.1

end 1996

13.2

13.7

2.7

8.3

4.8

2.6

45.3

1997 (September)

16.6

15.8

2.9

8.1

4.4

2.7

50.5

1997 (December)

18.7

19.8

3.2

8.0

3.6

1.6

56.6

1998 (March)

18.3

18.4

3.0

8.9

3.9

2.6

55.2

1998 (June)

18.5

18.6

2.8

8.9

4.0

2.9

55.6

1998 (September)

18.0

20.1

2.6

9.4

4.0

2.7

57.7

 

Although the world orderbook has increased smoothly at a rate of about 8% per year since 1993, while dollar prices were falling from their peak in 1991 at about 4% per year, the main explanation of the sustained activity in 1998 is the significant fall in newbuilding prices over an extremely short period.

Compared with 1991 the fall is yet more marked, while over the same period ship specifications have become more sophisticated. 

Newbuilding prices variations (in million US$ - basis 5 x 20%)

   

3Q1997

3Q1998

Variations 98/97

1991

Variations 98/91

VLCC

82

70

-15%

115

-39%

Suezmax

51

45

-14%

65

-30%

Tankers

Aframax

41

34

-17%

55

-38%

Panamax

36

30

-17%

   

IMO2 45k Product

33

29

-12%

40

-27%

Capesize

42

35

-17%

55

-36%

Bulkers

Panamax

27

20

-25%

30

-33%

Handymax

26

19

-27%

29

-34%

Prices reached very low levels in current dollars and, in constant dollars (adjusted for inflation), levels below those reached during the previous shipbuilding crisis in the mid-1980s. 
Under these conditions, shipowners can justify their investment decision by being sure of profiting from a relative advantage over their predecessors, who ordered at higher prices, but also of buying at all-time low prices. 

Vlcc newbuilding price evolution

The Asian financial crisis certainly influenced the behavior of the decision-makers. However, it was definitely the fall in the Korean currency with respect to the dollar which made the very big fall in newbuilding prices and the new orders possible in an uncertain environment. 

There are no precedents of this magnitude. 

Average exchange rates with US Dollar

Yen

Won

DM

1997

1998

1997

1998

1997

1998

January

118.0

129.5

851

1 702

1.60

1.82

February

123.0

126.0

866

1 627

1.67

1.84

March

122.5

129.0

880

1 489

1.70

1.83

April

125.5

132.0

894

1 387

1.71

1.81

May

118.0

135.5

892

1 403

1.70

1.79

June

114.0

140.5

889

1 395

1.73

1.79

July

115.0

140.5

891

1 293

1.79

1.80

August

118.0

144.5

897

1 312

1.84

1.79

September

121.0

134.5

910

1 373

1.79

1.70

October

121.0

121.5

926

1 336

1.76

1.64

November

125.5

120.5

1 033

1 289

1.73

1.68

December

129.5

117.5

1 501

1 211

1.78

1.65

 

In 1991 the Finnish mark was devalued by about 40%. In 1992 and 1993 some South European countries (Italy, Spain, Portugal) devalued their currencies and the shipbuilding yards increased their sales. In 1994 China also devalued the yuan by 30% and increased its exports. However, the relative size of the shipbuilding industry in these countries meant that the impact was only regional.

The importance of Korea, which accounts for about one third of world ship production, amplified the phenomenon and dragged Japan into a downward spiral. The slow but continued depreciation of the yen and the anticipation by many protagonists of a still weaker yen until the end of the summer, given Japan's persisting difficulties, also pushed prices down. 

The fall in newbuilding prices in dollars generated a speculative downward movement. 

It is tempting - and it is the simplest approach - to calculate new prices in proportion to the changes in exchange rates. On this basis, and using an average precrisis exchange rate of 900 won/$ and an average exchange rate of 1,300 won/$, there should be a negative margin of about 30% between the prices charged in 1997 and those charged in 1998. This model is not completely validated by experience. 

In practice, the Korean yards must also buy many supplies in dollars or in wons-dollars, such as the steels, the main engine and the main equipment items, even though these can be made locally, together with specific equipment imported from Europe or from Japan. This proportion of purchases in dollars varies from one ship to another. For a VLCC it is about 60% in dollars and 40% in wons, giving a theoretical negative margin of about 18%. 

By pure coincidence, the fall in the price of VLCCs recorded in 1998 happens to be approximately this magnitude. However, this relationship is insufficient to explain the larger changes recorded for other types of ship such as Panamax and Handy bulk carriers, where the competition between Korean, Japanese and Chinese shipyards is more intense. 

Moreover, when the yen went from 80 yen/$ in April 1995 to 145 yen/$ in August 1998, the market prices, mostly fixed in the US currency, did not decrease in proportion (neither had they increased when the yen went from 130 yen/$ in 1991 to 80 yen/$ in 1995). 

Exchange rates are therefore only one part of the equation. The cost of raw materials and equipment, which also fell, and the higher interest rates and more expensive imports after a devaluation must be taken into account. 

However, it seems that the sudden appreciation of the yen from 145 to 111.6 yen/$ on 8 October was able to stabilize the fall in ship sale prices. An upward trend seemed to be identifiable at the end of 1998, at least in the bulk carrier ship market which is dominated by Japan, and this will continue in 1999 if the outlook allows. In any case it is the market and the balance (or lack of it) between supply and demand which will prevail in the end. 


 

Orders by quarters (in million gross tonnage)

   

Japan

South Korea

China

Western Europe

1996

March

2.237

1.176

0.279

0.890

June

1.896

1.344

0.440

0.665

September

2.660

1.301

0.270

0.532

December

2.366

2.916

0.676

1.087

1997

March

3.875

2.585

0.500

1.001

June

2.905

3.728

0.283

1.129

September

2.757

3.533

0.235

0.394

December

5.824

3.887

0.443

0.925

1998

March

2.238

1.379

0.245

1.585

June

2.648

1.741

0.241

1.040

September

3.875

2.801

0.053

1.085

% increase 1-2-3 Q 1997/98

-30%

-30%

-47%

32%

Although the orderbook grew in 1998, the overall rate of ordering nevertheless slowed compared to 1997: it fell in Korea, Japan and China and increased in Europe. 

This fall is relative, because the volume of orders over the first three quarters of 1998 remained high and greater than the same period in 1996, when it was sustained. 

This drop in order volume affected most standard ships but also the specialized tonnage, except for containerships, LPG carriers, ro-ro ships and car carriers, and cruiseships. 

The search for economies of scale, the competition between operators to maintain or increase market shares and the reduction in newbuilding prices were probably behind the new containership orders, the volume of which increased from 9% to 15% of the total carrying capacity of the orders. The number of units ordered, which increased from 77 to 153, is a more significant indicator. 

For ro-ro ships, absent from the orderbooks for many years, the need for renewal with better-adapted and faster ships, the firmness of freight rates and of second-hand values and the fall in newbuilding prices as a consequence of the new interest of Asian shipbuilding yards in this type of ship increased the number of ships on order from 28 to 39. 

The increase in vehicle production capacities and the search for more export outlets also contributed to the large number of car carriers in 1998, slightly below the 1997 figure but substantially higher than that for 1996. 

The firmness of freight rates and the development of alternative energy sources can also explain the interest in large LPG carriers, for which the total capacity on order increased from 646,719 cbm to 878,025 cbm. 

The excellent results of the cruise companies, profiting from economic growth in the United States and Europe, as well as the longer leisure time of the baby-boom generation, encouraged these companies to continue investing in new cruiseships. 

However, these ships represent only a small percentage of the world orderbook, most of which comprises tankers, bulk carriers and containerships. 

1997 had inaugurated a new tanker fleet renewal cycle. This continued through 1998, since this category's share in the world orderbook, expressed in dwt, increased from 49% to 59%, while those of bulk carriers and containerships decreased from 29% to 24% and from 15% to 10%, respectively. 
Among the tankers the VLCCs occupy a special place, because most Asian shipbuilding yards have optimized their activities around this type of ship. 

One of the challenges of the early 1990s was to deal with the renewal of the VLCC fleet, and in particular to replace the fleet built between 1973 and 1976 and still in service, which represents 170 ships in four years. This seems to have been managed without difficulty. Scrapping has more or less offset deliveries over the last few years. 

Although some shipowners had declared that they wanted to extend the life of their tankers beyond the critical age of 25 years, it seems that most of them have reversed their initial decision under pressure from, among others, the oil companies. In this case, VLCC deliveries in 1999 and 2000 would remain below the number of ships scrapped, which could generate new orders in 1999. However, the slowdown in energy demand as a consequence of the reduction in world growth could have a dampening effect. A fall in the price per barrel below 10 dollars could make the oil companies postpone non-strategic investment. From 2001 the rate of deliveries should fall substantially, approaching the scrapping rate: the VLCC renewal cycle will then be partly completed, which underlines the abundance of supply and the reactivity of the market. 

Vessel contracting 97-98

Specialised vessel contracting 97-98 




Shipping and Shipbuilding Markets 1999

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