The Shipbuilding market in 2000 (3)

It is generally acknowledged that an increase in prices for mass produced items is impossible as long as the supply is in excess of demand. The year 2000 experienced the shift where demand for new building exceeded supply and provided the chance to give an accurate measure of real production capacity in the global shipbuilding industry.
 

 

Part of the ambiguity now seems to be settled. However, the question remains about whether it will ever be possible for any of the world's active shipyards to make a good return on their newbuilding business. In spite of significant increases, newbuilding prices remained very low, often even lower than those prevailing before the 1997 Asia crisis and well below those which were existing at the beginning of the nineties when the world orderbook was not even reaching 40 million gt. 

It is legitimate to try to understand why in a year which has seen exceptional demand, it has not been possible to get prices even higher, and one wonders if it will ever be possible to get further increases. The formidable reaction and elasticity of Korean construction capacity along with the Chinese one indeed offers at least a partial explanation of the phenomena of only nominal increase in prices in face of profound increase of demand.
 

Japan achieved a strong performance, obtaining about one third of the orders with about 14 million gt (end 2000) for a year end total orderbook of 18.1 millions gt, compared with the 1999 year end figure of 17.4 million gt.

However, its market share contracted from 29.5 % down to 25.5 %.

During the course of the first three quarters of 2000, Japanese shipbuilding seemed to be missing a certain dynamic response in the face of the surging Korean industry. Japanese yards took only about 11.5 million gt of orders as of the 3rd quarter 2000 maintaining their orderbook at the same level of 1999. Last quarter was more favourable.

Japan's builders had to contend with a strong, overvalued yen in comparison with the currencies of their main competitors. The Korean won maintained its weak levels established during the Asian crisis and the euro has experienced an ongoing depreciation against the US dollar from its inception. The yen, has since September 1999 traded in a band between 105 and 110 yen / US dollar, as opposed to the exchange rate in excess of 120 yen / US dollar since the beginning of 1997.

As Japanese shipbuilders had focussed a large part of their production towards the dry bulk sector, they met with considerable success in 1999 and the first part of 2000, during which period demand was strong, especially in Handysize and HandyMax sizes. Japan was not however able to take advantage in 2000 of the full rebound in demand for tankers and containerships newbuildings.

In the fourth quarter of 2000, when it seemed as if the Japanese yen would not be able to recover, Korean yards became saturated and were unable to offer the earlier deliveries that buyers required. Japan's earlier deliveries and rising US dollar prices for newbuildings created a new attraction and the large and medium-sized Japanese shipyards were successfully able to take as many orders as their Korean counterparts. However, small Japanese yards, whose clientele consists mainly of domestic shipowners, are still experiencing difficulties in filling up their berths taking into account the tightness of the funding market in Japan.

It is interesting to note that a certain geographical specialisation has progressively taken place. The question is to know if this specialisation is voluntary or forced.
 

Japanese shipyards have seen their market share for tankers declining from 46 % in September 1998 to 38 % in 1999 down to 21 % in 2000.

For containerships, figures for the same period represent a decline from 25 % to 12 % finishing at 8 %. Korea by comparison had 31 % in 1998 and finished year 2000 with 63 %. These losses of market share have added equally to financial difficulties. The decline of newbuilding prices combined with the influence of the strong yen had a hard impact on the financial performance of the major ship exporters in Japan who all reported losses in their results announced for the first six months of fiscal 2000 with the exception of Hitachi and NKK which however had posted losses in 1999.

But Japanese yards nonetheless persisted in their efforts to improve their competitive performance. Mitsubishi H.I. and Sumitomo have announced new plans for workforce reductions. Mitsubishi has also decided to specialise its four production sites.

Japanese shipbuilders are also well aware of the need to further integrate their production scale on a nation-wide basis in the face of the competition from the giants of Korea.

In April of 1999, the Japanese central government established a commission to consider the future of shipbuilding in Japan. Their report, published in August 1999, made specific recommendations on the need for shipyard specialisation, combined with a reduction and rationalisation of production into three or four major groups instead of the seven existing today.

Since the publication of the commission's report, discussion has effectively started with regrouping of Kawasaki - Mitsui - IHI as one group, NKK - Hitachi as another, while Mitsubishi and Sumitomo are expected to remain alone. However until now, no concrete arrangements have yet been made. It seems as if the principal difficulty rests in the structure of the large industrial groups. They have to de-consolidate their activities in the shipbuilding sector before being able to achieve the regroupings now under consideration. Kawasaki H.I. has at least announced that they will spin off the shipbuilding division as a stand alone company during 2001.

Japan could thus proceed with regrouping their construction sites, closing some docks, reopening others which have been de-activated in response to the two previous crisis periods in the shipbuilding industry, experienced in the seventies and the eighties in order to compensate the closures of those affected yards and to increase the production and productivity of the new yards.

The Japanese Shipbuilders Association has predicted that the demand for newbuilding could decline in the next few years and this could accelerate the trend towards the regrouping of the Japanese shipbuilding industry.