The forecast for deliveries made in October 1998 by the Association of Japanese Shipbuilders was relatively pessimistic for the years 1999 and 2000 with a little over 26 million dwt against 40 and 44 million dwt actually achieved.

During the 90's the world orderbook and the delivery of newbuildings always grew a little each year. There were occasional moments of doubt. But they were immediately overcome by new concessions made on sale's price. In this respect 1999 and 2000 were exceptions, to the extent that demand for newbuildings which was extremely strong was met by a very modest price rise.

Despite current pessimism, it is by no means unlikely that a rebound after 2002 can be expected. The capacity of the market to pick itself up after the Asian crisis of 1997-1998 was quite remarkable and experience shows that with the cycles in industry, the more they are intense, the shorter they are.

This rebound could come from an economic revival and from an increase in demolitions.

But it is clear that during 2002 the volume of new orders should be lower than that of 2001 which will have the effect of causing a further deterioration in the price of these orders.

Shipbuilding is a relatively atypical industrial activity. Contrary to numerous other industrial sectors, which do not hesitate to reduce their production capacities when confronted with lower demand, either by closing down plants or by reducing activity, shipyards have sought throughout the 90's to improve their productivity and their competitiveness by an increase in production and, at the slightest sign of weakening demand, by lowering their prices to attract new orders.

Excluding devaluation of the majors shipbuilding countries' currencies (yen, won, yuan) to the dollar, any such lowering of prices in dollars should be very difficult to grant for the following reasons:

• Current prices are already extremely low, near to the levels obtained in 1999 following the Asian crisis.
• Ships are improving in performance and must meet increasing legal restrictions, thus in principle are more expensive to build.
• The Asian crisis caused a change in behaviour especially in Korea. What was possible before is no longer the case. The Chaebols have broken up and it is now impossible to expect that losses of one activity can be subsidised by the gains of another.
• Shareholders and financial analysts are pushing the industrial conglomerates to spin off their different activities to obtain a more transparent statement of their accounts.

Shipyards could hope to obtain some price reductions on raw materials and equipment they use under economic pressure. They can also hope that prevailing low interest rates will act as a strong incentive.

However the different shipbuilding areas do not have the same forces to face this new crisis.

• European shipyards seem to us particularly vulnerable as they have just lost the benefits of their shipbuilding subsidies. In addition the exchange rate between the euro area countries versus the dollar has recently enjoyed favorable levels which have not been seen for the last 15 years. Production is dispersed over several countries, shipyards, and building sites, leaving little room for consolidation or economies of scale. Their production is also very narrowly spread and substitute orders, which are a form of diversification, are less easily undertaken and perhaps more risky. An increase of orders in euro prices could possibly reverse this tendency.
• Korean shipyards appear to be better placed. They have a considerable backlog of orders to allow them to bide their time. They benefit from important economies of scale. They can decide to shut down one or more docks if necessary. The won remains closely linked to the dollar, which is the money of reference. Thanks to these advantages they can also hope to capture a number of orders for standard vessels or more sophisticated ships which would have gone to European shipyards and thus gain market shares.
• Japanese shipyards seem to us equally well placed. Consolidations are certainly easier to achieve within a nation rather than a continent. Numerous Japanese shipyards are multi-site and regroupings and rationalisations can be easily done. The yen remains weak and allows Japanese yards to seduce opportunistic owners. Japanese shipyards can also count, as they have always been able to do, on the support almost unconditional of domestic shipowners.
• The low cost of Chinese manpower linked to a very modern infrastructure should in principle guarantee a competitive advantage over their two Asian rivals - the Koreans and the Japanese. In the price war that is looming, it would appear that the Chinese shipyards have a considerable advantage, even if it takes more man-hours to build a ship of the same specifications. They can also count on their domestic owners and on the pressure of the Chinese government to encourage owners to buy and build in China. Nonetheless the fixed exchange rate of the yuan to the dollar and the reduced commercial reactivity already seen in 1998 in a dropping market, could be a handicap to these shipyards in 2002.