The Shipbuilding market in 2003 (2)

Asia 

2003 was a new record year for Korea, which asserts its world leadership in the shipbuilding industry. The Korean shipbuilders' orderbook went from 25 to 48 million tons between end 2002 and end 2003. Sale targets of shipyards set at the beginning of 2003 were already met by the third quarter and then surpassed
 

2003 was also a new record year for Japan confirming its second place in the world ranking.

Japanese shipbuilders' orderbook went from 24 to nearly 38 million tons between end-2002 and end-2003. New orders represented more than 26.7 million tons this year as against 15.1 in 2002.
 

2003 was also a record year for China which confirms its third place in the world ranking. The orderbook of Chinese shipbuilders went from 9.1 at the end of 2002, to more than 15 million tons one year later. .

Chinese shipbuilders surpassed their objective of 10 million gt before the date that they had fixed (2005), despite the SARS epidemic, which hit the country in the second quarter of the year and slowed down numerous projects.

Expansion in Chinese shipbuilding is continuing. New large shipyards are under construction (e.g. Nantong Rongshen), while existing yards are expanding or modernising their production facilities. Some yards located in urban areas are being displaced where facilities are modernised and capacity increased (e.g. Shanghai Shipyard to Chong Ming island, Jiangnan Shipbuilding to Chang Xing island, Qingdao Beihai to Haixiwan, etc.).

Finance for this capacity expansion is coming from various sources. Funds provided or loans guaranteed by central, provincial or city governments seem to account for a significant amount of the investment in shipbuilding, however direct foreign investment and private domestic funds are now becoming more and more active, especially in the privatising of former government controlled shipyards.

China is thus becoming equipped with gigantic shipbuilding facilities, capable of competing in the future with the largest Japanese and Korean shipyards. China's ambition is to become number one in world shipbuilding before 2015, which is tomorrow.
 

China has even surpassed its own expectations and surprised its previous critics. Chinese yards today build almost every type of ship, even if they are, from time to time, delivered with some delay. The latest ships produced in China, which can be sometimes extremely complex, are trading well worldwide and are witness to the progress achieved over the last few years.

Chinese shipbuilding has however seen some failures, the best known being the case of the Jiang Yang shipyard but even in this case the new wave of private investment has illustrated the trend of the private sector taking over where previous government management failed. The year 2003 saw a new identity, 'Yangzhou Dayang Shipbuilding' rising from the ashes of the defunct Jiang Yang shipyard.

Shipyards have been able to enjoy a great degree of liberty over the last years, but some have at the same time encountered some losses, hence a closer scrutiny from the highest levels in the commercial policy of these yards is being implemented.

Perhaps, more than elsewhere, due to a lack of some 'old clients', Chinese shipyards have been more opportunistic, which has sometimes irritated some owners.

The fixed exchange rate between the yuan and the dollar has clearly been a considerable advantage this year for Chinese builders, offering them a distinct competitive edge over their Japanese and Korean rivals. Nonetheless, this fixed parity does not completely protect them when the yen, euro, and won appreciate against the dollar as they need to buy numerous supplies and base products outside China. This is why Chinese builders are pressing the authorities to develop domestic production of ships' design and equipment, as Japan and Korea did in the past. The very strong growth in the Chinese economy and the enormous demand for steel products have produced a cascade of price hikes for steel-plates and steel sections, increasing builders' costs and reducing their margins.

Confronted with the trade imbalance between the US and China, Washington is pressing Beijing to re-value its money. The depreciation of the dollar compared to other main currencies might lead the Chinese authorities to consider raising the exchange rate of the yuan against the dollar or to let their currency float, even partially, which of course would have an impact on Chinese shipbuilding.
 

Like other shipyards in the Far East, Taiwan's state shipbuilding group, CSBC, following a deep and painful restructuring programme, has filled up its orderbook in 2003 particularly with containerships and some Panamax or Capesize bulk carriers. The CSBC orderbook (split between two sites located in Kaohsiung and Keelung) has almost doubled to achieve roughly 2 million tons (1.2 million tons end 2002) allowing Taiwan to hold sixth place in the world.

The privately controlled Ching Fu Shipbuilding is also holding a full orderbook and has establishing itself as one of the emerging leaders in fishing vessels and other specialised types below 15,000 dwt.

We should mention the renewed interest this year for shipbuilding, in countries that should be able to benefit from the huge demand and higher prices. History shows that in such periods owners generally go out to encourage new suppliers in order to obtain reduced prices or simply earlier deliveries.

To illustrate this point we can cite emerging capacity and further development of shipbuilding in Vietnam, India and Iran, the latter founded for domestic requirements is now attracting international buyers.

In the Philippines, where the Japanese shipyard Tsuneishi established the subsidiary base at Cebu in 1994 to concentrate on the construction of Handymax bulk carriers, production rose from 7 deliveries per year in 2001 to 10 deliveries achieved in 2003 of the Cebu standard design 'Tess 52'. With this full orderbook, an investment programme is already being implemented to reach an annual production of 14 newbuildings in the next few years.
 

New orders are in sharp decline. The total orderbook for Western Europe is still shrinking, dropping from 6.7 million gt in December 2002 to 6 million gt by the end of 2003. The fall in market share of West-European shipyards from 8 % to about 5 % is even more spectacular, but it is also proportionally due to the considerable increase of the Asian shipyards' orderbooks.

West European shipbuilding at the beginning of this decade underwent a downscale compared to the 1990's, when the orderbook was hovering between 8 and 9 million gt.

By simply drawing a straight line, we could forecast that European shipbuilding would disappear in the coming years, but nothing is as uncertain as extrapolation.

If we try to analyse this evolution we can see that from the beginning of the 1990's most European shipyards have implemented cost-reduction schemes:

• production outsourcing (carpentry, electricity, air systems, pipes, outfitting, assembly),

• reducing their management staff and often buying their designs,

• rationalising procurement,

• sub-contracting steel blocs, or consigning entire hulls to East European countries, such as Poland, Romania, Turkey, Russia, Ukraine, complicating at the same time the management of this sub-contracting,

• sub-contracting to the same yards the outfitting of ships, which are now almost completely built abroad.

They have done away with the superfluous but sometimes also with the essential skill, and particularly human resources that make up the intellectual capital of shipyards.

Today European yards are organised to build ships of small and medium sizes (less than 40,000 dwt), which have been progressively abandoned by the large Korean and Japanese shipyards, and are being battered by the strength of Chinese yards now interested in building all types and sizes of ships.

To a large extent, European shipyards have also lost their subsidies. At the end of 2000, they had filled up their orderbooks for three years in order to benefit from the maximum authorised in the EU, up to 9 %. The end of this mechanism increased the price differential with Asian shipyards and, whereas some clients were still prepared to pay a little more to stay in Europe, they progressively left the area due to an ever-growing disparity. For some shipowners building in Europe became an unaffordable luxury item.

European shipyards have also more recently been handicapped by the level of the euro, in a market where ships' values are most of the time expressed in dollars.

Certainly there are areas of excellence in Europe, such as the building of cruise-ships, ferries or other passenger ships, but will there be a sufficient number of orders in these sectors to allow full employment of these facilities?
 

European shipyards have unfortunately today structural handicaps compared to their Korean, Japanese, and Chinese counterparts. For political, social or economical reasons, they have not been able to restructure their facilities. Newbuilding sites remain widespread all over Europe and can not compete with the Korean giants. Fincantieri and Izar, which have several domestic sites, have not even merged or closed any facilities. For lack of means, they have not been able to invest in their yards as the Koreans and Chinese builders have done on a massive scale. On top of that, the tax burden, social costs and administrative constraints add some weight to the bill.

In industrialised countries like Japan and Korea, net salaries are on a par or even higher than those of European workers, however, differences in social expenses and the number of working hours make man-hour cost much more expensive. Therefore, on the basis of identical costs for procurement and equal man-hours to build a ship, there still would be a gap between Korean or Japanese and European builders to the detriment of the latter.

An alternative policy could have been to favour the closure of some sites in Europe and the merger of some of the remaining capacities.

Will there be a turnaround? One must hope so and also that it comes quickly as European shipyards are continuously laying off workers and even some closing down. A further new reduction of West European production capacity is again to be envisaged for this year.

Notwithstanding the above, West European shipbuilders have today good cards up their sleeves, as they could offer earlier delivery dates and should obtain a premium above current market prices on that basis.
 

The orderbook of the major French shipbuilders has dropped from 553,000 tons end 2002 to 380,000 tons end 2003.

After having signed a contract for the construction of a LNG carrier of 74,000 cbm with Chantiers de l'Atlantique in 2002, Gaz de France decided this year to order another LNG carrier of 153,000 cbm, which will as well be a membrane type, equipped with an advanced propulsion based on a combined diesel-gas-electric engine. This propulsion offers two advantages to the owner: important energy savings due to a lower consumption and an additional cargo capacity for similar dimensions.

Chantiers de l'Atlantique have also received an order for a ferry of 1,900 passengers, 700 cars and 2,000 lane-meters for the account of Sea France.

Demand for cruiseships remained weak over the last three years and prospects remain modest in the short term. Chantiers de l'Atlantique are currently taking measures to adjust to this new environment, not having been able to obtain any new cruiseship orders since 2000. They have delivered four cruiseships in 2003, including the 'Queen Mary 2', the biggest liner ever built, demonstrating the excellent performance of the yard.

Chantiers de l'Atlantique hope to be able to build military ships like other shipyards elsewhere in Europe. Without a special agreement, this is a rare event in France since military shipbuilding is restricted to naval yards. However a joining of forces could benefit all the parties: Chantiers de l'Atlantique possess a highly efficient organisation and can propose economically viable solutions which should in co-operation with naval yards, reduce the cost of their ships. The French Navy could thus satisfy its needs more easily and the French government would reduce its expenses.

With the progressive downsizing of the deep-sea fishing fleet, planned by Brussels, we should note that since the delivery of the 'Ulysse', Piriou Shipyards in Concarneau, have managed to diversify and propose a large range of products from AHTS, PSV, tugs and some others innovative service ships, either for some French interests or foreign clients.

Piriou Shipyards still propose their traditional trawler, seiner and other fishing boat designs. In this highly competitive context, the yard has been able to develop its client base and sign a number of new contracts. They also developed a new building facility on Mauritius which reinforces their presence in the region.

The situation at Constructions Mecaniques de Normandie in Cherbourg is rather different as they still have a strong workforce of about 400 employees and an order backlog which suffers from a lack of private clients. The latest order for a series of 6 corvettes from the Emirates Navy at the end of the year, of which only the first one will be built at Cherbourg, has brought some fresh life to the shipyard until 2007. The French Coast Guard has a 52 metres long patrol boat on order at the yard. Some yachts and sailing ships have to be added to this orderbook which is still not completely full.
 

German shipyards have benefited from the tremendous demand for containerships. Whilst Korean shipyards were concentrating on very large container carriers, German yards received orders for 54 new ships mainly in the 2 500 / 3 500 teu size range as well as feeders of smaller size. For reference, in 2001, German yards signed up orders for 46 containerships of over 1 000 teu. In 2002, this figure was divided by three.

They have benefited from the lack of interest for these smaller sizes from Korean yards, but also from the proximity with their buyers (all Germans), and finally from an overflow of orders from Asia onto Europe, which, despite higher prices, has been able to offer earlier delivery dates in the second half of 2003.

Meyer Werft received two orders for cruiseships of 93,000 tons for the account of their traditional clients Star Cruises / NCL as well as a new passenger-ferry for Indonesia.

Flensburger has been specialising more and more in ro-ros and Lindenau continued its success in the tanker sector securing orders for 5 product tankers of 32,000 to 34,000 dwt.

As to the other shipyards which diversified in other types of ships, times are becoming more difficult. Flender Werft and SSW have closed down. Elsewhere, reduction of personnel and other plans (early retirements and layoffs) are going on.

Germany occupies the second place in Europe behind Poland and ranks number 5 in the world.
 

Italian builders were penalised by the prevailing weak demand for cruiseships and passenger liners.

Nevertheless, Fincantieri was awarded one of the 4 orders for cruiseships placed in 2003 and carry in their orderbook 8 cruiseships to be built in three different construction sites. They have also received orders for ro-ros and ferries for their Ancona, Napoli and Palermo facilities from Italian owners. Italy occupies 4^th rank in Europe and 8^th in the world.
 

In 2003, Izar, the Spanish state shipbuilding group, successfully delivered their first three 138,000 cbm LNG carriers and should deliver this year the two remaining ones, out of an order for five ships signed in 2000. Izar clearly hopes to continue in this niche against very fierce competition from Asia. 

Unfortunately with the exception of Barreras, Spanish shipyards succeeded in taking very few new orders in 2003. In addition, European authorities have requested Spanish authorities to put an end to certain arrangements favouring shipping investment, which were considered to be contrary to the Community regulations.
 

- Finland 

Finnish shipbuilders also suffered from the poor demand for cruise and passengers ships.

Kvaerner-Masa Yards have however gained the order for the biggest cruiseship ever to be built (160,000 gt) for the account of Royal Caribbean. They have also landed the order for very sophisticated ice-breaker ships for Russian account.

Finnish shipyards have an indisputable expertise in building ships capable of navigating in ice conditions and their geographical position is an advantage. They should benefit from the Russian growth and renew their links with an economic partner who had rewarded them before the fall of the Soviet Union with numerous orders.

They could also take advantage from the economic development of the Baltic states which are about to join the European Union.
 

- Denmark 

Odense Lindo, the last major Danish shipyard, continues to build a series of large containerships, of which the last version should approach the 10 000 teu size. These containerships will then be operated by the shipping branch of the A.P. Moller group, which was the first owner to invest in large containerships. Together with MSC, they are the sole owners in the world who have their own private terminal capable of discharging ships with beams up to 21 / 22 rows of containers
 

- Netherlands

2003 was a particularly difficult year for Dutch shipyards. After the closure of Tille at the beginning of 2003, van der Giessen-de Noord, specialised in the building of ferries, decided to cease their activities in shipbuilding, just after the delivery of the French ro-pax 'Pascal Paoli'. One of the building sites of another yard, Bijlsma, also had to close down.

Dutch shipyards, still very active in the sector of small ships, owe their survival to their capacity for innovation. Hulls are largely subcontracted out to Romania or Ukraine, before being repatriated for outfitting. Dutch yards are still strong in the building of offshore support ships, dredgers, small cargo vessels and small petroleum product and chemical carriers.

Dutch shipbuilders have suffered badly from the aggressive competition of Chinese shipyards for similar types of ships. With only slighlty more than 300,000 tons on order at the end of 2003, the Dutch shipyards are now close to the bottom of the world ranking.
 

The merger in 2002 of two old rival yards Aker and Kvaerner gave birth to a group with twelve yards in Norway, Finland, Germany, Romania, Brazil and the USA, employing 13 500 people and having a turnover of around 20 billion Norwegian crowns.

2003 was a very difficult year and the orderbook of Norwegian shipyards dropped significantly. The shipyards suffered from the appreciation of their currency. Now specialised in the offshore sector, the overall tonnage on order at Norwegian shipyards does not weigh much in the world shipbuilders' ranking despite that the value of each ship is often very high.
 

Polish yards which had encountered important financial difficulties in 2002 necessitating restructuring and recapitalisation, were on the rebound in 2003. Their production is largely orientated on containerships, open-hatch bulk carriers, car-carriers and ro-ros.

Poland occupies the first rank in Europe and fourth rank in the world with about 2.5 million gt at the end of 2003. Poland's entry into the European Union could be a new stimulus to growth but the shipyards will probably have to face a progressive increase in their salary costs.
 

Croatian shipyards have largely taken advantage from the demand for product tankers and car-carriers. The five main shipyards Split, Trogir, Kraljevica, 3 Maj and Uljanik are full up until 2007. They place themselves often with ships slightly more innovative than those built in Asia. Trogir is finishing a series of 6 product tankers of 47,000 dwt fitted with a two-engine propulsion and one crankshaft. Split has been awarded the order from Stena for a series of 6 P-Max type tankers.

At the end of 2003, Croatian shipyards occupy 7^th place in the world with about 1.5 million gt on order.
 

Turkish shipbuilding with its numerous shipyards benefited from the demand for small oil product carriers and chemical carriers from domestic and European owners. Domestic owners are also very dynamic. Turkish yards are also used to take subcontracting works from West European shipyards. With nearly 300,000 dwt on order, Turkish shipyards are now at a level comparable to the Netherlands shipbuilding industry.
 

- Romania

Romanian shipyards have benefited from significant direct foreign investment and management from experienced international shipbuilders (Aker, Daewoo, Damen, etc.) and have been able to take advantage of the overflow from Asian yards. They managed to attract orders which could have gone to Korea in other circumstances. Thus, Constanza signed contracts for two product tankers of 37,000 dwt and Daewoo Mangalia for two Panamax tankers. In the meantime 2003 saw a significant increase in both volume and value of the subcontracting of hulls of a diverse range of vessel types including offshore and container vessels for a number of West European shipbuilders.
 

Russian shipbuilding should also logically draw benefits from the world demand and the congestion of Asian yards, with sites being able to offer earlier delivery dates. They could also take on domestic orders in view of the predictable increase in oil exports from this zone, and the pressing need for ships of suitable ice class. Its industrial infrastructure however needs to be enhanced.
 

The American shipbuilding industry has consolidated its position this year and has maintained its 9^th place in the world with around 0.7 million tons at the end of 2003. However, American yards protected by the Jones Act, are not really able to be in the market at competitive prices.  

In 2003 the Aker-Kvaerner group saw its first newbuilding delivery from their Philadelphia shipyard of a 2,600 teu containership for the US flag owner MatsonNavigation Company. This is the first of a two-ship order and each vessel was reportedly priced at $ 110 million (owner's costs included). There was originally a lot of hope that by taking on the Philadelphia shipyard that the Aker-Kvaerner group could bring it back into the international shipbuilding market, but today it is unable to ensure a sufficient workload, due to the pricing distortions of the Jones Act environment (US built - US flag - US crew). 

Nassco of San Diego is still working on 4 Suezmax tankers of 185,000 dwt for the account of BP, bound to trade between Alaska and the US West Coast, also under the Jones Act regulation. However it should be noted that this activity is secondary to Nassco's many contracts for the US Navy.
 

The very strong demand for new tonnage in 2003 and the reversal of what has traditionally been a 'buyers' market to a 'sellers' one was hardly anticipated. Will this trend continue?

We can reasonably think it will, at least for 2004 and this is for several reasons:

• Inflation often breeds on itself: the enormous demand is causing at the moment substantial increases in procurement costs and especially in steel plate prices. Despite increases in the price of ships, it is not certain that yards will improve their margins. In these conditions, it is likely that shipbuilders will maintain a policy of price increases, which in turn could motivate owners to invest today rather than tomorrow.

• These owners may also consider that prices from the yards, for a large variety of ships, are still below the historical highs reached at the beginning of the 1990s, and thanks to low interest rates it is reasonable to invest.

• Prices have broken through new limits, rendering the reference benchmark prices of the past five years obsolete. The former equilibrium has been broken and we have entered a new cycle. Given the current situation with shipyards, suppliers, raw materials and energy, it is fairly certain that newbuilding prices will remain at high levels for several years.

There will be however a correction to this trend as these price increases pose several problems as to the real value of the assets and their financing. Owners can ask themselves if it is reasonable to order ships for delivery in four years time. The ratios of ships on order versus active fleet may also be a cause for concern: how will the market absorb this overflow of tonnage?

The enormous shipbuilding capacity that China is putting on the market and its ambition to become the leading shipbuilder in the world within 2015, will certainly meet some strong resistance from Japan and Korea.

All of this is part of the 'common' history of the shipping industry, euphoric periods being often followed by more or less deep depressions. We can see some similarities between the current dry bulk freight market evolution and the stock exchanges excesses in the 1999 to 2000 period, before the bubble burst!

Adjustments are already taking place, since the cost of shipping becomes a significant element in the price of some goods, especially of raw materials. Industries always have the possibility to seek out alternative solutions, which will minimise their costs, they will switch to other types of energy, for example, or will purchase their raw materials from closer sources.

However, it is true also that, despite these price increases (assets, freight rates), transportation by sea remains extraordinary cheap and has contributed to a remarkable development in international trade.