2004 was a new record year for Korea, which once again confirmed its role as world leader. The Korean orderbook went from 49 to 62 million gt between the end of 2003 and year-end 2004. By contrast the Korean orderbook stood at only 27 million gt at the end of 2002.

All the yards are full until the first or second quarter of 2008, with only very limited exceptions. Within some yards, certain berths are committed up until the end of 2008.

Korean shipbuilding remains very concentrated. The Korean portfolio, which represents slightly over 1,100 ships, is split up between 15 shipyards.

The orderbook of the three largest Korean builders Hyundai Heavy Industries (HHI), Daewoo Shipbuilding and Machinery Engineering (DSME) and Samsung Heavy Industries (SHI), are largely focused on the very large containerships, LNG carriers and tankers (VLCCs, Suezmax, Aframax). Hanjin exclusively builds very large containerships.

Hyundai Mipo Dockyard and STX, who have previously concentrated on product tankers, have now considerable orders of containerships, of 2,800 teu for the former and from 2,700 to 3,500 teu for the latter. Shin-A remains concentrated on building Medium Range product-chemical carriers.

The smaller Korean shipyards have been ambitious and have succeeded in making a remarkable presence on the international scene. INP has attracted the very top names in the shipping industry and by year-end 2004 could count 20 ships on order. Others like 21st Century, Samho, Nokbong, Kwangyang have succeeded in selling extensive series of product tankers of 5,500 dwt, 12,800 dwt, and 13,000 dwt to different owners. Daesun continues to be active in the construction of containerships of 900 to 1,100 teu.

How have the Korean shipyards been able to increase their portfolio from 49 million to 62 million gt without creating a single new berth?

Above all, by spreading out over time their orderbook, and by constantly improving their productivity, but also by opening new docks.

HHI has used its dry-land building facility, usually dedicated to offshore units, to build a series of 16 Aframaxes. STX has recovered its old construction site in Busan (ex Daedong), now renamed STX-Busan, to build a series of 12 product tankers of 10,000 dwt for Clipper. DSME and SHI have invested heavily in floating docks. Recourse to sub-contracting, especially for steel blocks, has grown. SHI, which possesses a steel blocks factory at Ningbo in China, intends to increase its production from 60,000 to 200,000 tons as of 2005 (corresponding to the equivalent of 5 VLCCs or 8 LNG carriers). Hyundai Corporation has decided to invest in a Chinese shipyard, Lingshan, near to Qingdao.

The Sun Dong shipyard, which specialises in the building of blocks, has decided to launch itself into newbuildings and has signed contracts for a series of Panamax bulkers which should become effective upon receipt of bank refund guarantees.

Some Korean shipyards (DSME, STX) also have plans to expand in China which remain to be materialised. Others like HHI and HMD could give priority to new developments in North Korea when the moment comes.

South-Korean shipyards are worried about having filled their orderbooks too early and at too low prices. By the end of 2004, it was obvious that several Korean shipyards were facing difficulties in spite of higher sale prices.

2004 was also a new record year for Japan, which confirmed its second place among world leading shipbuilding nations.

Japanese builders' orderbooks went from 43 up to 54 million gt between end 2003 and year-end 2004. It was 24 million gt at year-end 2002.

All the yards are generally full until 2008, but certain are committed up to 2009. Contracts for such late delivery dates might not be signed before another year or two, but berths are already booked.

Even more than elsewhere, Japanese shipyards give priority to their dynamic domestic owners and it has become more and more difficult for a foreign owner to place an order with them. It seems that Japanese owners are also less demanding and even more accommodating than their foreign counterparts, this has had a visible impact on the number of hours spent on each ship and on the final net result of each building contract.

Japanese shipbuilding industry is less concentrated than in South Korea. The Japanese portfolio, which has practically an identical number with more than 1,100 ships, is spread out between fifty construction sites.

How have Japanese shipyards been able to increase their portfolio from 43 million to 54 million gt?

Above all, this has been achieved through extending their orderbook over a longer period of time, up until 2009 for some yards. Additionally, it has been achieved by a constant improvement of their productivity. For instance, at the beginning of February 2004, Mitsubishi announced that they were planning to reduce the construction time of a VLCC between keel-laying and delivery from 7 to 5.5 months.

New production capacity has also been created. Imabari opened a new site specialising in the construction of bulkers. Naikai Zosen has absorbed its affiliate Nichizo IMC to improve productivity. Murakami Hide has expanded one dock. Other yards, such as Namura and Kyokuyo, have decided to invest in new workshops and lifting equipment to increase the size of the berths and the number of ships they can handle.

Proximity with China, where Japanese owners like NYK and K Line have already placed orders, could represent a danger for Japanese builders. But it has also been an opportunity as they can increase their purchases of equipment and sub-contracting there. Tsuneishi has created a production site for steel blocks in the province of Zhejiang. The success of NACKS shipyard, opened in 1998 in Nantong (China) -a joint venture between the Japanese builder Kawasaki Heavy Industries and the Chinese owner Cosco- is another example of co-operation and possible development.

One has to admire the perseverance and dynamism of Japanese shipyards. They reflect the ambition of Japan, a developed country with a well-paid workforce, not only to maintain but also to develop shipbuilding in a highly industrialised country. Japan demonstrates that it is possible to build ships at market prices with a more expensive workforce than in Korea and China, thanks to a remarkably high level of organisation and highly automated production process.
 

Huntestern
37,179 dwt, built in 2004 by Jinling, owned by Rigel Schiffahrts

2004 was also once again a record year for China, which confirms its third place in the world ranking.

The orderbook of Chinese builders went from 17 to 26 million gt between year-end 2003 and year-end 2004. In 2002, by comparison, the Chinese orderbook stood at 9 million gt. It is a remarkable performance when we remember that the orderbook of Japanese builders was 24 million gt at the end of 2002.

Contrary to their Japanese and Korean counterparts, Chinese yards still have some berths available in 2008.

The strength of the Chinese orderbook is not only explained by having been spread out over 3 years but, above all, by the expansion of existing facilities and the creation of new shipyards. There are about two hundred shipyards with merchant ship building capability in China and about fifty competing on the international market.

Signing of new building contracts in China generally takes a longer time than in Korea and Japan. Whilst this was a handicap to Chinese yards in the middle of the Asian crisis in 1998, when prices were falling, it was rather to their advantage in 2004 with a rising market. They have been able to adjust their prices closer to the market. One should also be aware of the arrival of a new generation of management in the shipyards, more internationally minded and much better informed, thanks largely to the internet, who carry out a close monitoring of the markets.

Nonetheless, this rapid development is not without some hitches, and even some frustration with clients of certain provincial shipyards. Letters of intent have in some cases not been transformed into firm contracts at agreed prices, signed contracts have not been formalised, options have not been confirmed or at least not on agreed terms, etc. Some yards have encountered real problems in obtaining financial support from their bankers who criticise them for having signed at too low levels which are insufficient to cover their costs. Some even had to renegotiate contracts with their clients, facing rising costs and weak financial situations.

Chinese shipyards work in a constantly changing environment and have to juggle with a number of difficulties. They have been affected by energy shortages and steel or main equipment supplies, like engines, which they had to buy abroad at higher prices.

Chinese shipyards should pursue their efforts to produce quality ships. In the current market, they have been able to benefit from the rise in prices and, above all, to obtain terms and conditions on par with their Korean and Japanese competitors. The expectations of owners on the quality front are high, and it is important not to deceive them as the reputation of Chinese yards is at stake. Quality is the best way to reduce costs. To deliver a good vessel, in order to avoid expensive surveys, repairs, waste of materials or even problems that can compromise ship's operations once in service, is the best way to save money.

Expansion projects and creation of new shipyards are continuing, but some ambitions have been contained. The central government has put a hold on credit access and some projects have not obtained the necessary government authorisations. The ambitious project of Nantong Rongshen seems to be one such casualty.

Restructuring is taking place. Shanghai Shipyard has left the centre of Shanghai for the island of Chong Ming. Chengxi and Shanghai Shipyard are now part of the same group. Jiangdu shipyard has been taken over by the private group Sinopacific, which now controls three yards: Zhejiang, Dayang, and Dadong. Dalian (old) and Dalian New have restructured their management.

As with the Japanese yards, Chinese shipyards have also given priority to domestic owners who have enormous needs.

Hudong Zhonghua has signed up this year for two LNG carriers of 147,000 cbm for delivery in 2006 and 2007 in the context of the Guangdong project. Negotiations are in process for two supplementary ships intended to the Fujian project. Chantiers de l'Atlantique (France) are undertaking the technology transfer.

The yuan vs dollar fixed parity offers an undeniable competitive advantage to Chinese builders, even if they have to purchase a large share of equipment in Europe, Korea, or in Japan. There were talks between governments this year about adjusting this parity, and even to float the Chinese currency. The Chinese yards have even sometimes used this possibility as a sales pitch.

Chinese shipyards are in an enviable position, since most investments are the result, directly or indirectly, of the government. Shipyards in other countries, particularly in Europe, would be delighted to be able to benefit from such a support to modernise their production base, without bearing the costs.

China is investing in some gigantic shipbuilding sites, capable of competing in the future with the biggest Japanese or Korean facilities. There are currently 8 docks for building a VLCC in China, compared to 14 in Korea and 14 in Japan. By 2008 / 2009, China might have no less than 22 VLCC docks. One can however fear that this expansion plan will come to overturn the existing equilibrium and destabilise the industry in the coming years. In a short while, Chinese shipyards will be in direct competition with Japanese and Korean shipbuilders for the same types of ships (VLCC, LNG, very large containerships).
 

Messidor
55,300 dwt, built in 2004 by NACKS, owned by Setaf-Saget (Groupe Bourbon)

The orderbook of Taiwanese builders went from 1.9 to 3.2 million gt between year-end 2003 and year-end 2004. Taiwan thus occupies the 5th place in the world ranking.

The state shipyard CSBC gave priority to domestic owners such as Yang Ming, Wan Hai and China Steel Corporation. Their orderbook extends until end 2008 and comprises essentially containerships: with a capacity of 1,800 teu in Keelung and of 4,250, 5,250 and 6,000 teu in Kaohsiung, as well as a few Capesize bulk carriers of 200,000 tons.

Other countries in the Indo-Asian zone

The search for newbuilding sites has pushed owners to less traditional destinations.

Ha Long and Nam Trieu shipyards of the Vinashin group in Vietnam signed up with Craig from the UK, for an important series of Handymax dry bulk carriers of 53,000 dwt. Danish owner Clipper placed an order for several Handysize bulk carriers of 30,000 dwt with Cochin shipyard in India.

Iranian shipyards have signed some noteworthy orders with domestic accounts and are now looking for some international clients. Dubai Drydocks has booked its first order for bunkers vessels of 6,500 dwt. Others should follow.
 

The European shipyards have benefited from the overflow of a saturated Asia. They have been able to offer earlier deliveries: 2006 as against 2007 or 2008, for which owners have been prepared to pay a premium. The mainstream of business for Asian shipyards being standard ships, the recovery of demand for specialised tonnage has certainly helped the European yards to regain some ground.

It is worth stressing that the West European orderbook has progressed this year for the first time for ages. They have moves up from 5.9 to 8.4 million gt between end 2003 and end 2004.

It is of course a pleasure to see this recovery of business. But the basic handicaps of West European shipyards in comparison with their Asian competitors still remain: dispersed production, poor investment, ageing installations and workforce, unfavourable tax regimes, high social security costs, too much bureaucracy and too few effective working hours.

The drop of the dollar against the euro and the impending termination of subsidies of up to 6 % on March 31st 2005 will not help the European shipyards' task.

It is a pity to see that there is not a more efficient European industrial policy. Too much public money is spent to reduce workforce, to put employees on early retirement or to close yards. It should be possible to conceive of a more proactive and wilful policy aimed at using the inherent social funds to help the industry to adapt, develop, and prepare for the future rather than liquidate the past. Japan has demonstrated that this option was not totally illusory.
 

Breuil
600 dwt, self-propelled barge, delivered in 2004 by De Hoop, operated by Socatra, dedicated to the carriage of blocks of the A380 airplane on the Gironde estuary

The orderbook of French shipbuilders has gone from 380,000 gt at year-end 2003 to 450,000 gt year-end 2004.

Gaz de France decided to entrust the building of another LNG carrier of 153,000 cbm to Chantiers de l'Atlantique, which took their total backlog of such ships to three. As with the two preceding ships, signed in 2002 and 2003, this one will be equipped with a diesel-gas-electric propulsion, the power being provided by gas engines. It is also the method of propulsion that AP Moller has adopted this year with its orders at the Korean shipyard Samsung.

Chantiers de l'Atlantique have taken advantage of the revival in the cruise market and signed up two new ships of 90,000 gt and 3,000 passengers with Mediterranean Shipping Cruises who, on their side, have taken delivery of the 'MSC Opera', a passenger liner of 59,058 gt, with 795 cabins.

But Chantiers de l'Atlantique, faced with a declining demand for cruiseships compared to the glory years of the late 1990s, need to adjust their building capacity, which should be reduced from 5.5 to 2.5 equivalent cruiseships. This reduction in capacity should be accompanied by a reduction in the workforce, a drive for further economies of scale with a more important reliance being placed on sub-contracting and Asian supplies.

The Piriou shipyards delivered two fishing vessels, a tug boat and a PSV. They are building 5 trawlers, 3 tuna purse seiners - one of which is 83 m in length - and 2 fast intervention aluminium crewboats.

In 2004, Constructions M'chaniques de Normandie (CMN) have delivered a patrol boat to the French Maritime Administration and have under construction a corvette for the Emirates Navy within a programme of six boats for the same client, and two motor yachts of respectively 58 and 42.6 m in length.
 

Fast ferry
Artist impression of a 450 seats fast catamaran ordered by Conseil G'n'ral de la Vend'e at the Norwegian shipyard Fjellstrand for a service between Fromentine and Ile d'Yeu

Germany

There are some twenty shipyards in Germany of which about fifteen build almost exclusively containerships between 800 and 4,000 teu. Meyer Werft, reputed for its cruiseships, has even filled up its orderbook with a series of four containerships of 1,500 teu. Amongst the major shipyards, only Flensburger and Lindenau are specialising in other types of ships such as Ro-ros and Ro-paxes on one hand, product tankers on the other.

German builders have naturally benefited from the enormous demand in the containership sector and, above all, from the sustained interest for feeders, a size which the three large South-Korean yards have abandoned. They have also been able to offer prompt delivery dates which are particularly sought after by German investors (KG) whose proximity helps business relationships.

The orderbook of German shipbuilders has gone from 2.3 to 3.1 million gt between year-end 2003 and year-end 2004. Germany occupies the 2nd position in Europe behind Poland and is ranked 6th in the world.
 

Wisby Verity
7,600 dwt, delivered in July 2004 by Ferus Smit, owned by Wisby Tankers of Sweden and on long-term charter to Preem Petroleum.

Italy

There are some fifteen shipyards or building sites in Italy. Cruiseships, Ferries, Ro-ros and Car-carriers form the core of Italian production (Fincantieri, Visentini). But there are also some very good specialist shipyards such as De Poli or Di Pesaro for chemical carriers, gas carriers and small bunker tankers.

Italian shipyards have been particularly successful in obtaining over half of the new orders for Ro-ros, Ro-paxes and Ferries. Fincantieri, for its part, succeeded in capturing 6 out of the 13 cruiseships ordered in 2004 and has confirmed its place as the European leader in the cruise sector.

The orderbook of Italian shipbuilders has gone from 1.25 to 1.8 million gt between year-end 2003 and year-end 2004. Italy holds the 4th position in Europe and the 8th position in the world shipbuilding ranking.

Spain

There are still some twenty shipyards or sites in Spain, but the question that has to be asked is for how much longer?

Spanish shipbuilding is in a crisis and is going through a drastic change, somewhat in the same mould as in other European countries during the 1980s and 1990s.

European authorities have told Spanish authorities to put an end to certain practices which they consider to be contrary to EU regulations. In particular, they have asked Izar to reimburse subsidies received in 1999 and 2000. Under these circumstances, Izar, who did not have any new order in 2003, has not been authorised to take on any new business in 2004. The separation between military and commercial sites should be done and be followed with the privatisation of the latter.

The Spanish shipyards' situation remains fragile on the overall. It is a shame that Spain has not been able to benefit from the revival in the newbuilding market. However, this allow them to propose very prompt delivery dates and would put them in a position to take advantage from the healthy sales prices in 2005.

The Spanish shipbuilding orderbook has gone from 500,000 to 135,000 gt between end 2003 and end 2004. It is one of the few countries in the world with a shipbuilding tradition that has seen its portfolio decline this year.
 

There are three construction sites in Finland, which however work under the single banner of the Aker Yards group. In September, the Aker group announced the merger between Kvaerner Masa and Aker Finnyards, under the combined name of Aker Finnyards Inc. This new entity will employ 4,500 people of which 1,000 on the Rauma site, 2,000 in Turku and 1,250 in Helsinki.

Cruiseships, Ferries, and Ro-ros are the mainstay of the Finnish production. The recovery in these sectors has helped them and their orderbook has moved from 400,000 to 550,000 gt between year-end 2003 and year-end 2004.

The Turku site (ex Kvaerner-Masa) picked up in 2004 the order for a second 'Ultra Voyager-type' cruiseship, 160,000 gt and 3,600 passengers, for RCCL. The Helsinki shipyard (ex Aker-Finnyards) was awarded the order for an ice-breaking containership for Russian account and has signed a letter of intent to build a cruiseship for NCL. Finally the Rauma site obtained the order for three carriers specialised in the transport of forest products and a 2,800 passenger ferry.

Finnish shipyards have an uncontested know-how in building ships for navigating in polar latitudes, and should therefore benefit from the growth in this traffic with the Russians.

Denmark

The last major Danish shipyard Odense Lindo keeps on building series of over-Panamax containerships for the account of its main shareholder, the AP Moller group, which has become the only client of this yard. In the current context, to be the owner of a shipyard when you are also ship owner is a clear advantage.

Netherlands

There are still some fifteen Dutch shipyards, whose production is mainly concentrated on building general cargo ships, multi-purposes, small containerships, small product tankers and offshore supply vessels.

The Dutch shipyards' orderbook has gone from 280,000 to 490,000 gt between year-end 2003 and year-end 2004.

After a difficult year 2003, which saw the closure of a number of sites, Dutch shipyard workers held massive protest meetings at the beginning of 2004 to attract the attention of the authorities. The government, in turn, conceded a form of temporary defence mechanism, while they also benefited from the market upturn.

The Dutch shipyards operate largely by sub-contracting hulls to Romania, Ukraine, Poland and Turkey, without which they could not be competitive today with small yards in China, Korea, Turkey, Romania, or Poland. Some shipyards even succeed in having a full orderbook without doing any construction in their own sites in the Netherlands, this of course, creating other problems.

Norway

Norway has some fifteen shipyards. Their production is largely concentrated on offshore units such as PSV or AHTS. There was also the rare order at the end of the year for an orange juice carrier of 40,000 dwt at Kleven Werft.

Norwegian shipyards also sub-contract a lot of hulls in Eastern Europe and have succeeded in 2004 to renew fruitful relationships with some Russian shipyards. Thus, Fosen has become associated with Baltiyskiy Zavod for building Ro-ros for the account of Stena, while Kleven Maritime has joined up with Sevmash for a series of coated chemical carriers for the account of Odfjell.

Portugal

The last large Portuguese shipyard, Viana do Castelo, is currently building a product tanker of 19,000 dwt for the account of the French owner Fouquet-Sacop and another of 14,000 dwt for the Finnish owner Fortum, as well as two coastal passenger vessels for a domestic account. They also have an agreement to build a significant series of vessels for the Portuguese Navy.

Poland

Poland has four main shipyards whose production is largely geared to build containerships, open-hatch bulk carriers, car-carriers and Ro-ros.

The orderbook of Polish yards has gone from 2.5 to 3.3 million gt between year-end 2003 and year-end 2004. Poland keeps its 1st place within Europe and the 4th place in the world ranking.

Poland, now part of the European Union, has to progressively abide by its regulations. In particular, the shipyards in Gdynia and Gdansk, which have benefited from state funding, will see their capacity being limited to 390,000 cgt over the next ten years.

Polish yards, which have experienced serious financial difficulties, have given priority to their traditional clients and to build series of existing, proven designs thus reducing their risks.

Croatia

There are five shipyards in Croatia whose orderbook has gone from 1.5 to 2.7 million gt between year-end 2003 and year-end 2004. Croatia occupies the 3rd place in Europe and the 7th place in the world.

Croatian yards have largely benefited from the demand of product tankers and of car-carriers. The orderbook of Treci-Maj and Uljanik are full until mid-2008, Trogir and Split are full until early 2009.

Turkey

Apart from a few sites, Turkish shipbuilders are mainly located in the bay of Tuzla, located some thirty kilometres from the heart of Istanbul, in Anatolia. There are about 35 shipyards next to each other in a semi-circle with a radius of about 1,000 m. Currently it is brimming with activity.

Most of the ships under construction are less than 10,000 dwt. Between 2003 and 2004, the five biggest builders in the bay took on orders for ships between 15,000 and 20,000 dwt. One of them, Celik Tekne, is even building a sophisticated product-chemical tanker of 25,000 dwt for delivery in 2005.

These shipyards display a remarkable dynamism and special ingenuity. They seek to increase their building capacity by constructing new berths, new lifting procedures, new workshops and study numerous expansion projects.

Current production is mainly concentrated on product tankers and chemical carriers (including some stainless steel units), but there are also cement carriers and containerships in the orderbook. A number of hulls bought in Romania or in Bulgaria have been towed there in order to be fitted out and finished.

Most of the Turkish shipyards' clients are West European owners, but also West European shipyards who sub-contract hulls. Some Turkish owners have contributed in the form of orders for which they basically act as shipbuilders: they build their own ships using the yards' facilities but supplying the design, steel and equipment.

The orderbook of Turkish yards has gone from 250,000 to 365,000 gt between end-2003 and end-2004

Romania

Romania has six shipyards. The revival of Romanian shipbuilding which was already firmly in place has been consolidated by the strong demand throughout the year 2004, both for complete vessels as well as sub-contracted hulls from West European shipyards.

The orderbook of Romania yards has gone from 230,000 to 550,000 gt between year-end 2003 and year-end 2004.

Romanian production is diversified and consists of offshore units (PSV), product tankers, Panamax tankers, and containerships. German owner Gebab has ordered six containerships of 4,800 teu at Daewoo Mangalia.

This excellent performance is largely due to the strategic investments made by three foreign groups: Aker, Daewoo, and Damen. These Norwegian, Korean, and Dutch companies have supplied their own know-how and the benefit of their reputation to the respective shipyards: Aker Tulcea, Aker Braila, Daewoo Mangalia and Damen Galatz.
 

There are ten shipyards in Russia, whose orderbook has doubled from 350,000 to 615,000 gt between year-end 2003 and year-end 2004.

They have been able to benefit from considerable domestic orders. Baltiyskiy Zavod has thus been given the order for a tanker of 75,000 dwt for Rosneft. The foreseeable increase in oil exports from this country and the need for ice-class ships capable of navigating in polar latitudes should probably help feed Russian shipyards with new orders.

Russian shipbuilding has also been able to take advantage of the world demand and the programmes of cost-cutting by European yards in the form of sub-contracting. Baltiyskiy Zavod is going to build in co-operation with Fosen shipyard two Ro-paxes for the account of the owner Stena. Sevmash in conjunction with Kleven Maritime will build a series of eight chemical carriers of 40,000 dwt for the account of Odfjell.
 

The American shipbuilding industry is concentrated on its national market. Despite a strong rise in construction costs and a search for new capacities, American shipyards remain too expensive and have not been able to take advantage of the current situation. As an example, Kvaerner Philadelphia (Aker Yards) have only sold four containerships of 2,600 teu since 2002, at a unit price of roughly $ 70 million, namely more than double the price inked with Asian yards.

Avondale and National Steel (NASSCO) are the two large commercial American shipyards where tankers of 140,000 and 185,000 dwt are under construction. They belong to American shipping defence companies, respectively Grumman and General Dynamics, but have not registered any new merchant ship order this year.

New orders for merchant ships are scarce, except for the offshore industry. Besides, a part of the homeland security budget is dedicated to the building of a number of ships for the account of the U.S. Coast Guard, which should keep the civil shipyards busy for several years.
 

Will the orders intake remain as high as over the past two years? Will the price of ships continue to climb? Are the markets able to absorb the capacity of such an orderbook?

Numerous factors suggest a continuation of this trend due to the enormous requirements of China, to which can be added those of India and other emerging countries. Some believe that the strength of the freight market could last through 2005 or even beyond into 2006. Others claim that the engine of the Chinese economy will keep on running at full speed until the Olympics Games of 2008, or even the Universal Exhibition in Shanghai of 2010. Finally, the most optimistic seems to detect economic miracle signs in China of an identical cycle to that of the post World War II in the Western world.

Volumes

Whereas more than 110 million dwt of ships were ordered in 2003 and builders' portfolios were already spread out for over three years, the continuation of this trend in 2004 was surprising.

With an economic development and a world trade superseding the most optimistic forecasts, and as a corollary an unprecedented rise of freight rates and the improvement of owners' financial standing, these are the underlining explanations for the volumes ordered.

First, shipyards became euphoric with their commercial success, but they progressively realised that the increases in newbuilding prices obtained in 2003 were hardly sufficient to cover the rise in their own costs. They discovered, with dismay, that they had taken enormous risks and that in fulfilling existing contracts they could jeopardise their financial results.

Builders could well exercise additional caution in 2005 by not agreeing to take on any new orders except at substantially higher prices, especially as they have time on their side. This could cause owners to slow down as well, as they have taken on commitments over the next three years themselves (165 million gt on order).

Prices

Shipbuilding prices in 2004 reached new levels, equalling and in some cases surpassing the records obtained at the beginning of the 1990s (in actual values). Owners can reasonably ask themselves, in such heady time, if they might not soon encounter a decline.

However, one should keep in mind that $ 100 million in 2005 is worth considerably less than the same $ 100 million in 1991 (in current values) and meanwhile the price of steel has risen.

The analysis of the cycle that shipbuilding experienced in the 1980s is instructive. In 1985, a VLCC of 250,000 dwt would have been contracted for around $ 35 million at the Asian shipyards. The upward cycle then followed a six year trajectory, into the beginning of the 1990s, to the point where the same single-hulled VLCC would have cost around $ 90 million. At the same time, the price of a 300,000 dwt double-hull VLCC reached the $ 110 million region.

If we expect the current upward cycle to las as long as the previous one, there is no doubt that newbuilding prices still have some margin to go up. Much will depend on the further development and stability of the dollar exchange rate, which remains a serious issue. We can also draw some comfort in the extrapolation of most economists, whose sentiments are that the dollar is not about to appreciate substantially against the currencies of the main shipbuilders.

Of course we would like to be able to predict newbuilding prices evolution and we would like to know if an eventual drop could send us again towards the very low levels seen in mid 2002.

Given the size of shipyards' orderbooks, the pressure placed on an already strained raw materials markets and world growth forecasts, it seems probable that newbuilding prices will continue to climb during 2005 and 2006 as long as steel prices do not drop.

There is nevertheless reasons to be careful about the enormous building capacity that China will put on the market as from 2008 / 2009. This, coupled with the steady productivity improvement achieved by the Chinese shipbuilding industry, may start to break this delicate balance. The outcome will then depend to a large degree on the capacity of resistance offered by the Japanese and South-Korean shipbuilders.