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Wednesday, December 13, 2017

Increasing capacity and expected slowdown in ordering could lead to yard overcapacity

There was strong participation from all the major shipbuilding countries at the Organisation for Economic Co-operation and Development (OECD) workshop on Shipbuilding (WP6) in Paris in December, and all of them presented their views on the shipbuilding industry. INTERTANKO’s Research and Projects Manager, Erik Ranheim was present.

 

There was recognition that there have been significant changes in the shipbuilding environment since 2002 - not least the buoyant state of the market with order books full well into this decade - with much of the demand generated by economic growth in Asia generally, and in China in particular.

 

Established shipbuilders in the major shipbuilding centres of South Korea, Japan and Europe, as well as enhancing their own capacity through continuing productivity gains, have also broadened their horizons by investing in foreign shipyards in China, Vietnam, the Philippines and central Europe. There have been reports of ship repair activities moving to cheaper, specialised off-shore locations in order to free yards to undertake building rather than ship repair.

 

Significant investments in shipbuilding capacity are being made by emerging shipbuilding economies. This has taken the form of substantial green-field investment in new facilities (sometimes with the financial participation of established shipbuilders), examples of which have been seen in China, Vietnam, the Philippines and India. These investments are generally encouraged by government policy and occasionally enjoy some form of government assistance.

 

Another increasingly growing trend has been the construction of hull blocks in lower cost foreign yards before transfer to the home yards for finishing. A number of major yards in Europe, Japan and Korea have invested in foreign yards in order to facilitate this process.

 

Strong demand for new ships has left most shipyards with full order books for the next two to three years. The demand for container vessels has been sustained by the popularity of larger vessels, with one report claiming that as of June 2006 the container order book stood at just over half of the total container fleet. Both liquid and dry bulk vessels have been in great demand due to the continuing demand for commodities. LPG/LNG vessels have enjoyed a very strong growth due to the growing preference shift for gas energy over oil.

 

The order book data June 2006 indicates that South Korea continues to dominate the market (approx 36%), while China is making very strong gains (approx 17%). Japan (approx 24%) has shown a sharp decline in its market share (as reflected by the order book). If this situation persists, then this could indicate a substantial and rapid shift in the relatively balanced market share pattern of recent years.

 

China is a rapidly growing force in world shipbuilding, and has publicly stated its objective to become the world's largest producer of new ships. In 2005 it produced almost 15% of global production, while as at June 2006 it held almost 17% of the world order book. The following is a brief list of the major recent events that will continue to underpin this rapid growth:

  • Announcement of the major new shipyard, Janghan Changxin, which, with a projected annual capacity 4.5m dwt, would make it the largest in the country.
  • A proposal for the 1.1m dwt pa capacity Zhousan Jinhaiwan yard.
  • The China Shipbuilding Industry Corporation (CSIC) has announced a planned capacity expansion to triple turnover by 2015.
  • There are increasing numbers of smaller vessels for the international trade being constructed by minor Chinese yards (which together account for around one-third of total Chinese production).

 

While most of manufacturing industries in Japan have been increasing their overseas production ratio, the shipbuilding industry remains one of few industries with a domestic production of nearly 100%. Other shipbuilding nations such as South Korea and China are expected to become more competitive, and Japan is concerned that a downward swing in global shipbuilding demand could create an imbalance of supply and demand.

 

During the shipbuilding downturn after the oil crisis of 1970s, shipbuilding companies refrained from recruiting skilled workers, and today nearly half the skilled workers in the industry are over 50, while skilled workers in their 30s account for just over 10%. This skewed age distribution will not help the industry over the next 10 years or so. 

The current huge orderbook means that expected completions by world shipyards in 2007, according to the Shipbuilding Association of Japan, will amount to 37.5 m cgt, up from 29.5 m cgt in 2005. The completions are projected to be marginally reduced in 2008.

 

Taking all this into account, the consensus from Paris was that the shipbuilding industry is heading towards overcapacity both due to increasing capacity as well as to an expected slowdown in ordering. Whereas China is aiming to become the world's largest shipbuilding nation, Korea's vision is to maintain its position as the global leader in the future "marine era", while Japan's aim is to keep its market share.

 

Erik Ranheim presented a paper on tanker phase-out and tanker newbuilding demand until 2015.  He concluded that assuming 4.5% trade growth, a surplus is likely to build up in the tanker market by 2010. As from 2010, when the market may be balanced by phase-out, there will be a reduced demand for tanker newbuildings.  Click here to view the presentation.

 

Erik Ranheim also presented a paper on INTERTANKO's submission to the IMO on MARPOL Annex VI and possible impacts on the industry.  He presented the pros and cons of the various alternatives to reducing emissions from ships and explained why INTERTANKO considered distillate fuels to be a viable alternative. Click here to view the presentation.

 

Contact: Erik Ranheim