Warming waters

There are few more depressing indicators of the collapse of world trade than the snapshots one finds on Vesseltracker.com, a website that provides real-time data on cargo ship movements. Satellite shots integrated with the site’s vessel tracking data show that the world’s largest ports have become parking lots for cargo ships, and most will remain parked for the near future. In 2009, container ship trade is expected to decline 9% from an already dismal 2008, and the Baltic Dry Index, a benchmark for shipping rates, is down 43% since June. The global shipbuilding industry is getting hammered.

"New orders for ships have completely dried up. There is both a lack of demand for new ships and a lack of financing," said Divay Goel, director of the Asia Division at Drewry Shipping Consultants.

New build orders for container vessels peaked in 2007 and have been declining ever since. As of September, shipbuilding orders were down 87.7% year-on-year and prices for new ships declined 38% from the second half of 2008. And it is becoming clear that the ordering spree of 2006-2007 is unlikely to turn into an actual buying spree in 2009. Orders for new ships are still being cancelled or delayed by ship owners that can no longer finance their purchases.

The shipbuilding industry’s endemic long lag time between order and fulfillment has now produced a painful irony; during one of the worst years in history for shipping, the pipeline for new ships is now near historic highs. For container ships, the order book now represents 42% of the current fleet. For bulk carriers ("bulkers") it is at 66%. Even if all ships over 20 years old were scrapped – highly unlikely in this economic climate – it would only offset 26% of the container ship order book and 38% of the bulker order book.  In 2002, combined order books for containers and bulkers were only at 12% of the existing fleet.

Silver lining

For China, however, there is an upside to the downside; it has brought the country closer to its goal of becoming the world’s leading shipbuilder by 2015. Due to general economic optimism and a strong effort by the Chinese government to prop up the domestic industry, a small recovery is underway, and China has taken advantage.

From June to August, 114 new vessels of 14.6 million deadweight tons (dwt) were ordered, compared to a low of only nine ships worldwide in January. The biggest ship order was placed by China Logistics, which ordered 30 bulkers from domestic shipbuilder Zhoushan Jinhaiwan for US$1.5 billion in July. As a result, China has now taken the lead in the shipbuilding industry, holding the largest share of the world’s order book with 38% of new orders compared with South Korea’s 34.5%.

The lead may or may not be temporary. At present, China has two advantages. The first is strong backing from the central government. Beijing has not only helped foreign ship buyers with bank financing to prevent cancelled and delayed orders, but is also forcing its own state-owned shipping firms to buy up excess orders.

The second advantage is the relative torpor of its competitors, Japan and South Korea.

"China is really the only country to actually implement a rescue," said Keith Wallis, East Asia editor at Lloyd’s List. In contrast, neither Japan nor South Korea has done much to prop up their respective shipping industries. Japan has turned inward and is focusing on building for the domestic shipping industry (its percentage of the world’s order book is now only 18.9%). South Korea has done even less, apart from setting up a fund to help domestic shipbuilders with cash flow problems.

In addition to government support, China has also been able to gain market share by building ships for less, using cheaper labor and cheaper steel. Nevertheless, there are still concerns about quality standards. In December 2008, investment bank Macquarie estimated that 80% of Chinese shipyards have difficulty completing orders on time and have yet to surmount quality problems. While most industry insiders say that Macquarie’s claims are exaggerated, quality and on-time delivery remain a problem and pose a challenge for China to remain on top of the order book. At present, China’s strong position in shipbuilding is – like in other recently flourishing domestic sectors – driven by state spending, not private demand.

"It is almost all new capacity in China. The labor costs in China might be low, but productivity and quality in Korean and Japanese shipyards is much higher, because they have been in the business since the 1970s. But it’s really just a matter of time before [Chinese shipyards] catch up on the learning curve," explained Drewry Shipping Consultant’s Goel.

However, as it will take some time for orders for container ships and bulkers to come back, the likely leading area of demand growth is offshore vessels for oil and gas exploration. Unfortunately for China, its shipbuilders have little expertise in this area. Most large oil and gas companies are looking elsewhere.  for vessels. Chevron and Petrobas announced that they would spend US$15-20 billion in the second half of 2009 on offshore vessels, but will be ordering them from South Korea’s Samsung Heavy Industries, not Chinese yards.

Thinking big

The Chinese government realizes this weakness and is ordering the shipbuilding industry to move away from smaller, cheaper vessels and focus more on the high value ships, such as mega container ships, offshore drillships, very large crude carriers and liquid natural gas carriers. Beijing is offering shipyards financing to restructure.

If China can pull the restructuring off, the country’s shipyards may well be able to retain their lead when global demand stabilizes.

"The outlook for the Chinese shipbuilding industry is competitive, but reasonably bright," said Wallis of Lloyd’s List. "Potentially there is huge overcapacity, but China is still committed to becoming the world’s largest shipbuilding nation by 2015, so most yards should feel pretty secure."