Prospects for the global shipbuilding industry in 2015 do not appear overly positive. With an already large order book in the three major merchant ship sectors—bulk carriers, containerships, and tankers—there appears little opportunity for shipyards to increase their relatively low, and in many cases unprofitable, prices as new orders decline.
Confirmed orders in Q3 2014 were down 30% from year-earlier levels, while the number of new contracts during the final quarter of 2014 was expected to be significantly lower than Q4 2013 (see chart).
In the midst of the current extended period of low freight rate earnings and significant hidden overcapacity caused by slow steaming, incentives for ordering new ships are becoming fewer in spite of efforts by national agencies in Asia to prop up ailing shipbuilders by either government aid or highly competitive credit terms in order to win new business. In addition, the significant boom in private equity financing for new ships that took off beginning in mid-2013 appears to have stalled at a time when conventional ship financing has become increasingly hard to come by.
Meanwhile, the major shipbuilding groups in China and South Korea are focusing their marketing strategies on other vessel sectors, particularly those in liquefied natural gas (LNG) and liquefied petroleum gas (LPG). This sales strategy could in turn create further overcapacity in the gas shipping sectors over the longer term should an expansion of speculative ordering take place.
Against this backdrop, shipbuilders will likely be forced to consolidate in order to survive. This situation is already evident in the recent announcement by Hyundai Heavy Industries, the world’s largest shipbuilder, to combine various back-office and sales functions with its affiliated shipyards Hyundai Mipo and Hyundai Samho.
In addition, yards will be forced to lay off contractors as order books start to thin out. In China, state support is now being provided to only the most efficient shipbuilders; backing of small- and medium-sized shipyards has been withdrawn.
Once the global order book thins, owners and operators are expected to return to the newbuilding market in late 2015/early 2016 to maintain market competitiveness. This is likely to lead to continued pressure on shipowners’ earnings.
A consequence of this likely behavior is potentially a long-term era of low freight rates. While this would benefit shippers, it would result in lower service levels, in particular in the container liner trades.
Robert Willmington, Manager, Data Transformation, IHS Maritime and Trade