Two strangers were drinking in a cliff top bar during a gale. "You know” said one, "If I jump off that cliff, by opening my coat, I’ll be carried back up by the wind". "Never", said the other. “OK, I'll show you”. He jumped and seconds later he was carried back up. The other was so impressed he jumped too, but crashed on the rocks below. “You know” said the barman to the first guy, "you can be a real jerk when you’ve been drinking, Superman".
Life on the Cliff Top
The moral of this story is not to jump off cliffs. And it’s a lesson the shipbuilders are working on at the moment. After 20 years of steadily building up their capacity, in 2010 output reached the peak of the very long cycle which had started 35 years ago in 1975. A year ago it seemed likely that output would slump in 2011, but as the year end draws near, our statistics paint a different picture . It now looks as if production in 2011 will be similar to in 2010, or a little higher, depending on the unit of measurement.
Three Types of Tonnage
CRSL uses three tonnages to measure shipyard output. Dwt measures the cargo capacity of the ships and is an indicator of transport capacity. But some important vessel types, for example cruise liners or offshore vessels, have a small dwt but involve a lot of work. Gross tonnage (GT) is less biased, but the best measure of shipyard capacity is CGT which is based on of the work content of the vessels.
Don't Jump, Enjoy
Looking ahead our graph shows little sign of the shipyards jumping off the cliff in any unit. In dwt 2011 output might edge up by 2% to 154m dwt. GT deliveries will be down, but only by 1% and CGT deliveries by about 8%. Moving on to 2012 our latest projection shows dwt deliveries edging down 5%; GT deliveries down 8%; and CGT down about 9%. Even 2013 looks solid, with only an 18% fall in CGT deliveries. So the shipyards will enjoy three years of running their capacity at full stretch.
Superman's Shipyard Strategy
But there are a few doubts. The big one is money. Nobody really knows how much of this $364 bn orderbook is financed. The European banking sector, the principal source of new building finance, was already suffering from sub-prime problems when the sovereign debt crisis piled on the pressure. Just to make matters worse, after a two-year holiday, vessel earnings are under real pressure, as are secondhand prices. Both form an es-sential part of any credit package.
Ready, Steady, Jump?
So there you have it. Three years at the top of the cycle would be a pretty good run, but in the end somebody has to pay. The orders are there and in 2010 and 2011 the yards proved they can deliver the volumes; which just leaves the small matter of getting the orderbook financed. And that is one area where, most investors would agree, even Superman will be struggling. Have a nice day.