One of the key reasons behind many ship owners’ tendency to contract more newbuildings, despite the large supply glut, which in turn has forced freight rates downwards since the end of 2011, is the fact that these days the price one can achieve for a newbuilding is near historic lows. Given the average lifespan of each vessel, which could easily reach of surpass 20 years, it’s more than evident that, low rates or not, the ship owners will be able to reap net profits of it sooner than later. In the past, during the “golden years” of huge rates, ship prices were escalating to incredible highs. But, in turn, owners could cover those costs in a matter of a couple of years. Today, it’s quite the opposite.
In its annual report for 2011, Paris-based shipbroker Barry Rogliano Salles (BRS) said that “construction overcapacity and the scarcity of demand have exacerbated the competition between newbuilding countries and between individual shipbuilders. For the first time in many years, Chinese shipyards are experiencing local competition, in contrast to the boom years when they needed to compete only with South Korean, Japanese or European shipbuilders who were offering newbuilding prices. Less reputable shipyards have not hesitated to undercut the better established shipyards. The strong or state-owned shipyards obtained higher prices than the private or less experienced shipyards, but nevertheless they were also forced to make significant efforts and offer better terms in order to attract clients. By the end of 2011, many shipbuilders reckoned that their sales prices are from now on below their building costs. Many owners asked themselves if the market had reached its lowest point. It is true that often one only realises the lowest point has been reached when prices are once again on the ascent” said BRS.
It went on to take a case-study with a 176,000 dwt Capesize bulk carrier as an example. The price of such a vessel at the end of 2011 was about $48m in China and $52m in South Korea, some 50% below the peak seen in 2008. The lowest price obtained for a bulk carrier of this size was approximately $32m in China in 2002. At the time, China's currency was worth Yuan 8.28 to the dollar, versus Yuan 6.38 at the end of 2011, while steel plates sold for about $300/tonne, against $800/tonne at the end of 2011. “These two parameters alone add an extra $8m and $10m today to the $32m purchase price seen in 2002, leading to an adjusted new theoretical price of $50m. But we must also take into account: the dramatic increase in the amount of steel required to build a hull of this vessel type due to the new regulations (URL, CSR, ...), which overall may represent an additional 2,000-3,000 tonnes of steel, the new regulations which have generated additional arrangements: cofferdams around bunker tanks, bunker tanks to receive different fuel grades, more stringent paint specifications and applications (PSPC), requirements to reduce Nox and SOx, to treat ballast water, to guard against pirates... Also, a significant increase in energy costs (the cost of a barrel of oil averaged $23 in 2002, compared to $106 in 2011), higher wage costs (a Chinese worker earned less than $100 per month 10 years ago, compared to about $800 per month in 2011) and upgraded specifications for onboard equipment” says BRS.
Nevertheless, the report noted that market prices are very likely below costs and we are therefore certainly very close to a new historic low. Much will depend on the yards’ capacity to accept loss-making contracts. It is also very interesting to note that dollar prices for the most representative bulk carrier and tanker types were the same at the end of 2011 as they were in 1993, that is, 18 years ago.
RENEGOTIATIONS
“Shipbuilders continued to be approached during the year with all sorts of requests from customers: cancellations, delivery deferrals, payment deferrals, contract price adjustments, conversion of contracts into other ship types to reflect the new market conditions. Let us not forget that in 2009 and 2010 many owners requested and obtained delivery deferrals for orders placed at high prices before the crisis, in the hopes of an improvement in the freight market conditions - conditions which have not been realised. It seems the situation is even worse now, given the deterioration of the market (freight and asset values) and the new difficulties faced by the banks.
Uncertainty over the exact number of cancellations persists. We estimate cancellations at some 260 vessels in 2011, against approximately 750 in 2010. Most of the 2011 cancellations involved bulk carriers, with nearly 150 units annulled, against some 65 tankers and 13 containerships. They were more numerous in China (127 units) than in South Korea (76) and Japan (20). Since 2008, there has been nearly 120m dwt cancelled: 20m dwt in 2008, 39m dwt in 2009, 42m dwt in 2010 and 21m dwt in 2011.
Order cancellations
The situation of many shipbuilders weakened again in 2011 due to cancellations, renegotiations, difficulties in taking new orders and the decline in prices, which have further complicated their relationship with their own financiers who remain essential to new deals. Many shipyards will not be able to execute their contracts and will therefore have to close. Already in China several shipyards have gone bankrupt or simply closed due to a lack of work, often without any publicity” concluded BRS.