Back in the not so long ago "golden" days of shipping, shipyards couldn't be built fast enough, in order to cope with the huge newbuildings demand, which in turn was trigerred by the hike of freight rates, especially in the dry bulk sector. Today, things are pretty different with many shipyards looking to cut down on capacity, as demand for newbuildings after 2014, won't be looking all that rosy. In a recent analysis report, which estimates that 20% of the 2011 shipyard capacity, or 15 million cgt, will exit the market, Danish Ship Finance mentioned that "yard capacity has grown too big for future demand. Shipyards without a sufficient order cover cannot maintain a steady production flow. Eventually some yard capacity will disappear. Clearly, the question is where and when? Experience from previous periods of overcapacity has taught us that capacity adapts slowly to weaker demand. However, as with other investment-intensive industries, concentration of ownership plays a significant role. If the industry is concentrated on relatively few large owners, shipyard capacity is inclined to be adjusted less frequently but more dramatically" said Danish Ship Finance.
According to the report, there are big differences between the four major shipbuilding nations. In Japan, 57 shipyards account for the estimated 2011 capacity of 11 million cgt. In South Korea, the estimated 2011 capacity of 18 million cgt was distributed on 23 shipyards while the Chinese capacity of 23 million cgt was available through 204 shipyards. In Europe, 117 yards have an estimated aggregate capacity of 7 million cgt. One might expect that a process of reducing yard capacity would be more feasible and agile in China and Europe than in South Korea and Japan, but this is certainly not a foregone conclusion.
In its analysis, Danish Ship Finance said that "we apply a bottom-up approach to yard capacity based upon individual yards’ orderbook. We assume that market mechanisms will dictate prompt yard capacity adjustments. Clearly, actual capacity adjustments might be less responsive to market mechanisms in case of government interventions. However, we present a scenario where yard capacity is scaled back to the 2008-level by 2014. We therefore assume that 20% (15 million cgt) of the 2011-yard capacity will exit the newbuilding market within three years. Yards do not necessarily have to shut down as they might either scale down capacity by closing dry docks or simply start operating as repair yards" it mentioned.
In terms of individual per country analysis, Danish Ship Finance says that "we expect to see the largest adjustments in China and Europe. While the largest Chinese yards have a strong order cover, several of the smaller yards are struggling to win new orders and utilize capacity. Many of these yards have primarily been building Dry Bulk vessels. We doubt that they will all acquire the necessary skills to become able to build high specification vessels in the near future. Therefore, we expect that almost 7 million cgt (30% of 2011 capacity) will close down within the next three years. Most of it – 4.5 million cgt – is expected to close in 2014" said the report.
It went on to conclude that "global yards’ spare capacity will rise steeply if global yard capacity is not reduced over the next three years. We estimate global yard capacity at 63 million cgt in 2011. If this capacity is maintained until 2014, spare capacity at global yards will peak at 44 million cgt in 2014 (by comparison 50 million cgt was delivered in 2011). However, if global yard capacity is reduced according to our estimations, spare capacity at global yards will amount to 29 million cgt in 2014. For yard utilization to stay close to 80%, new orders of 20 million cgt, scheduled for delivery in 2014, will be required" stated Danish Ship Finance.
It's also worth noting that newbuilding prices dropped 13% during 2011. "The declining orderbook and the prospects of spare capacity at yards in the near future have pushed newbuilding prices lower. The average newbuilding price on a Dry Bulk vessel was down 13% year-on-year in January 2012. The decline in newbuilding prices was tilted more towards smaller Panamax vessels as well as Handymax vessels which dropped some 16-18% year-on-year in January. Capesize vessels dropped 13% on average while Handysize vessels saw declines of some 10%" said the company's report.