Four years into the global mega-credit crisis, quarterly shipbuilding production has peaked at 14.6m CGT (see graph). This is the third time we have reported an output peak, but each time, like Arnie Schwarzenegger in The Terminator, the yards have been back with a higher record. So, even newcomers (and many investors eyeing up the market today) know that shipping has a supply problem. Terminating the Terminator
The precise numbers are a bit technical (see graph for CGT definition), but it is hard to see how investors are going to escape from the shipyard Terminator. Deliveries are currently running at twice the level of 2005, when quarterly deliveries averaged 7m CGT. They now represent 10.6% of the cargo fleet (on an annual basis), much more than is needed to expand the fleet and replace old ships. Since 2005 seaborne trade has grown at 3.8% per annum. Add "normal" scrapping of 2% of the fleet for each year and the annual requirement for new ships is 5.8% of the fleet. That puts shipyard output 4-5% ahead of demand.
I’ll Be Back of an Envelope
These "back of the envelope" calculations suggest the shipyards are in a jam. There are two issues. One is the distorted product mix; 42% of the ships delivered in the last quarter were bulkers (see graph), which also account for 43% of the remaining orderbook. The gas orderbook has now run down to a very low level; while the tanker orderbook looks manageable. So the supply side problem is quite unbalanced, which is good for investors in those segments with a small orderbook, but only if that orderbook stays small.
Facing Termination
However, the really pressing issue for the yards is the forward orderbook, which is now down to only two years production at current levels. The forward delivery profile at 1st July 2012 is shown by the line in the graph. By the 2Q 2013 deliveries fall to 10.8m CGT and by the 1Q 2014 they are down by two thirds to only 5.3m CGT.
This volume of empty berths 12-18 months ahead makes life extremely difficult for the shipyards. In the past, shipyards facing this sort of pressure have often staged a come-back, generally by offering attractive new designs (eco-ships?) at super attractive prices. In the short term this helps the shipyards out of a mess, but it also risks prolonging the agony for their customers. Moreover, it only works if the yards have the funds to discount prices below cost and their customers can lay their hands on the finance to pay for those bargains.
Terminate or Terminated?
So there you have it. The shipyards are edging towards a crunch point. Can they find the cash to offer a new generation of eco-ship designs at prices which will tempt investors? And will shipping investors play ball? Nobody really knows, but one thing is certain - for the shipyards it’s a case of Terminate or be Terminated. Have a nice day.