At times last year, it looked as if shipyards would again defy the odds and record another year of record output. That is what we were forecasting mid-year when deliveries were up over 10%, but in the end the forecast was wrong (not for the first time!) and the yards pulled up just short at 152m dwt. Still, a remarkable performance in the circumstances. Peaking Out
So which year will mark the peak of the shipbuilding production cycle? The rather geeky answer is that it depends on the unit of measurement – in CGT terms the peak year was 2010 but 2011 comes out on top if dwt is applied (reflecting the dominance of relatively simple to build bulker deliveries over the past eighteen months). Nevertheless, after ‘plateauing’ out at record levels since the turn of the decade, it does now look like production is set for a significant downturn.
Managing the Descent
Of course, while production has remained high, yards have had it tough ever since the market downturn hit in 2008. Despite an unexpected (and for the markets perhaps unhelpful) run on bulkers in 2010, order volumes have been running at around one third of the levels of the boom years, as tonnage surplus and a finance squeeze have bitten. Contracting in CGT came in 37% down y-o-y in 2012, with an average lead time of just 22.4 months. This led to a run down in forward coverage (the current orderbook represents 1.7 years of current production compared to 3.5 years in 2008) and many marginal yards failing to secure new business (540 yards took new orders in 2007 compared to 209 in 2012).
Challenges Abound
Besides lower order volumes and weaker prices, yards have had to adjust to a significant change in product mix. The contract value of the offshore orderbook ($139bn) has grown to almost the same levels as the merchant orderbook ($169bn), while there has also been relatively more ordering in the gas, car carrier, products and chemical markets where fundamentals are generally better than in the big volume sectors. Whatever the exact output in coming years, it will involve relatively more niche business, along with the different technical and management challenges that come with these products. Add in the challenges of developing eco-designs and price discounting to tempt counter cyclical ordering and most yards and suppliers go into 2013 facing tough times and looking closely at strategy.
Where Now?
The latest forecasts from the World Shipyard Monitor suggest shipbuilding output will drop by around 15% this year, with a further major drop in 2014. Forecasts have been wrong before and further order runs are possible, but it does look like it will be a while before we are discussing record output again. Tough for shipyards operating in one of the most challenging businesses around but certainly what the market needs to help it get back on track.