Demand, Supply & Capacity in the Shipbuilding Industry

Demand, Supply & Capacity in the Shipbuilding Industry

million dwt Ship completions by region 120 100 80 60 Other Europe Japan Korea China "Europe" includes Russia SOURCE: IHS-Fairplay 40 20 42.3 0 0.4 1.3 5.7 1983 1993 2003 2013

Overview Global shipyard capacity surged in previous decade, to an estimated 51.6 million cgt in 2010 * Growth reflected firm demand in all sectors & huge investment in capacity, especially by China Far softer freight markets from late 2008 led to order cancellations & collapse in new contracting Asia now world s dominant shipbuilding region * Source: OECD C/WP6(2011)13, November 2011

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 annld million gross tons Newbuilding ordering by ship type * 150 125 100 75 50 Other LNGC Offshore Other Dry Cargo Roro Container Oil tanker Bulker Excludes cancelled orders SOURCE: IHS-Fairplay 25 0 * 2014 totals annualised on basis of ordering reported in January-April inclusive

Recent developments in shipyard capacity Global capacity very sensitive to levels of tonnage demand & can alter radically, even at short notice Steep falls in ordering from late 2008 onwards led to much capacity being taken out of use, but not permanently decommissioned Strong revival in ordering interest in 2013 & 2014 to date has seemingly led to reactivation of some capacity that had been surplus to requirements

Why the recent revival in fresh ordering? Sustained ordering now taking place, especially of large bulkers, despite lack of freight market upturn Many owners have placed orders in anticipation of expected higher tonnage demand Shipping attracting new funding sources,* due to its high gearing to global economic activity Access to finance fuelling current ordering surge Yards marketing cost-saving eco-type designs * e.g. hedge funds & initial public offerings (IPOs)

no. of ships Bulker ordering by ship size & year 1,400 1,200 1,000 800 600 220,000+ 100-219,999 65-99,999 40-64,999 10-39,999 SOURCE: IHS-Fairplay 2014 totals annualised on basis of year-to-date ordering 400 200 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 annld year ordered

no. of ships Baltic Capesize Index (annual averages) Capesize bulker ordering & BCI * 300 250 297 New Capesize orders Baltic Capesize Index Excludes orders placed but later cancelled 12,000 10,000 200 2014 total annualised on basis of year-to-date ordering 211 8,000 SOURCES: SSY, Baltic Exchange 188 150 155 6,000 134 100 4,000 50 69 46 2,000 0 2007 2008 2009 2010 2011 2012 2013 2014 annld year ordered 21 0 * BCI = Baltic Exchange Capesize Index

no. of ships 12-month time-charter rate VLCC ordering & 12-month T/C rates 90 90,000 75 2014 total annualised on basis of year-to-date ordering New VLCC orders 83 75,000 60 12-month T/C rate 60,000 Excludes orders placed but later cancelled 45 48 45,000 42 SOURCE: SSY 42 30 15 0 28 24 13 7 2007 2008 2009 2010 2011 2012 2013 2014 annld year ordered 30,000 15,000 0

Capacity by geographical region (1) China, Korea & Japan together accounted for 93.6% of all new tonnage delivered in 2013 * China s relative share of total new deliveries up from 10.3% in 2003 to 39.7% in 2013 Europe s share of global deliveries down to just 1.6% in dwt terms last year, but its yards now mainly focus on higher-value tonnage types * As measured in deadweight terms

Capacity by geographical region (2) Developing nations winning greater share of total ship completions, due to lower production costs Governments of such countries have actively encouraged investment in new yard capacity Further migration of shipbuilding activity to lowcost locations still likely in next 15 years even though excess yard capacity is expected to persist

million dwt China: new ship completions by year 80 70 60 50 Excludes allowance for slippage from reported delivery dates or possible further ordering Figures for 2014 onwards based on current orderbooks SOURCE: IHS-Fairplay 40 30 Other Tanker Container Bulker 20 10 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 year of build / scheduled delivery

Benefits of shipbuilding to emerging nations Boosts employment & can generate substantial hardcurrency earnings Increases demand for home-produced steel & ships equipment, adding to employment in those sectors Can be used as an instrument of regional policy Makes it easier for domestic owners to increase or modernize their fleets Possible prestige of orders won from foreign owners

New orders by country of build, 2007-2014 * China Korea Japan Other Asia-Pacific Europe Other "Europe" includes Russia 1,595 593 1,898 7,383 2,701 2,894 Excludes ships below 1,000gt Figures denote number of ships ordered SOURCE: IHS-Fairplay Excludes orders placed but subsequently cancelled * 2014 data to end-april

Capacity by geographical region: outlook OECD-based yards mainly limited to building high-specification, high-value complex tonnage Lower-cost nations set to diversify into building higher-value ship types by 2028, at expense of shipbuilders in North America, Europe & Japan Some scope for OECD-based yards to set up joint ventures in low-cost developing economies

Factors affecting global shipyard capacity World economic activity & seaborne trade flows Newbuilding demand & profile of new vessel completions by ship type * Contract prices & ship construction costs Government policy (local & national) Staffing levels, work practices, changes in yard productivity & alterations to existing facilities * Depends on owners future expectations plus ship finance availability & cost

Problems measuring shipyard capacity (1) Capacity is demand-sensitive & can alter greatly, even at short notice, reflecting trading conditions: global ship completions very variable over time New equipment or different work practices can add to a yard s productivity * Output also depends on total staffing levels & working patterns (i.e. no. of shifts worked) * e.g. introduction of on-theground building techniques

no. of orders received Chengxi Shipyard: new bulker orders by year 50 45 2014 total annualised on basis of year-to-date ordering 49 40 35 30 SOURCE: IHS-Fairplay 42 25 20 15 10 14 5 0 3 2 5 1 2007 2008 2009 2010 2011 2013 2014 annld year ordered NB: all such orders relate to bulkers of 50,000 to 65,000dwt

Problems measuring shipyard capacity (2) Overall capacity can also depend on government policy, which may alter over time If demand is weak, some yards may temporarily switch to repairs, conversions, demolition or to building products other than ships * Yards that have been mothballed/put to other uses can rapidly resume shipbuilding if demand rises * e.g. wind turbine equipment

Risk factors in forecasting future capacity Dramatic shocks to the global economy Severe dislocations to normal cargo trade flows arising from unpredictable events (e.g. wars, political disputes or natural disasters) Large changes to product demand caused by major shifts in government policies * Serious vessel casualties that lead to radical changes in existing maritime regulations * e.g. environmental policy on use of coal in power generation

total workforce Japan: shipbuilding employment * 60,000 SOURCE: Shipbuilders' Association of Japan 50,000 Figures at 1 April each year 40,000 30,000 20,000 10,000 Sub-contracted Directly-employed * 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 * Shipbuilders Association of Japan member companies only

Projected future yard capacity by 2028 (1) Actual capacity likely to be closely linked to total demand (i.e. volumes of new ordering) No certainty that capacity will grow smoothly over time: some recently-reactivated yards could be at risk by 2016 if orders falter again Rise in seaborne trade & world fleet unlikely to match rapid growth of 2003-2008 inclusive, when China s raw material imports surged

Projected future yard capacity by 2028 (2) Some scope for ordering & yard capacity to be boosted if vessels scrapped at earlier ages Threat of slower trade growth if further shocks to global economy ensue before 2028 SSY Base Case implies that growth in world trade & global fleet could mean that 2028 call on shipyard capacity may total just 39.8mcgt, or almost 23% below levels attained in 2010

yard capacity (million cgt) Global shipyard capacity, 2010 & 2028 70 60 2028 2010 SOURCES: 2010 estimate: OECD; 2028 forecasts: SSY 68.3 50 51.6 40 39.8 30 20 23.0 10 0 2010 2028 (Low Case) 2028 (Base Case) 2028 (High Case)

Summary & conclusions (1) Large disparities exist in relative costs of new ship construction in respective countries Shipyard capacity migrates over time to developing nations that can build vessels at lower prices Governments of newly-industrialising economies have strong incentive to promote shipbuilding for the employment & hard currency that it generates OECD governments have less incentive to support shipbuilding as no longer as large an employer

Summary & conclusions (2) Few technical obstacles exist to building simple ship types (e.g. bulkers or container ships), so easy for new yards in emerging nations to enter such sectors Joint ventures with established builders in mature industrial nations give yards in emerging economies access to expertise to build more complex tonnage Such joint ventures can allow OECD-based builders to remain active in some sectors, even if their homebased yards can no longer compete on price

Summary & conclusions (3) Demand for complex ship types relatively limited, with far smaller numbers of new orders placed, compared to contracting of simpler tonnage types Some buyers of complex ships are price sensitive, so if option exists to have such tonnage built in lowercost nations, such owners may do so Yards in emerging nations initially likely to quote very low prices for complex tonnage to help them to establish market share

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