Only the law of the jungle can work for shipbuilding

“The picture is not optimistic,”
Marine Plus managing director Dimitris Vranopoulos told the Capital Link Invest in International Shipping conference in New York in March.
Despite talk about stimulus packages and other measures to shore up the sector, the market has to be left to restore its own balance, Mr Vranopoulos said.
There is overcapacity in shipbuilding, and there will be many more cancellations of newbuildings and many greenfield yards will default on contracts or go insolvent.
Mr Vranopoulos’ firm is a newbuilding broker active in China, and provides consultancy and technical services.
It has documented only 4% of the world’s orderbook as being cancelled to date, amounting to some 323 ships.
However, Mr Vranopoulos said this number would increase significantly, as cancellations from small or greenfield yards are not adequately documented.
Despite the Chinese stimulus, the country might not be averse to seeing many of its greenfield yards die.
Japan, world number three in shipbuilding, enjoys the rare situation of servicing largely Japanese owners and has a historic record of forcing its yards to contract when times get tough.
A similar kind of shakeout is on the cards for global shipbuilding, Mr Vranopoulos said.
Despite his pessimism, he said shipyards are the “only means” of replacing the world fleet, and shipowners and yards with good pedigrees will survive.
One positive aspect is that the orderbook is shrinking. The most striking development in this context is that no new orders have been placed since last September at most of the world’s largest yards, Mr Vranopoulos said.
In January 2009 only nine new ships, aggregating 400,000 dwt, were ordered, which was a 96% decline over the previous year’s corresponding month. The new orders are mostly specialist ships and tankers.
Simultaneously, scrapping, which had dropped to almost zero in the previous few years, has picked up sharply. Mr Vranopoulos reported that in December 2008 and January 2009, 182 ships aggregating 10m dwt were sent to the breakers.
This trend is likely to escalate as freight rates in several sectors plumb unprecedented depths, he said.
A good fallout of the coming contraction in shipbuilding was likely to be that shiprepair yards that ventured into newbuildings would return to repair work, which in turn would help the increasing number of ships likely to go in for overdue maintenance.
The impending shakeout in global shipbuilding comes on the back of an unprecedented rise in new orders. As at February 1 this year, the world’s shipyards had 9,653 ships aggregating 572.7m dwt and priced at US$533bn on order, Mr Vranopoulos said.
Some 65% of these ships, as measured by dwt, are scheduled for delivery by the end of 2010. Bulkers account for 51% of the orderbook by dwt, followed by tankers at 30% and containerships at 12%.
In 2002, the world orderbook was 115m dwt and 14% of the then existing fleet. By the end of 2008, this figure had jumped to 51% of the existing fleet.
Within the bulker category, the capesize orderbook represents 106% of the existing fleet.
Corresponding numbers for other sizes are 46% of the existing fleet for panamax, 64% for handymax, and 37% for handysize. About 24% of the global bulker orderbook is being built at new yards and 14% at greenfield yards.
Assuming on-time delivery of the 2009 orderbook, Marine Plus expects the world fleet to grow by 18% for capesize, 16% for handymax, 22% for post-panamax containerships and 4% for sub-panamax containerships.
However, whether the entire orderbook is indeed delivered is a remarkably “fuzzy” picture, Mr Vranopoulos said.
On the one hand, several buyers could default because of a paucity of bank financing or their own cashflow constraints in an anaemic freight market.
On the shipyard side, inability to secure refund guarantees or outright insolvencies could cause cancellations.
Answering a question from the floor, Mr Vranopoulos said that even though many shipbuilding contracts in China carry “prim and proper” clauses regarding refund guarantees, in the event of having to call in these guarantees owners are likely to face a “small nightmare” and find themselves mired in fine print.