Shipyards: An international perspective... By Captain Stephen Brown

By BCShippingNews
July 28 2017
Predicted expansion of world seaborne trade to 2050.
A global downturn of 71 per cent in orders in 2016 compared to 2015 was bound to have consequences...

Many of you will have sat through presentations in which I have spoken to the pending crisis in world shipyards as a consequence of the financial crisis affecting most sectors of global shipping. That crisis has now been with us for the past two to three years depending on the specialization and location of the yard, but most of all, the willingness of the particular national government to subsidize production in the interests of safeguarding a strategic industry and maintenance of social stability. Whatever the case, a global downturn of 71 per cent in orders in 2016 compared to 2015 was bound to have consequences.

To put the issue into perspective, there perhaps needs to be an appreciation of the importance of shipbuilding for developing Asian countries whether for reasons of prestige, a source of mass employment, foreign exchange earnings or simply providing an avenue to industrial modernization and technological innovation. Japan used shipbuilding in the 1950s and 1960s to rebuild its industrial base; South Korea copied the blueprint in the 1970s by declaring shipbuilding to be a strategic industry; closely followed by China in the 1980s in the form of major state-controlled enterprises. Today, we see a new round of Asian shipbuilding growth centred on the Philippines, Indonesia, Vietnam, and to some extent, Singapore which, despite current hard times, specializes in construction and conversion for the off-shore industry. We should also not overlook that in the Arabian Gulf, Saudi Aramco is to build the region’s biggest shipyard in a $5.2 billion joint venture with South Korea’s Hyundai Heavy Industries, and others, with the capacity to produce four offshore rigs and 40 vessels, including three VLCCs a year.

It is therefore of no surprise that despite the steep decline in orders for new vessels over the past five years, and some attempts at consolidation of the industry, state support is as important as ever. South Korea’s so called “Big-Three” shipbuilders — Hyundai Heavy Industries (HHI), Samsung Heavy Industries (SHI), and Daewoo Shipbuilding & Marine Engineering (DSME) — dominate the global market for large container ships but those orders are rapidly drying up as the major container lines place greater emphasis on consolidation and profitability rather than protection of market share. Competition from China, production delays, and massive overcapacity have resulted in the current round of financial distress for South Korean shipyards.

Despite increasing numbers of ultra-large container vessels (ULCVs) joining the global fleet, the last time an order was placed for a ULCV was the final quarter of 2015, and latest numbers indicate that the orderbook to existing fleet ratio has fallen to a record low of 14 per cent despite outstanding orders for 50 ULCVs. This translates to the fact that all new container vessels due for delivery until the end of 2019 will add just 14 per cent to global fleet capacity with the ratio likely to continue in decline given the imperative for the liner trades to bring balance to supply and demand and thereby stem several consecutive years of unsustainable losses.

Of course, the fanfare around the delivery of ever larger ULCVs, the most recent being around the OOCL Hong Kong at 21,400 TEU, continues to be the headline grabber. However, an interesting aspect is that while ULCV capacity has grown, the actual size of the vessels has not — all have a length of between 395 and 400 metres with a beam of 58-59 metres allowing for 24 bays across on deck.

Faced with a reduction of shipyard orders in dollar terms of 94 per cent after shedding some 20,000 jobs in the first half of 2016, and a backlash from the failure of Hanjin Shipping, it was announced last fall that the Government of South Korea had elected to extend almost $10 billion in subsidies to the beleaguered shipbuilding industry and create a fund designed to encourage Korean owners to order more than 250 ships. All this despite a short-lived policy statement from the Government in 2015 when it was announced that as a consequence of World Trade Organization rules, there would be no further state support for DSME, the world’s single largest builder of container ships.

Chinese shipyards have been facing even greater problems with many projected greenfield yards failing to materialize, despite having accepted orders for vessels. In addition, as a consequence of a 32 per cent reduction in orders in 2016 compared to 2015, and a further 47 per cent fall in orders in the year to date 2017, many existing yards have been liquidated, with huge consequences for local economies There are no firm numbers but informed estimates put the reduction in China’s national ship building capacity at around 30 per cent.

That being said, China has been steadily eating into South Korea’s traditional areas of expertise in LNG carriers and large container ships. Not content with that, it was announced in February this year that Carnival Corporation had signed a memorandum of agreement (MOA) with China State Shipbuilding Corporation (CSSC) and Fincantieri of Italy, to order the first-ever cruise ships and four options to be built in China for the Chinese market. The significance of this may be judged by the fact that the MOA was formalized during an official signing ceremony held at the Great Hall of the People in Beijing, attended by Chinese President Xi Jinping and Italian President Sergio Mattarella. The first of these ships is scheduled for delivery in 2023.

Despite many years of rationalization and consolidation of yards, Japan’s shipbuilding industry is also in its worst slump since the 2008 global financial crisis. After a few bumper years of new orders driven by a weak yen and a spike in demand ahead of stricter environmental regulations, the country’s yards saw new orders for export ships plunge by 80 per cent during 2016. Japan too has flirted with construction of cruise ships, initially with Diamond Princess and Sapphire Princess (both delivered in 2004 following an expensive fire on the first hull during construction) and more recently for Aida cruises built at the Mitsubishi Heavy Industries (MHI) Yard in Nagasaki. AIDAprima was originally scheduled for delivery in March 2015 but was actually delivered in March 2016. One can only speculate that the late delivery penalties will give MHI reason to pause for thought before competing for similar projects.

Despite a far lower profile, the Philippines is also developing into a global shipbuilding hub, aided by the resources and know-how of foreign investors. In 2010, the country quietly surpassed its European rivals and has since become the fourth largest shipbuilding nation after China, South Korea and Japan. Major yards are Hanjin Heavy Industries & Construction in Subic Bay, Keppel Subic Shipyard and the Keppel Batangas Shipyard. In 2015, the Hanjin Yard secured an order for three 20,600 TEU capacity container vessels for CMA-CGM, the first of which is due for delivery later this year and which will be the largest vessel ever to be built in the Philippines.

On the other side of the South China Sea, Singapore has been badly hit by the global oversupply of oil and shrinking profits with most oil companies taking a time-out from exploration drilling and thereby the construction of the new offshore rigs in which Singapore has traditionally specialized. While contraction began in 2013, the impacts were modest until 2015 when several contracts were dumped in rapid succession. Leading player Sembcorp Marine delivered eight rigs in 2014 but only one in 2015. For its part, Keppel was scheduled to deliver 15 rigs in 2015 but only seven materialized.

The prolonged slowdown has therefore resulted in Keppel reducing its global workforce by around 18,000, or about 49 per cent, since the start of 2015. The company also ceased operations at two overseas yards and announced plans to mothball three rigs in Singapore.

If you are seeking some brighter news — look no further than the European shipyards which have patiently stayed away from boom and bust cycles in the construction of container ships, bulk carriers and tankers but rather maintained focus on competing for the construction of naval vessels, cruise ships and ferries. While European shipbuilding is but a shadow of its former self, the dominance of Italy, Germany, France, and to a lesser extent Poland, Finland, the Netherlands and Turkey has to be admired. These are not low-cost labour environments but the key to their success has been productivity and quality of product combined with reliability in terms of building to budget and on-time delivery.

One leading example of success is Germany’s MEYER WERFT which was founded way back in 1795 and which is now in its seventh generation of family ownership. In the closing decades of the 20th century, MEYER WERFT acquired and has maintained an envious international reputation for the construction of all manner of ferries, gas tankers, livestock carriers but above all, cruise ships.

However, here too, consolidation has been a necessity for smaller yards to survive. Examples are the acquisition of Finland’s highly regarded Turku Shipyard by MEYER WERFT in 2014 following a near collapse under the ownership of South Korea’s STX Group during that company’s well-documented financial struggles. This was followed in May this year when the Italian shipbuilding group Fincantieri signed an agreement to acquire a majority stake in STX France, operator of the 150-year-old shipyard in Saint-Nazaire, thereby allowing Fincantieri to further expand the company’s footprint in the cruise ship market. It was only last year that STX San Nazaire delivered the world’s largest cruise ship, Harmony of the Seas, the third ship in Royal Caribbean’s Oasis class of vessels and will deliver the fourth in class in 2018. Thus far, the French government has vowed to maintain its 33 per cent stake in the yard and thereby ensure blocking rights.

A further eyebrow raiser materialized in 2015 following the decision of Malaysia’s Genting Group to take a controlling interest in Lloyd Werft in Bremerhaven, Germany, a shipyard which has been continuously in business since 1857. The Genting Group is the majority owner/controller of Norwegian Cruise Line, Star Cruises (now renamed as Genting Hong Kong), Dream Cruises, Crystal Cruises, Oceania Cruises and Regent Seven Seas. The Group has a long-time relationship with Lloyd Werft but the decision to elevate this to the next level and thereby have the ability to directly control new build costs is quite significant.

At the end of the day, no discussion of international shipbuilding can thus escape the reality that shipyards are frequently a tool of national economic policy and are therefore subject to the political direction of the day. When shipyards are a key strategic and economic bedrock such as is the case in Asia, policy distortions become inevitable.

But it doesn’t end there. In 1994, under the umbrella of the OECD, the European Commission, together with the Governments of Finland, Japan, South Korea, Norway, Sweden and the United States, signed the Final Act of the “Agreement Respecting Normal Competitive Conditions in the Commercial Shipbuilding and Repair Industry.” The Agreement was scheduled to enter into force in July 1996 however, the United States, which launched the initial discussions in 1989, has still not ratified the Agreement, and as a consequence, the Agreement is not yet in force. Needless to say, as perhaps the world’s foremost subsidizer of ship construction, it is not in the strategic interests of the U.S. to enter such an agreement.

Looking to the future, if well informed predictions are correct, world trade will double by 2030 and triple by 2050. Despite the steady increase in vessel sizes, this will require many more ships to be added to the global fleet than exist today. The question is, who will build them? Strategic purpose and long-term vision will dictate winners and losers but, as with ship owning, there are many bumps, twists and turns along the way which will decide the outcomes.

Captain Stephen Brown spent 21 years at sea where he served as Master for the last five years with Gearbulk Shipping. After coming ashore, he worked in various levels of operational management for Gearbulk Shipping before going on to serve as Chamber of Shipping of BC Director (2000 to 2008) and President (2008 to 2016). Captain Brown is currently the owner of West Pacific Marine Ltd., Marine Consultancy and can be reached at westpacificmarine-at-gmail.com.