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Jotun 09/11/2016

Bentley Systems 10/11/16

Building a future

The Naval Architect: January 2016

The economic and financial crisis has put an end to the boom in global shipping and shipbuilding markets and still affects competitors in South and North Asia. Large over-capacity in many segments of the fleet has led to low freight rates and decreasing ship prices.

As a result the maritime technology industry is seeing declining profitability on many new building projects. A massive decline in completions began in 2011 and continues to this day.

Also notable is a decline in workforce at the shipyards. Japan, for example, has seen a decline in its shipyard workforce from 54,000 to 44,000 between 2009 and 2014, a decline of almost 20%. After a good year 2013 new orders globally declined again in 2014 from 103.2 million GT to 82.6 million GT, leaving little hope for improvement in 2015. This data was sourced from the Japanese Shipbuilders Association and their report published in March 2015, as well as from IHS Fairplay statistics.

South Korean yards are faring little better. In the new KOSHIPA (Korean Offshore & Shipbuilding Association) report for 2015 statistics show that new orders were down to 293 vessels in 2014 from 407 in 2013, completions were down to 277 from 301 and the orderbook total was only up to 891 from 877.

It can be further stated that the situation in the Philippines and Vietnam has, in some ways, not changed since 2014. The development in these ‘emerging’ shipbuilding nations still shows a strong decline since the global financial crisis broke.

Plans from Hanjin in Subic Bay to venture into the VLCC market never materialised despite the fact that the dry docks in the Philippines would easily accommodate these size vessels. Instead, a few orders from European ship owners for the new Panamax size container vessels are being built. They have to build four at the same time in one dock to be able to float them out simultaneously, which does not give a competitive edge when negotiating new orders and is slowing down the building process and delivery. In addition, the high prices for electricity and general infrastructural problems in the Philippines hinder further consolidation of the business.

However, for the first time in the history of the Philippines maritime and shipping industry, shipyards have, through their heads or representatives, organised their first-ever national association to provide a “common voice” in representing the needs of shipyards as its major objective. The organisation has been officially named the Shipyards Association of the Philippines (SHAP). SHAP was launched on 17 June last year, the opening day of the three-day 2015 Marine Ship building and offshore event, at the SMX Convention Center, in Pasay City, Metro Manila, Philippines, where the first set of SHAP officers were elected.

The shipyards currently represented  in the SHAP include the R & LT Shipyard,  RRT Marine Service Corp., Colorado  Shipyard Corp., Western Shipyard, Elfa Shipyard  Corp., Fortune  Shipbuilding and Lighterage, Elfa Shipyard Corp., Keppel  Shipyard,  Frabelle Shipyard,  RBL Shipyard,  Austal Shipyard,  Philippine  Iron Works, Josefa Slipways, Herma Shipyard, SAS Shipyard Inc., Chesteel Marine, and Tsuneishi Shipyard.

Nevertheless, to describe the mostly unchanged situation in the Philippines today I would like to use the words of our Philippine colleague Barista Uno from his blog from March 2010: “The plain truth is that the Philippines’ shipbuilding sector is squarely in the hands of foreigners ­ Korea’s Hanjin in Subic, Japan’s Tsuneishi in Cebu and Keppel of Singapore in Subic and Batangas. They’re all here because of the cheap local labour. The only Filipino-owned company that’s into the newbuilding game in any significant manner is Herma Shipyard in Bataan province. Herma, though, isn’t a player in the commercial sense as it has been constructing double-hulled tankers for a sister company, a domestic tanker operator, not for third-party customers. The Koreans, the Japanese and the Singaporeans can pack up and leave tomorrow, and the Filipinos will not be any closer to having their own shipbuilding industry that would earn them the title ‘shipbuilding nation.’ Those fond of brandishing the phrase to describe the country are seeing a mirage.”

That view is as true today as the day it was written more than five years ago.

The situation in Vietnam, the world’s number five in shipbuilding activities, also remains grim. Thanks to a number of favourable conditions such as competitive labour costs, strong development of oil and gas activities, a skilful labour force, and favourable geographical conditions, Vietnam maritime’s supporting industry has developed to a certain level. But huge debts of the state owned companies mean they need complete restructuring, including foreign investment.

From the Vietnam Shipbuilding news of 11 February 2015: “The Shipbuilding Industry Corporation (SBIC) has risen from a proverbial shipwreck after an active restructuring and is now ready to sail,” stated Chairman of the firm’s member council Nguyen Ngoc Su.
So far, the reform process of the SBIC ­ formerly known as Vinashin ­ is on the right track, having restructured US$135 million of foreign debt and VND16.61 trillion (US$790.95 million) of domestic debt, he said. Su revealed that during this year, the SBIC plans to restructure its remaining debt of about VND10 trillion (US$470 million).

Currently, the firm has 16,500 employees, a sharp decrease from 33,184 in 2010, said Su, adding that in 2014 alone, the SBIC laid off more than 4,000 staff. Vu Anh Minh, head of the Transport Ministry’s Department for Enterprise Management, said collaborating with foreign partners is a strong solution for the SBIC, as fruitful outcomes have resulted from cooperation between the firm’s subsidiaries and a number of partners, including Samsung, Damen and Veka.

In 2015, the SBIC is set to generate total revenue of over VND7.2 trillion (US$343.8 million), including over VND4.72 trillion from shipbuilding and VND375 billion from repair services. Last year, the SBIC delivered 76 ships, including 33 to foreign clients.

In view of these statistics and statements it can be said that the outlook for the shipbuilding industry for the South East Asian yards has not changed from last year’s conclusions. Only where quality and product mix can be adapted to market trends can a recovery from the global crisis be seen at the end of the horizon.

Traditional markets like orders for dry bulk carriers, according to Clarkson’s weekly report from 8 May 2015, crashed to a 20-year low during the last four months and Japanese yards are suffering from this development especially. This is all disappointing news, but as we all know, in good markets and bad, there is still a lot of cargo to be moved and statistics show a constant growth of global trade. The same can be said for Offshore Oil & Gas. Worldwide output is still on the rise with 2.8% more predicted for 2015.

Hopefully we will see increased efforts in the region to help the industry to adapt to the changing environment more quickly and will be able to declare an end to a crisis that was self-generated through over supply and dumping prices.

Executives from the leading shipbuilding companies in Japan, Europe, China, South Korea and the United States meet annually at the “JECKU” shipbuilding summit. This is the most important industry meeting with top level representatives of practically all major shipyards in the world. The last meeting was held in Paris on 6 November 2014 and an abstract of its most important points can be found in chairman Dave Iwamoto’s end note:

“Supply is still outstripping demand in the conventional shipbuilding markets creating imbalances in the day-to-day business. Measures have been taken to address this overcapacity with the yards focusing on quality of shipbuilding versus quantity and specialisation into new high-tech business fields such as the offshore market. However, these measures alone will not be enough to restore a healthy supply and demand balance in the sector. Further ideas and opinions were put forward and discussed by the regional shipbuilding delegations.

“Focusing on the environmental footprint of shipping offers real opportunities for the shipbuilding sector to support the removal of underperforming ships from the market and offer energy efficient, technologically advanced vessel solutions to the regulatory demands which are placed upon the sector. Regulation, hence innovation, is seen as a key driver to promote the fleet renewal into energy efficient vessel types and for the development of technologies to be retrofitted to ships to allow them to meet the energy efficient design profiles required today. Regulation needs to have implementation certainty in order not to impede technology development.

“The JECKU Top Executive Meeting was reminded to be mindful of any practices that may lead to excess capacity and market distortions. Furthermore, it discussed initiatives currently in place for dealing with overcapacity [that] could be pursued for the healthy development of world shipbuilding.”

Considering the above and a few more statistics from last year (See Box) it can be said that the situation in shipbuilding is grim for many of the Asian countries and changes as envisaged by JECKU are not implemented fast enough to avoid further yard closures. This is especially the case with yards that continue to focus on producing bulkers, which will have little chance of survival as the market is more than saturated.

The five-year outlook
Considering the situation I want first to look at the Risk & Chance Factors in Global Shipbuilding Demand & Capacity:

  • Major disruptions to normal cargo trade arising from military conflicts, political disputes or natural disasters;
  • Major shocks to the global economy especially if these result in severe and widespread recession. As noted earlier the 2008 recession led to large-scale cancellation of vessel orders. As a consequence global ship completions declined by 40.8% from 2008 to 2012 in relation to 2003 to 2007 completions;
  • A slowdown in China’s demand for raw materials;
  • Change in demand for commodities. For example the use of coal for electricity generation could decline, leading to large reductions of coal shipments and a coinciding decline in dry bulk carrier employment.
    (Coal imports were down in China by 18% in 2014);
  • Serious maritime casualties can entail rapid and fundamental changes to existing regulations;
  • Major technology innovations that radically alter the performance and running costs (e.g. the introduction of new “eco-type” designs that reduce fuel consumption and therewith bring substantial savings on fuel cost). This could generate additional demand for new tonnage to replace the less fuel efficient vessels. Nevertheless, the recent drop in oil prices may slow down this development.

To further analyse the future outlook the newest reports from China and Korea may help.

Chinese shipyards are seeing a general consolidation process that deals with a market rebound and not yet a recovery due to the fact that prices were too low in the two years before 2013. It is projected that the industry is to bottom out in 2015 and will slowly start to recover in 2016. In 2015 the industry still has to live with low margin orders from 2012. The recession of China’s shipbuilding sector has seen the closing of many unproductive and speculative yards as the sector undergoes consolidation that is likely to carry on for the next few years.

Sources say that today China has only around 700 active yards with about 85 having received new orders this year. One prediction included a statement that after the consolidation period we will see only 10 Chinese shipyards accounting for 75% of the country’s shipbuilding market share. (From sources that cannot be independently verified).

South Korea has a longer history as a leading shipbuilding nation than China, and its government and shipyard associations seem to have best adapted to the situation that arose with the global financial crisis. They are using their higher experience level to venture further into the LNG tanker market that shows demand and are also developing their capabilities to work in the more demanding offshore vessel industry. The government plan aims to achieve three goals by 2020:

  • Increase marine industrial plant orders up to US$80 billion from US$25.7 billion in 2011;
  • Raise the percentage of critical engineering and components manufacturing that can be carried out in the country from
    40% in 2011 to 60%;
  • Strengthen the competitiveness of the parts and equipment industry for offshore plants to the extent that the rate of localization jumps from 20% in 2011 to 50%.

In the KOSHIPA report for 2015 the chairman Dae Young Park writes: “Korean companies have moved forward with a revamping exercise through restructuring in core business areas to play a crucial part in helping spur growth of shipbuilding & offshore industries. Externally, Korean companies have mapped out a plan to actively cope with the changing market environment by fully leveraging the leading-edge technologies and know how accumulated over many years of work.”

In the same report the preview of the association for 2015 is given as follows: Korean shipyards are expected to see a growth of new order intake by more than 15%, fuelled by strong performance in LNG Carriers, FLNG, and ultra large containership sectors, although new orders from global shipping and offshore markets are expected to edge downward slightly from the level of 2014.

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