Shipbuilding in 2012
Shipbuilding did not enjoy the best of years in 2012. Although on the surface things seem satisfactory, with many yards reporting that production is still high and order books are full, the realisation that far less healthy times are just around the corner.
As an industry, shipbuilding, although moving in cycles, tends to be less extreme in the ups and downs than many other sectors, and to follow trends rather than initiate them. A boom in manufacturing means more ships are required, to take raw materials to where they are needed, then to transport the finished goods to where they are sold. As demand reduces, as it is bound to do in times of global recession, demand for ships dries up – but because of long lead times, typically around three years from initial order to delivery – the supply of ships steadily continues for some time ahead.
This is exactly the situation facing most fleets today. Shipowners find they have surplus capacity, and as ships ordered during and at the tail end of the period of high demand are delivered, the surplus increases. Many owners are having to decide whether to keep ships running despite charter rates that barely, if at all, cover costs, or to lay up ships and cancel orders. Layup, even though ships are not being used, incurs continuing cost, and most newbuilding contracts include substantial penalties for cancellation. So it is difficult to make the maths add up – and in the absence of returns on investment, financiers turn away from shipping as a worthwhile home for their money.
The situation is not helped by sharply rising operating costs, not just in terms of fuel, but in meeting increasingly strict regulations.
One equation that does have a solution is that with surplus capacity, orders for new ships will all but dry up – and this is what is happening. Once the present spate of orders is fulfilled, shipyards face a bleak future.
Some sectors are still doing well, for example offshore support ships, and gas carriers. Demand for energy means that oil and gas need to be extracted from new field, many of which are in deep water or Arctic regions, necessitating a new breed of ship with enhanced capabilities and equipment. The growing demand for natural gas as a fuel means more specialised ships are needed to transport the gas over longer distances, with equipment for handling and liquefying the gas. Another fast-growing energy-related sector is in wind farm erection and servicing, which, with more and larger offshore wind farms being built and planned, needs new, specialised ships, of considerably greater capacity than the workboats which have served the market up to now.
Many yards are trying to diversify into these specialised sectors, although not all are likely to succeed – designing and building smaller specialist ships is quite different from the deep sea bulkers and tankers that have provided the bread-and-butter for the largest shipbuilding nations. European yards have traditionally dominated this market, and this continues, but European (Norwegian in particular) designs are being built in China and Brazil.
It's a similar story with passenger ships. European builders are losing orders to Asian yards, as they begin to seriously enter the cruise and ro-pax markets. German yards seem to have been particularly hard-hit, with several insolvencies in the past year. Two – Meyer Werft, specialising in cruise ships, and ro-ro specialist FSG – seem to be more than holding their own, though both have looked at diversification. One of the less fortunate groups was P+S, where the problem seemed to be one of too many orders rather than too few; it simply took on more newbuilds than it could handle, resulting in late deliveries, penalties and cancellations.
Up to fairly recently, the more specialised ship types held little interest for the yards in Korea and China (and previously Japan). There was a domestic market to be served, but internationally more orders could be won, and greater profits made, by concentrating on the relatively lower-tech merchant segment. In fact it was previously said that this practice was hindering the move towards more efficient ships. The yards were winning orders for basic, simple-to-construct vessels often based on very old designs, so any owner wanting something more up-to-date and out of the ordinary had to take his place at the back of the queue, and look at five- or six-year delivery times.
That, at least, has changed. The slowdown of new orders means that there is plenty of capacity in the shipyards, and owners – not builders - can call the tune. No longer is it just a matter of getting a new ship to directly replace old tonnage. Owners can specify a ship which burns less fuel per unit carried, and complies with existing and forthcoming emission limits.
Some of the major container carriers have decided that one way to reduce cost per mile per unit carried is to carry more on each vessel. This has initiated a size war – as to who can have the greatest number of TEU – which gives the boxship builders some solace. Currently the largest capacity afloat is the 16,200TEU quoted for CMA/CGM's Marco Polo. Nevertheless, the ship's physical dimensions are significantly smaller than the Emma Maersk class, for which a capacity of 15,500TEU is quoted. Mere TEU can be misleading; Maersk tends to count the maximum capacity of loaded containers, while several other carriers quote the maximum number of containers, whether full or empty. But the design for the ten Triple-E ships ordered by Maersk from DSME in Korea is quoted at 18,000TEU capacity, in a ship not much larger than the Emma Maersk.
Not only are there several ultra-large container ships on order, but as ships get bigger, with deeper draught, the number of ports that can accommodate them reduces, so there is a consequent demand for smaller feeder ships.
In fact size is giving another much needed, albeit small, fillip to the world shipbuilders, with the enlargement of the Panama Canal to take larger ships. The new third set of locks, scheduled to come into use in 2014, will effectively more than double the canal's capacity – allowing, for example, a new breed of `New Panamax' container ships of around 12,000TEU to pass through, compared with the current maximum of around 5,000TEU. But the largest boxships, and VLCCs will still be too large.
Until recently, propulsion power was given as the main limiting factor to ship size. The Emma Maersk class has a 14-cylinder 96cm-bore Wärtsilä main engine, currently the most powerful afloat at 81MW. It may be possible to build a single engine to produce more power, but the size of the propeller required would equate to too deep a draught for most current ports. But the current move towards slow steaming, or even ultra slow steaming, means that such power is no longer necessary. Although most owners are, naturally enough, reluctant to permanently limit speeds to the 10-14 knots commonly used in a slow steaming regime – Emma Maersk is capable of over 25 knots – it looks as if more modest speeds are here to stay, and the Triple-E will have lower installed power than Emma Maersk.
Even so, reports indicate that Maersk has opted for a twin-screw propulsion system for the Triple-E. This will be based on two MAN ultra-long-stroke diesels, with a total output of around 64MW. The original concept accommodated either a single engine, as in Emma Maersk, or the twin-screw installation. Although a single engine arrangement is generally reckoned to be more fuel-efficient, in this case the twin-engine installation won, on grounds of propulsion efficiency. MAN says that its ultra-long-stroke, and hence lower revolutions, allows the use of larger propellers, with a significant increase in efficiency, in this case sufficient to offset the use of two engines rather than one larger unit. The Triple-E engines will be equipped with shaft generators and a sophisticated waste heat recovery system developed by Siemens, for further fuel savings, while the inherent redundancy of the twin-screw arrangement offers a useful safety benefit, enhancing the `green' credentials even further.
Fuel saving and efficiency is gaining in importance. Charterers are demanding that their goods are carried in the `greenest' way possible, with growing insistence on environmental awareness. Sea transport is of course environmentally friendly; there is that oft-quoted statistic that over 90% of the world's goods are carried on ships, yet it produces only 3% of the total air pollution. However, that is far from the whole story, as we know. 3% still represents a considerable tonnage of CO2, and the type of fuel and the engines used mean that shipping is responsible for a very large proportion of sulphur and nitrogen oxide emissions.
IMO's Marpol regulations are going through a continuing updating process, as we all know, to address these concerns, with sulphur emissions in a growing number of emission control areas (ECAs) being cut drastically from 2015, and further NOx limits coming in with Tier III in 2016. A further, this time global, cut in sulphur emissions, is planned for 2020, although this looks likely to be put off until 2025.
More pressing is the need to be seen to be acting on greenhouse gases. Shipping's major contribution to these is CO2, and the way to cut carbon emissions is to reduce the amount of fuel burned. This actually sits happily alongside owners and operators' needs to cut fuel costs, so the quest for shipping efficiency should be a win-win situation. The important first step in the official action to limit carbon emissions comes with the advent of 2013, and that is the introduction of the EEDI and SEEMP, energy efficiency design index (for new ships) and ship energy efficiency management plan (for all ships) respectively.
A ship with a favourable EEDI is likely to be more attractive in the charter market, and thus should command a premium, and will also have a higher second-hand value. So at last there is an incentive, in international maritime law, to design and build efficient ships. No wonder there are those who want the EEDI to apply across the whole fleet, not just newbuilds. But how the EEDI is established, and how it is used, is still a controversial question in some circles.
The SEEMP is less of a design matter, more an operational one. It is, as the name suggests, a plan that suggests the most efficient way of operating the ship, taking into account maintenance, loading, ballasting, trim, speed, weather routing and the like. A recent survey by Napa of Finland, a company developing, among other things, loading calculation software, suggested that the vast majority of shipowners thought the SEEMP to be a `good thing' as far as shipping's environmental credentials are concerned, but only some 40% were aware of the SEEMP's potential as a fuel saving, and hence cost-cutting measure. The remaining 60% saw the SEEMP as mainly a paperwork exercise.
But what do these developments mean to the yards, and their suppliers, themselves? Although, as mentioned earlier, shipbuilding production has been maintained at similar high levels in 2010, 2011 and 2012, peaking at about 50 million gt/year, the forward orderbook shows that this will diminish rapidly, to very low levels indeed for 2014 onwards. The situation is exacerbated by excess-tonnage in the existing fleet, which analysts like Drewry see as being combined with poor levels of operating efficiency which is hindering a recovery, so even if the shipping market should turn around it will not immediately result in new orders. Moreover, Drewry points out that the orderbook is dominated by bulk carriers and containerships, two of the worst hit markets in terms of over supply wreaking havoc with rates, which reflects the fact that for some time now ordering activity by shipowners has exceed the requirements of trade growth.
We remember remarking in The Motorship on a statistic presented at the height of the ordering boom that the amount of available money in the world was scarcely sufficient to finance all the ships on order, so something had to give. At the time, such a view seemed rather extreme, but since then we have seen a particularly severe global recession and severe problems in the banking sector, giving that outlook more than a little credibility.
Analysts expect the orderbook to remain flat at least until 2016, and probably, if funding for shipowners continues to be limited, there will be a bitter fight for survival among shipyards.
The current market is dominated by China and South Korea, both of which see a tough time ahead. Korea's International Trade Association and Hyundai Research Institute have both studied the declining demand in overseas markets. Unfavourable exchange rates, the eurozone crisis and increased protectionism are all seen as potentially having a negative effect on exports. As Korea is home to the three largest shipbuilders, Hyundai Heavy Industries (HHI), Samsung Heavy Industries and Daewoo Shipbuilding and Marine Engineering, all of which have forecast sharp reductions in profits following a poor 2012, the situation looks bleak. HHI has made job cuts and both executive and shopfloor levels to help cope with the worsening business situation.
It's a rather similar story in China, which overtook Korea to become the market leader in terms of shipbuilding tonnage. Although there are plenty of unfinished orders, these are not thought to be sufficient to tide the yards over until such time as shipping recovers. At least one major shipyard group, Jiangnan, was reported during 2012 as having laid some of the blame on the Chinese government for failing to control the rapid expansion of shipbuilding capacity. This view was echoed by the director general of the Shanghai Society of Naval Architects and Marine Engineers, Zhang Shengkun, who said that lack of market foresight led to excess capacity, and the fast expansion meant that there had been little progress in industrial upgrades, meaning China was comparatively poorly placed to take advantage of any rising demand for high value-added and energy-efficient ships. This problem is being addressed under the current government five-year plan, with policies to promote the shipbuilding industry and the development of engineering expertise, offering an opportunity for the industry to move up the value chain.
Such moves are not before time; production at Chinese yards declined steeply during the first three quarters of 2012, according to the China Daily. Completed orders dropped by 18.5% to 41.58 million dwt compared with 2011, and the decline was even more marked in new orders, which decreased by 46.9% year-on-year to 15.41 million dwt, according to data from the Chinese Ministry of Industry and Information Technology.
Yard closures seem inevitable; and the outlook is pessimistic. Tan Zuojun, a former general manager of China State Shipbuilding Corp, said that at least half of China's 3,400 shipyards will fail within the next three years, while some analysts were quoted as saying that only 300 of the biggest yards will still be operating by the time the market turns the corner.
Over 30 years since the reform and opening up, China's shipbuilding industry continuously expands, and it makes direct contributions to China's water transportation industry, aquatic fishery, marine development industry, etc. Its status in China's national economy continuously rises. The shipbuilding industry is one of the few Chinese manufacturing that rank among the top worldwide and compete with advanced levels in the world.
Some industry experts take a more favourable view. While recognising that the worldwide recession is having a negative impact on Chinese shipbuilding, they feel that the country's government regards shipbuilding as an important sector in China's economy and will encourage technological advances and diversification into the better-performing market segments. A continuing price differential should favour Chinese shipyards over their higher-cost competitors in Korea and Japan, so China should continue to do relatively well.
Source: Motor Ship
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