Demand trends within the shipbuilding industry 0 comments

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The marine sector has long been considered a sunset industry but its resurgence over the last three years has shown that sometimes when such perceptions arise, it suggests underinvestment that ultimately will have to be rebalanced through vigorous capacity expansion.

Since late 2003, shipyards locally and abroad have been receiving incessant orders for newbuilds of all varieties. The anchoring trend has been the optimism surrounding the increase in global trade, in particular the rise of China. The key symptom has been rising chartering rates all round for bulk shippers, container shippers, oil tankers, exploration vessels. It is a demand-pull effect: rising end-demand rates pull shipbuilding rates along, benefiting an entire industry across the board.

Yet the signs are clear that this situation is near its end. The charter rates for bulk shippers have gone down substantially since early 2005, as evidenced by the Baltic Dry Index and the poor performances of bulk shippers like STX Pan-Ocean and Noble, while containership charter rates had also peaked around mid-2005(although their decline has not been as drastic compared to bulk), as evidenced by the performance of NOL. Given the looming demand-supply imbalance in the downstream demand, the demand for newbuilds has obviously been affected. This is best reflected in the newbuilding prices, where rates for both bulk carrier and containership newbuilds peaked in mid-2005 and have slowly come down to a plateau since then (see Reference 1). It is inevitable that declining freight/charter rates will have a direct negative impact on prices for future new buildings as well as expansion plans for yards worldwide.

On the other hand, there has been no significant weakness in the oil exploration and transportation market, in line with the huge and steadily growing demand for crude oil and supported by persistently high oil prices. In particular, the more expensive offshore exploration/production segment has been made viable by high oil prices which have led oil majors to revise their long-term oil price projections (on which they base their long-term capex plans). The day rates for deepwater rig and mid-water depth market are at 4 years’ highs, boosted by near-full utilization capacity; Keppel and Sembcorp Marine have of course been beneficiaries of this highly trumpeted development. Also, the offshore exploration/production trend is driving demand for offshore support vessels such as AHTS/AHT vessels, which have been experiencing upward trending chartering rates since 2003, as evidenced by the rising fortunes of Ezra. Indeed, most old AHTS vessels will not be able to support deepwater production; it is estimated that only <15% of the global fleet of >1,800 AHTS can fulfill deepwater operations. This means that the replacement cycle is likely to accelerate as the offshore production trend increasingly develops. On the transportation side, tanker rates have not exhibited any significant sustained downtrend, while LNG vesselbuilding --- reputedly the most complex vessel types --- are increasingly being planned as the importance of natural gas as the most viable alternative fuel is being realised.

The orderbooks of most shipyards are filled all the way till 2008-09, such has been the pent-up demand. However, the above observations suggest that weaknesses in freight rates will have a knock-on effect on new building orders and prices, and weakening demand (due to, for example, tightening US liquidity and hence consumer demand) might exacerbate any such situation. What is most likely is a stratification of demand trends in the various functional shipbuilding segments, with weakening demand in bulk carriers and containerships, and sustained strength in energy-related vessel newbuilds. Singapore shipyards are likely to benefit from the latter trend rather than suffer badly from the former, because the shipyards here have evolved to specialty vessel building due to lack of competitiveness in the mainstream market (as a result of high labour rates locally). It is interesting to note the recent orders received by shipyards such as ASL Marine, Pan-United Marine and Labroy Marine: most have been AHTS vessels, with a smattering of supply vessels, drillships, diving support vessels, maintenance vessels, barges ---- all offshore support-related.

References:
(1) Maxmart Shipping Information
(2) Business Guide to Shanghai and the YRD: World Leader by 2015? - Shipbuilding in the PRC & the YRD
(3) OCBC analyst report 16 June 06: Oil and gas support service sector