2. MARKET ANALYSIS
2.1. Key market developments
2.1.1. Ordering activity and market shares
The global shipbuilding market increasingly feels the impact of the past over-ordering, the US recession, the uncertainties in the world economy and the effects of 11 September. Order intake in 2002 has so far been very slow and selective. Following a decade of almost continuous growth and a boom year in 2000, the rate of generation of new orders has declined sharply (see graph). This change has affected EU shipbuilding in particular. In the absence of any significant cruise-ship ordering activity, the volume of the order-book (i.e. the existing workload) within the EU is shrinking quickly.
Quarterly rate of generation of new shipbuilding orders
The rate of generation of new orders in the first half of 2002 was around 60% below the peak year 2000 (comparing quarterly figures) and has reached the lowest point since 1992. Ordering at EU yards was 77% below the level in 2000. The downturn in ordering has been accompanied by a fall in prices of more than 15% on average as compared to the 2001 level, in general returning to levels last seen in 1999.
Most affected by the deteriorating market conditions are container ships and cruise ships. Only product tankers see a comparatively stable demand, due to the replacement of old tonnage following new EU maritime safety regulations (《Erika》).
The following table shows the total of orders placed in compensated gross tonnes - cgt (Source: World Shipbuilding Statistics, LR).
|NEW ORDERS IN 2000
||NEW ORDERS IN 2001
||NEW ORDERS IN 1ST HALF OF 2002
Looking at particular shiptypes, the impact of the developments described above becomes even clearer (all figures in cgt; source: World Shipbuilding Statistics, LR).
||NEW ORDERS IN 2000
||NEW ORDERS IN 2001
||NEW ORDERS IN 1ST HALF OF 2002
The market shares developed as follows (based on cgt):
||1ST HALF OF 2002
Regarding container ships even more tonnage will enter the market in the coming months (reflecting the massive ordering for this shiptype in 2000 and 2001), probably leading to lower freight rates and thus a disincentive to place new orders. The expected economies of scale from ever bigger container ships are now seen to be limited, due to restrictions in ports and the imbalances in cargo volumes on the major trading routes.
Concerning cruise ships the market sentiment is still to some extent suffering from the events of 11 September. Cruise ship operators have responded by shifting cruises to areas closer to the USA (from which most cruise customers still originate), and reducing prices for cruises. Priority clearly lies with filling existing capacity, rather than striving for further fleet expansion. The resulting reduced revenue provides a disincentive for new investments. The on-going discussions about merging some of the biggest cruise operators have also contributed to a reluctance to pursue new investment in this market segment.
Another of the mainstays of world shipbuilding, oil tankers, is suffering from low freight rates. In addition there are now fears regarding military action and terrorist threats to oil tankers in the Middle East, which could have various effects: Increasing oil prices, leading to lower demand for oil shipments (through decreased demand and procurement from sources closer to the main markets, thus lowering the total tonnage-miles) and increased use of other sources (oil by pipelines, alternative forms of energy). Moreover, insurance premiums would sharply increase and drive operational costs up. This volatile situation makes shipowners reluctant to pursue investment in new ships.
On the other hand, the demand for dry bulk ships in a certain size range has been quite strong, due to increased need for imports of coal and iron ore to China and Japan.
In the segment of product tankers, where recent maritime safety legislation in Europe has triggered the need for replacement of old ships, demand has also remained comparatively stable.
The LNG market has not lived up to some of the optimistic forecasts made in 2000 and 2001 and ordering is well below the projections made then. The Commission, in its fifth shipbuilding report, expressed caution regarding this segment, and although there is a general trend towards cleaner energy and ordering for new ships is still well above the average of previous years, market forecasts are now more conservative.
There remains a significant production over-capacity in the shipbuilding sector, estimated to be at least 20 to 30 % above the levels required for the necessary replacement of old tonnage and the accommodation of additional demand stemming from increased sea-borne trade. This over-capacity continues to have a negative effect on prices.
Ship prices have declined by about 15% since mid-2001, affecting almost all shiptypes. The biggest drops were seen for container ships in the 3500 TEU range (minus 20%, comparing June 2001 to June 2002), large bulk carriers (minus 17%) and large oil tankers (minus 15%). But also higher value ships saw prices receding across the board (LNG carriers: minus 9%, small container ships: minus 9%). It is notable that the market segments most affected were those where Korean yards have their traditional product focus, indicating that the need to fill the large building facilities in Korea leads to fierce competition between the major Korean yards for the few remaining orders, keeping prices locked at a very low level or even indicating a further decline.
The ship price index maintained by the Commission reflects these developments (see graph). It shows that the price recovery in 2001, when ordering was strong, was not sustained and price levels are the lowest for more than a decade.
Price index for ship newbuildings (1987=100)
Shipbuilding is still considered by many nations a strategic industry, which, in their view, they cannot afford to lose, because of trade and defence interests. Therefore, the issue of over-capacities is hardly addressed and various measures are taken in order to maintain shipbuilding capacity despite lower market requirements. In a generalised manner it can be said that market mechanisms only selectively apply to the world shipbuilding industry. The next paragraphs give some indications on the policies pursued in the key shipbuilding regions, in response to the current problematic market situation.
EU shipyards have already been forced for a longer time to focus primarily on market segments with a higher value added, where Asian shipbuilders have been less active (passenger ships, specialised and smaller vessels), as they could not match the very low offer prices from Korean yards for standard ships. EU yards face a very difficult situation as the passenger ship market has significantly slowed down and an alternative market segment of similar importance is not in sight. A number of European yards (in Germany, Italy, the Netherlands, Sweden, Norway and Poland) went bankrupt or had to lay off workers (in Denmark, Germany, Finland, the Netherlands, the United Kingdom and Poland) since the date of the Commission's last report. Very few yards have orderbooks stretching beyond 2003/2004.
EU yards are undertaking various measures to improve their competitiveness (increased R&D, product and process innovation, outsourcing and downsizing of their workforce, procurement of hulls for outfitting etc.), but may be running out of time in the face of an almost flat market.
Korean yards seem to repeat past practices when facing a declining demand. On the one hand they try to enter new market segments (gas tankers, offshore structures and cruise ships), on the other hand they try to trigger more demand in their traditional market segments (tankers and container ships). Both are done through lowering offer prices, despite significant cost increases in Korean production over the past 12 months. Wages in Korean yards have increased by ca. 6%, material costs have increased by ca. 5% (steel, however, is up 10%), inflation is ca. 8% and the WON has appreciated by ca. 8% vis-à-vis the USD. Labour and material costs together account for ca. 90% of total production costs in shipbuilding and the related cost increases are therefore significant.
Due to this a number of Korean yards could be heading for insolvency.
Unfortunately, neither the Korean Government nor the shipyards themselves seem to consider reducing capacity, e.g. through the closure of non-profitable shipbuilding facilities.
Japanese shipbuilding is currently undergoing massive restructuring, bringing together a number of shipyards under the umbrella of a few large groups. The resulting synergies have helped Japanese yards to stay competitive (in particular regarding the series production of bulk carriers), although this is significantly assisted by the fact that ca. 50% of the order intake comes from domestic demand (currently mainly for bulk carriers). These orders by Japanese shipowners are almost inaccessible to other shipbuilding countries and therefore provide a captive market for Japanese yards.
Chinese yards enjoy a much lower labour cost base than the other main shipbuilding countries, but still suffer from organisational problems, limited access to technology and delivery delays. Market share of Chinese shipbuilders has continuously increased over the past years (mainly resulting from competitive offers for simple shiptypes) and once the above problems can be overcome, China could become a major player in world shipbuilding. However, there are concerns that shipyards are expanded beyond the market requirements and the need to upgrade existing facilities. The Commission will carefully watch these developments and try to engage China in a constructive dialogue on these issues, in the framework of the OECD and bi-laterally.