Shipbuilding fundamentally changing

Image: BAE Systems

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This year has already been busy in terms of tanker ordering activity with VLCCs and MRs once again appearing to be in vogue. 

 

So far this year (mid-February), at least 12 VLCCs and 11 MRs were ordered. Both types also received the most interest in 2018, with 42 and 49 units ordered, respectively.

Now, the question is - was the start of 2019 just a blip or a sign of things to come? Gibson Shipbrokers asked in a report.

Many factors will play a role in an investment decision - from fleet renewal programmes and regulatory developments, to speculative investments based on anticipated future demand.

Other influences, such as prices and yard slot availability, will also play a role. Precisely determining shipbuilding capacity can be a tricky game, with different vessel types occupying slots for different periods of time, depending on their complexity.

However, some conclusions can be drawn from what we know, and what we think might logically take place, Gibson said.

Looking at historical activity, overall, ordering across all shipping sectors declined last year and remained low compared to the busier ordering periods seen in 2013-2015 and prior to that, the 2006-2008 boom.

This implies that there is plenty of shipbuilding capacity to take care of higher ordering activity this year. Yet there are factors to consider, Gibson said.

First, the shipbuilding industry has not been in good health in recent years. Many yards that were active during the last shipbuilding boom remain idle, while offshoot yards, such as Hanjin Subic Bay have struggled, having recently filed for rehabilitation following loan defaults.

At the same time, consolidation is increasing, with Hyundai Heavy Industries (HHI) taking control of Daewoo Shipbuilding & Marine Engineering (DSME).

Second, whilst investment in 2018 was well below record levels, contracting of complex LNGCs and containerships roughly doubled year-on-year, suggesting that newbuilding slots at premium yards could be a little scarcer over the next few years.

This may be particularly true if, as widely reported in the press, a large LNGC order (for up to 60 vessels) is placed by Qatar. The timing of this deal may be unclear, but with the final investment decision now taken on the joint Exxon/Qatar Petroleum Golden Pass LNG project and Qatari aspirations to increase domestic capacity, the requirement is certainly there.?

Higher consolidation should reduce 'overcapacity' in the South Korean shipbuilding sector, which, coupled with higher demand from other sectors (eg LNG), could support higher prices, potentially impacting on the volumes of newbuilds contracted. However, much depends on what happens in the Chinese shipyards and whether this sector also sees further consolidation.

Nevertheless, prices have already increased over the past 12 months, with a newbuild VLCC (non-scrubber, South Korea) having risen around $10 mill over the past 12 months.

Regulations may also make the decision trickier, owing to uncertainty over which fuel choice/compliance method represents the future. Some owners may wait to see how the next few years evolve before committing to newbuilding designs.

Regardless of how these factors play out, replacement tonnage will be needed, and ordering activity will eventually surge. When this takes place, however, is key to the shape and timing of the next market upcycle, Gibson concluded.