Five Year Outlook For U.S. Shipbuilding

Overall Business Sett i n g : The scene is set for significant developments in global shipbuilding. Pent up demand for ship construction is about to be unleashed, producing a significant increase in orders for new ships during the second half of the 1990s. Replacement requirements will be the principal driver, as 47 percent of the world fleet will be 20 years or older within the next five years.

Meanwhile, traditional key players in the shipbuilding business are being impacted by currency exchange rates and increasing labor costs. Hourly rates in Northern European shipyards are up to 60 percent higher than in the U.S. Japanese shipyard labor rates are now at least 30 percent higher than in the U.S., and Japanese builders are increasingly looking to foreign sources for component supply to lower costs.

Never has there been a better time for U.S. companies to reposition in the worldwide commercial shipbuilding market. As shown in our study, opportunities are largely in the international area. They dwarf the domestic sector. Available revenues in the seven international sectors examined in the report are three times the size of the Navy and domestic sectors combined. International Market In our report we examine seven segments in the international business sector that look particularly interesting. They show signs of significant growth, involve relatively high technology and appear open to international competition. Together, these seven markets represent available revenues of $37 to $54 billion over the next five years. Product tankers - This is probably the most interesting business sector. A large number of ships are to be built. Demand will be driven by replacement requirements and additional transport needs. For the U.S. alone, we project a requirement for up to 195 additional tankers to handle increased petroleum product imports.

Crude carriers - Replacement requirements will drive demand in this sector. The building spike of the early 1970s is creating block obsolescence of crude carriers. We project that 36 percent of crude carriers currently in service will be retired over the next five years. Liquefied gas carriers - Additional transport requirements will be the principal driver for LNG/ LPG ship construction. The LNG trade looks like it will increase 30- to 45 percent in the second half of the 1900s. The LPG trade is projected to increase 20 to 29 percent.

Chemical ships - Replacement of aging tonnage and adding capacity to meet chemical transport demand will drive construction requirements. These expensive, small ships are an excellent opportunity for shipbuilders, and the growing interest in diesel-electric propulsion for parcel tankers opens interesting possibilities.

Cruise ships - This highly visible market sector has generated a great deal of interest. Cruise travel has grown at a rapid rate, and we see cruise passenger demand growing 1.5 to 2.2 million in the second half of the 1990s. Additional ships will be required to handle this growth and SOLAS 97 will cause some retirements.

Containerships - Required containership capacity is projected to increase 23 to 30 percent by 1999. Of particular interest is construction of mega containerships, a segment of the business which has been growing very rapidly.

Floating plants - Ability to get quick delivery and access to maritime financing make floating plants an interesting option to land-based facilities. Over the next five years we see opportunities to supply a significant number of floating power plants, methanol plants and desalination plants.

Domestic Market Six market segments in the domestic trade will offer future business opportunities. We estimate in our report that these opportunities will generate $3 to $5 billion in available revenues over the next five years. Since the law requires domestic trading ships be built in the U.S., the market is reserved for shipyards located in this country. There is no barrier to equipment manufacturers and other suppliers who want to sell into the domestic sector.

Coastal tankers - Between 1995 and 1999, the single hull restriction in OPA 90 will force out of service 36 of the 130 tankers with coastal trading privilege. There won't be a onefor- one replacement requirement, as the need for coastal tankers is expected to decline over the next five years. However, we see a need for new product tankers to replace some of those being retired. Several interesting rebodying projects are also in an advanced planning stage.

Domestic containerships - Softness in the U.S. economy and business conditions unique to Hawaii, Puerto Rico and Alaska have dampened demand for containerized shipping. We see a requirement for a few ships in the late 1990s.

Offshore support vessels - The Gulf of Mexico market has recently shown signs of revival. Equipment utilization and day rates are up, though not yet to the level that justifies major capital expenditures in new vessels. Particularly interesting are the expected orders for large anchor handling tugs and large supply vessels.

Ferries and small passenger vessels - There are 5,000 passenger vessels registered in the U.S.

Construction has averaged 150 to 200 vessels annually. Over the next five years, there are several major ferry construction projects in the pipeline. These projects involve construction of large passenger or passenger/vehicle ferries requiring diesel-electric or cycloidal propulsion. A variety of other small passenger vessel orders are expected.

Tugboats - Regulations calling for escort of tankers entering U.S. harbors will create demand for new, large escort tugs fitted with Z drive or cycloidal propulsion. We expect a significant flow of orders for these tugs over the next five years.

Floating prisons - The crime bill in Congress will provide an additional $800 million per year for correctional facilities. Floatingprisons can be delivered quickly and offer other advantages over landbased sites. We expect to see some orders for prison barges.

U.S. Navy Sector No doubt the Navy market is declining. But even at the reduced level of future ship construction, the revenue potential cannot be overlooked. This market will continue to be important, particularly to the four or five major players in this sector. Contracts totaling $8.5- to $11 billion will be thrown off by Navy business over the next five years.

A Time To Think Global To repeat an earlier comment: never has there been a more compelling reason for U.S. shipbuilders and marine suppliers to think global. As our study clearly documents, U.S. firms will be drastically limiting their available business base without a global approach to the market. The downturn of Navy work is reducing new business opportunities and the flow of domestic commercial work will not be adequate to offset these reductions. Meanwhile, the international shipbuilding market is about to take off, driven by the need to replace aging ships and satisfy increased transport demand.

This is not to say transitioning to commercial work will be easy.

There's no question that there's strong competition. There's also no question that the market is often disturbed by soft financing and other government assistance. But the shipbuilding and marine equipment industry in the U.S. has an abundance of skilled personnel, modern facilities, good management, access to capital and relatively low labor costs. It possesses all of the ingredients needed to position in the international commercial market.

Importantly, the U.S. government has shifted from a hands-off to a proactive policy toward shipbuilding. Several new programs have been implemented over the past four months that will help shipbuilders compete for international orders. Of particular significance is the availability of federal financing guarantees for ship export orders. Ask Boeing how important government financing guarantees have been in selling commercial aircraft overseas. U.S. shipbuilders now have access to similar financing assistance. The report profiles the existing inventory, identifies key owners and builders, examines underlying business trends and provides a construction forecast in each business sector over the next five years. More than 135 exhibits and 18 statistical tables document the findings and conclusions. A study published in mid-February by IMA lays out the entire marine market available to shipbuilders and ship system suppliers over the next five years. The 225-page study looks at the market from a U.S. perspective — detailing future business opportunities in seven key international shipbuilding sectors, six domestic market sectors and five Navy sectors.

"Five Year Outlook for U.S. Shipbuilding" (report number 7124) is available for $610. To order, please contact IMA Associates, Inc., 600 New Hampshire Ave., N.W., Suite 140, Washington, D.C. 20037, tel: (202) 333-8501; fax: (202) 333-8504.