Consolidation of Yard Capacity for Healthy Shipping
A dramatic collapse in newbuild orders due to a weak market environment across all shipping sectors is putting pressure on the global shipbuilding industry, says Teekay Corporation.
Just 7.2 million compensated gross tones (CGT) of new orders have been placed through the first eight months of the year, by far the lowest year for new orders since at least the early 1990s, and possibly longer (accurate orderbook data is patchy pre-1996).
The problem for the yards is that global shipbuilding capacity is far higher than it was in the past, at approximately 50 million CGT per year vs. 15-20 million CGT per year in the 1990s.
The current lack of new orders is therefore having a greater impact on shipyards, with average contract lead times falling from around 38 months at the peak of the last shipbuilding boom in 2008 to around 23 months at the beginning of 2016.
As per our estimates, the major shipyards have only filled 60% of total capacity for 2018 delivery with 25% booked for 2019.
In the past, shipyards responded to a weak market environment by offering deep discounts and taking unprofitable contracts in order to maintain production and keep their workforce employed.
However, there are significant differences in today’s shipbuilding landscape, particularly in Korea where the banks are exerting their influence over decision making and are no longer allowing the yards to take loss making contracts.
Instead, yards are looking to lower costs by reducing yard capacity, though some yards will struggle to survive through the current downturn.
Our expectation is that global shipyard capacity will fall by around 20-30% over the next five years due to a combination yard failures (particularly smaller facilities that are struggling to attract new orders), reduced capacity at the larger yards and through consolidation.
For global shipping markets, a reduction in shipyard capacity should be seen as a positive as it reduces the risk of a perpetually over-supplied market.
In the short-term there could be further benefits, as the potential failure of certain shipyards could lead to order cancellations and therefore reduced fleet growth. This would be a welcome relief for those shipping sectors currently drowning in a sea of oversupply.
