The Influence of the Financial and Economic Crisis on the Development of Global Shipbuilding

S. I. Logachev, Krylov Shipbuilding Research Institute
V.V. Chugunov, Wadan Yards

The authors of this article are not trying to determine the causes of the global crisis, their only aim is to show its influence on global shipbuilding. The global financial and economic crisis has led to bankruptcy of a number of financial institutions, difficulties in banking sector, stoppage of investments into new construction and current credit financing, sharp decrease in prices for energy sources and decrease in production and demand for goods and services.

The last-mentioned circumstance has significantly influenced shipping industry. Decrease in demand for shipping has made shipping industry face the problem of surplus tonnage and freight market decline. Shipping industry is suffering from the period of orders’ canceling, ships decommissioning and growth of debts. Since during 2007-2008 yards’ stock of orders was filled for a few years ahead the orders’ execution may even worsen the problem of surplus transport tonnage in global shipping.

Surplus tonnage and decrease in demand for transport products have led to sharp decrease in freight rates for shipment. In April 2009 daily freight rate, for example, for bulk container carriers of more than 2750 TEU capacity decreased by 4 times in comparison with average rates in 2008 and for bulk tankers – by 3 times. For certain types of vessels daily freight rates have become lower than shipping costs.

In such conditions ship owners have almost stopped ordering new vessels. Thus, in January 2008 more than 600 new vessels were ordered, while in the last quarter of 2008 – only 75 vessels and in March 2009 – only 9 vessels with total deadweight of 700 ths. tons were ordered. According to European analysts global decrease in stock of orders shall be the necessary means of correction of the unreal number of orders in the previous years. This will also help to avoid surplus capacities that are getting ready to be employed in Asia.

For attracting orders Japanese, Korean and Chinese shipbuilders are offering unprecedented decrease in prices for vessels. In May 2009 the prices in average decreased by 12 % in comparison with the level of 2008. And the prices for container carriers and bulk carriers decreased by more than 20 %.

Apart from sharp decrease in stock of orders there is a problem connected with credit financing of construction of the ordered vessels. In the present conditions the banks have started demanding long-term freight contracts from vessel ordering parties with the level of rates that would guarantee payback of the vessel under construction. Taking into account the present situation in freight market it seems impossible to fulfill this requirement. As a result 60 % of total volume of global stock of orders for September 2008 (USD 500 bln.) do not have real financing and are under the threat of canceling.

Therefore, the shipbuilding market is under double impact of total lack of financial resources and sharp decrease in demand for own products on behalf of shipbuilding industry with surplus production capacities available. The largest shipbuilding companies have started reporting on significant losses.

According to foreign analysts stagnation in the global shipbuilding market will continue for at least the period of 2009 and probably 2010. Thousands of working places directly in shipbuilding and in related industries are at risk.

This is not the first crisis that the global economics and related shipbuilding are suffering within the last 30-35 years. During this period at least four crises affected global shipbuilding. The hardest times for the global shipbuilding were within the period of mid 70-ies – second half of 80 ies when the first oil crisis broke out in 1973-1975 and gradually transformed into the second oil crisis in 1979-1982. The volume of shipbuilding decreased by more than 4 times and a number of countries eliminated their shipbuilding industries. The majority of European countries nationalized the main enterprises of their shipbuilding industries in order to save shipbuilding. After overcoming the crisis these enterprises were partially re-privatized. So the new global economic crisis is not something extraordinary for shipbuilding.

Countries in the South-East Asia have been most affected by the crisis as these shipbuilding industries are oriented mainly at construction of bulk vessels for carrying primary cargoes and container carriers.

Due to crisis situation South Korea started shipbuilding companies restructuring by way of diversification and specialization in construction of high-tech high-priced tonnage and platforms for shelf deposits development. The Government of the country is committed to the industry restructuring and elimination of those shipyards that have gone into bankruptcy. State support and accumulation of technical experience may lead to large-scale changes in the shipbuilding industry of South Korea.

Diversification of production involves increase of investments share into marine energy projects which are less affected by the crisis in comparison with shipping industry. This includes production of wind electric generators and devices for the conversion of solar energy into electricity.

The state export and import bank of South Korea – Korea Eximbank – made decision on supporting national shipbuilders. If previously it mainly specialized in providing credits to large exporting enterprises now it is ready to support small and medium-sized enterprises. In 2009 Korea Eximbank is laying out 9.5 trillion wons (USD 7.1 bln.) for supporting such enterprises against 6.5 trillion wons in 2008.

Speaking of China most orders already placed with Chinese shipbuilding yards are being cancelled by clients, delivery of vessels is delayed due to problems with financing required for the completion of vessels construction and tendency of clients to delay their delivery on purpose in conditions of global surplus tonnage available for shipping.

According to forecasts in 2009 almost twice as less new orders comparing to 2008 will be placed with Chinese shipbuilding yards.

In the next three years about 15-25 % of orders are expected to be cancelled in China which is about 300-500 mln. t of deadweight. This is by 5 % more than on average in the world. Decrease in Chinese shipbuilding may last until 2011. The new period of industry growth is expected from 2013.

The Government plans to support national shipbuilding during the crisis. The supporting means include financial credits and technological upgrading as well as enlargement of shipbuilding enterprises by way of their merging. It is planned to provide discounts to ship owners who are building their vessels in China.

It is supposed that the number of shipbuilding companies in China will decrease within the next few years. A number of small shipbuilding yards will go into bankruptcy but in general they will be merged and bought out by the Government.

European shipbuilding yards shall not be affected by the global crisis as greatly since they specialize in construction of vessels and platforms for shelf deposits development, cruise liners, mid-sized and small cargo vessels, support vessels and naval ships. Markets of these vessels have been quite profitable before and remain profitable still. The problem which European shipbuilding yards had to face during the crisis was connected with pay inability of many previously reliable clients and a number of banks as well as sharp decrease in the number and amount of credits for the construction of vessels.

Thus, since the end of 2008 total decrease in the amount of financing of shipbuilding in Europe has decreased by 25 % – 829.9 bln. euro and the largest decrease in the amount of financing has been registered with the banks holding large credit portfolios and large amounts of financing for the period of 2007 – beginning of 2008. A total of 20 banks have cancelled financing shipbuilding projects or quit this business since the end of 2008.

European Commission notifies that if shipbuilding yards and marine industry of EU countries keep undergoing hardship of accessing credit markets their decline will be inevitable. This problem requires immediate solution taking into account gigantic capital capacity of shipbuilding and the necessity of huge investments as the primary condition of its survival. European shipbuilding is not capable of withstanding prices reduction introduced by Asian shipbuilders. Unlike them European shipbuilders will not be able to introduce the same price policy for quite a long period of time.

Until the end of 2009 many shipbuilding yards in Europe are provided with enough orders however new orders have hardly been made since the fourth quarter of 2008 when the volume of new orders at shipbuilding yards of Europe decreased by 90 % at a time.

And it’s not that all customers are on the verge of bankruptcy, moreover they would never have faced this problem if banks didn’t refuse to give credits even to the most stable and reliable shipping companies and shipbuilding enterprises. Lack of trust of the banks to the industry especially to private shipping companies in practice results in the threat of collapse for the whole industry. In such conditions the governments start interfering with the situation to save shipbuilding and shipping industries. To support their shipbuilders the Government of Germany announced that through the State Bank KfW-Bank it will act as guarantor of up to 90 % of the amount of granted credits for shipbuilding.

At the same time analysis of the stock of orders of eight main shipbuilding yards and shipbuilding groups of Germany shows that out of 110 ordered vessels the majority of them belong to container carriers (38 vessels) and trailer ships of Ro-Ro, Con-Ro, Lo-Lo types (23 vessels). It is these types of vessels (as it has been previously mentioned) that are now at risk of maintaining construction and post-delivery financing. Other vessel types especially those connected with the shelf deposits development, coast-guard and naval ships are more likely to be provided with financial support. Therefore the shipbuilding yards that have such orders within their stock are able to overcome the period of 2009-2010 without major losses. However even these yards are concerned about the absence of new orders for over half a year now.

Even brief analysis of the situation in global shipbuilding at the end of 2008 – beginning of 2009 shows that due to the present global economic crisis hopes for intensive shipbuilding development continuation are unlikely to be fulfilled.

At the same time this period can be quite productive for Russian shipbuilders taking into account great demand for shipping and catching vessels, vessels and platforms for shelf operations, service ships and vessels of other types in the domestic market. It goes without saying that to meet this demand and therefore ensure gradual development of national shipbuilding active involvement of the government and its structures is required, mainly for taking economic measures. We will hope for these measures to be taken soon to provide for changes in the nearest future in such important industry for the country as shipbuilding.

Go to Index of # 3(29) 2009

 

# 3(29), 2009
Shipbuilding