Shipbuilding in Russia. Possibilities and perspectives in meeting doimestic market’s demand for variousship types

After period of stagnation in the 90s followed by the slow way out of crisis in 2000, this year Russian shipbuilding industry got a significant impulse for its development. Currently, on the threshold of the new and hopefully positive and active stage in the development of domestic shipbuilding, it seems appropriate to give an estimate of today’s potential in the industry to meet constantly growing demands of domestic shipowners, and to define financial and economic mechanisms and financial tools that would allow to develop and build up this potential. V. Chugunov, Director, shipbuilding projects, JSC Finance Leasing Company

Priorities of the Russian market of vessels and maritime infrastructure

Requirements and demands of Russian shipowners and other users of vessels and maritime equipment are formed by the perspectives of developing the Arctic, Sakhalin and Caspian continental shelf together with constantly growing domestic cargo volumes.

Priorities in these demands are mostly defined by shipbuilding programs of major Russian state owned companies “GAZPROM”, “ROSNEFT”, “SOVCOMFLOT”, “ROSMORPORT”, as well as by the current and perspective newbuilding orderbook of large and medium sized shipping companies FESCO, JSC Primorsk Shipping Corporation (PRISCO), Murmansk Shipping Company (MSCO), Northern Shipping Company, Volga-Baltic Shipping Company, Azov-Don Shipping Company, a number of Siberian shipowners and others.

These programs allow to structure these priorities of the domestic market for vessels into separate groups and to emphasize the most perspective for Russian shipbuilding (see Table).

Possibilities and restraints of domestic shipbuilding

Table. Groups of priorities in the Russian newbuildings market

Table. Groups of priorities in the Russian newbuildings market

Analysis of the groups of priorities of the Russian market shown in the Table, demonstrates that Russian shipyards can in theory build the major part of this list. The following types can be exceptions:

I.5. Ice class gas shuttle carriers with capacity around 130-150 thousand m3

The Russian shipyards will not be able to build such gas carriers during the next 3-5 years due to absence of projects for these ships, developed special technologies and, most important, relevant production capacity being fitted for building such vessels.

I.6. Gas carriers with capacity around 130-150 thousand m3

II.1. Vessels with DWT 70-100 thousand tons and over 100 thousand tons.

Building such vessels in Russia is not possible due to lack of available capacities. Russian Ministry of Industry and Energy is reviewing the possibility of creating such capacities.

II.2. Vessels with DWT 20-50 thousand tons

Presently only three shipyards can build vessels of this deadweight group: Admiralty Shipyards, Baltisky Zavod and Sevmash. But their today’s orderbook or vague situation like at Baltisky Zavod does not allow expect these shipyards in building number of vessels demanded by the Russian market.

Other vessels shown in the Table can, in theory, be built at domestic shipyards.

Problems in executing potential orders

Reviewing of the priority orders list in the Table shows that from the technical point of view mots of these vessels can be build on Russian shipyards. At the same time newbuilding, technological and financial capabilities of most shipyards make implementing these orders very complex and often either noncompetitive, or just impossible.

To large extent this happens due to the fact that production facilities of Russian shipyards are loaded irregularly and often irrationally. Their workload, which in fact means existing and perspective orderbook and its stability depend on many factors and first of all, on the stability of the financing system for building of ships both by the customers and by the shipyards themselves, which to this day is not yet tuned up and in fact does not work as a system in the industry.

Due to such unstable workload at the shipyards, the necessary balances are disrupted.

Production programs of many shipyards are based on shipbuilding orders with mostly hull works, which leads to a decrease of their technical level and loss of qualified personnel of workers and engineers.

All these reasons as well as almost total lack of State support of the industry sector especially in the part of tax benefits that more or less exist in countries with developed shipbuilding does not allow most of the shipyards to carry out systematic work on моdernization of production and increasing its competitiveness.

In their own turn potential customers of many domestic shipyards, which are the better part of middle and small Russian shipping companies that jointly own almost 40-45% of Russian tonnage, except for 4-6 leading companies that build their fleet mostly abroad, have been for over 10 years now having almost unmanageable problems with financing construction of new vessels.

All these problems of shipping companies are well known and are primarily connected with the impossibility to:

  • Advance money from own funds during the period of construction for more than 15-25% of the price of the vessel;
  • Provide to the banks sufficient security to receive a long-term (so called post-delivery) financing since the companies can have only their vessels held as securities and their age is usually more than 20-25 years. At the same time the cost of loans in Russian banks is 10-12% per annum for a period no longer than 5-6 years, which does not provide economics of the vessels and their return on investment.

As a result these companies hardly build any new vessels neither in Russia, nor abroad and the age of the currently existing vessels is close to being critical and is calculated as 25 years.

The noted problems of shipping companies in their turn create problems with orders and hence, with constant orderbook for most Russian shipyards.

As a result today the country sees a situation where:

  • there is a market of potential orders for vessels, most of which should service Russian cargoes and that can be built in domestic shipyards according to their characteristics;
  • there are industrial facilities in great need of modernization and technical re-equipment but, nevertheless, able to take part of these potential orders and get the possibility to begin modernization in the nearest future;
    and at the same time,
  • there is an absence of a financial-economic system capable of providing potential Russian customers with a capability to place orders at domestic shipyards and to create a reliable and steady manufacturing connection between them.
In many respects such system can be created on the basis of introduction and utilization of leasing schemes in the industry.

Advantages and possibilities of leasing schemes as an effective finance mechanism. Perspectives of its introduction in the industry

The real advantages of leasing compared to alternative ways of financing, building or buying new vessels (own funds or a bank loan) are well known.

Unfortunately, during the years of developing leasing in Russia, in the area of shipbuilding there were almost none full-fledged leasing deals for new conventional or other types of vessels.

In the year 2006 the part falling on leasing deals in connection with vessels in the whole structure of the leasing services’ market of Russia was close to 0%.

To a large extent it is connected with the fact that the essence and advantages of leasing as an instrument in investments are understood and used by the participants of the vessel market in a ambiguous way.

On the one hand, the potential lessees – shipping companies and other users of vessels often have a vague understanding of the benefits they could gain from using leasing schemes in building and operation of vessels, which lead them to trying to obtain financing through traditional credit schemes, which for most of them, as shown above, is very complicated.

On the other hand, most of the prominent Russian leasing companies are not yet ready to take the risks connected with building at Russian shipyards, which have a number of problems, such complex engineering objects as vessels. Moreover they see the risks connected with their operation, providing full payback  on investment in the vessels in not less that 8-12 years, and as for river vessels even more than 12 years. It requires the leasing company to be able to professionally estimate all these risks, to know how to defend from them or how to prevent them, at the same time it should have the capacity to attract the required financial resources for such a long period of time. Obviously, for some companies it is still complicated and for the better part of them it is impossible.

The situation shown above supports the known opinion that in order to effectively implement leasing in shipbuilding and shipping it is required to attract one or several large financially sound and State-supported (or with State participation) Federal level leasing companies, being able to place an order, arrange financing and construction at Russian shipyards for vessels, required by potential Russian customers, and to provide long-term leasing of these vessels. Besides, they should be able to solve the whole complex of technical, financial, and legal problems arising during the setting up and implementation of the leasing deals.

This is exactly how “Finance Leasing Company” (FLC) markets itself.

The company has vast experience in the field of leasing aircraft and takes up the leading positions in the market. FLC went through certain inner restructuring, created a specialized department, concentrating exclusively on bringing leasing into shipbuilding and shipping.

FLC took part in a tender competition of leasing projects set up by Russian Ministry of Industry and Energy  with a complex project that includes a broad variety of vessels required by Russian shipowners today and which can be built at domestic shipyards. This complex project consists of eight independent projects including river-sea tankers and dry cargo vessels, river dry cargo vessels and barges, sea-going dry cargo vessels and tankers, bunkering ships. Overall the projects envisage to build 120 vessels and the volume of planned financing shall be around 40 billion rubles. The projects cover 10 shipyards and there are such known companies among the lessees as the Volga-Baltic company, Volgo-Don Shipping and Donrechflot, North Western Shipping Company, Russian branch of the company Palmali in Rostov-on-Don, Federal State Unitary Enterprise Rosmorport. (The tender results will be announced on September 17, 2007 and will be known by the time this article comes out).

Implementation of at least part of these projects (their number will depend on the tender results) will allow shipyards, who will get long-term orders, to begin systematic work on modernizing and upgrading of their equipment and facilities. At the same time equipment packages, required for the projects, can also be provided under a leasing scheme.

But no matter what the tender results may be, FLC will continue to actively participate in shipbuilding projects and programs.

FLC’s share capital of over 10 billion rubles, together with majority of the company being owned by the State (around 70%) and current portfolio of over 30 billion rubles, shall inevitably permit FLC to take the leading position in the vessel’s leasing market in the nearest future and to introduce and develop the system of leasing in close cooperation with the Joint Shipbuilding Corporation (being under creation now), providing Russian shipyards with continuous significant orders from Russian shipowners.

Go to Index of # 3(21) 2007


# 3(21), 2007

V. Chugunov, Director, shipbuilding projects, JSC Finance Leasing Company

V. Chugunov, Director, shipbuilding projects, JSC Finance Leasing Company