Too many ships and...
Is world shipping heading for a recession in a sequel to excess capacity? Are the ship-builders building too much? These are the questions that are haunting many in the shipping industry. According to them, excess shipbuilding capacity poses one of the major threats, if not the biggest, to the sector's long-term profitability. True, the cycle of boom and bust is quite common in shipping a boom in earnings prompts a rush to shipyards for new-buildings for immediate delivery, followed by a downturn. But what world shipping is witnessing now is unprecedented deliveries of new ships, point out shipping experts.
More supply than demand
An estimated 77 million dwt (deadweight tonnes) of new ships are due for delivery this year a record, and double the annual deliveries of a decade ago. This will be followed by further record-breaking years in 2007 and 2008.
More important, the increase in the supply of new ships is taking place at a time when scrapping has been at its lowest ebb. Which means, there has been no fleet replacement, only fleet growth. The demand for additional tonnage, fuelled by booming world trade, has so far absorbed this growth and it is likely to remain so for some more time.
But world trade is also subject to cyclical fluctuations and a possible slowdown in the world economy can be a genuine cause for concern whether the tonnage on order, when it arrives in the market, could be put to fruitful use. At the end of 2005, the world shipbuilding orderbook stood at a little less than 227 million dwt. This represented the highest level of new-building on order ever, and three times greater than the orderbook position 10 years ago.
What drove the profits
For ship-builders, 2005 might have been a profitable year but it will be rash to claim that all of them posted super-normal profits. It was also a tough year. A large number of ships delivered during the year were contracted during the pre-boom period, when the prices were low but raw material costs, particularly steel, virtually skyrocketed. There were other points.
Most ships on order were contracted in the dollar, which became weak, while the Korean and Japanese currencies, in which the shipyards of these countries paid their expenses, were strong.
With steel prices having slipped and new orders contracted at higher prices, the situation in the current year, and perhaps also in next two years, may be good but a matter of concern is whether such an improvement will justify capacity expansion on the scale being undertaken by the shipbuilders.
There are reports that China is building shipyards and the established yards in other countries are set to expand their capacity.
It may be noted that at the end of 2005, the Asian yards, with an orderbook of 207 million dwt accounted for the bulk of the ships on order the world over. Interestingly, tankers and LNG ships are the current flavour of the season in the shipbuilding sector.
For example, Hyundai Heavy Industries, the world's largest shipbuilder, delivered its last bulk-carrier in early 2004 and has not taken on order a single bulker since. No wonder, the Shipping Corporation of India, after finding it difficult to place order for two Capesize bulk carriers (170,000 dwt), has opted for resale tenders.
The slowdown in the orders for bulk carriers should mean fewer deliveries towards the end of the decade. But much will depend on how much new capacity comes on stream. concentrate on the construction of bulk carriers.
What will happen five-six years from now is difficult to predict at this point. Much will depend on the supply-demand situation to be determined by a variety of factors, notably the state of the world economy and the level of scrapping.
According to Mr Tim Huxley, Managing Director of Clarkson Asia Ltd, if ship-owners and ship-builders go against their usual instincts and exercise an element of caution, there is no reason why a reasonable tonnage balance cannot be achieved.