It is essential that new orders are placed within the next three to six months for the yard industry to fill up its orderbooks for 2017, according to Danish Ship Finance.
The orderbook is rapidly approaching the low levels seen at the start of 2013, but 2016 looks to be a reasonable year for shipbuilding based solely on the amount of scheduled orders for the year. However, the prospects for 2017 are not that promising, seeing that 45% of the current orderbook is scheduled to be delivered during the last three quarters of 2016.
As of April 2016, scheduled orders for 2017 are only capable of employing 69% of current active newbuilding capacity, the ship finance institute said in its market review for May 2016, adding that if it is assumed that the usual number of orders are either postponed or cancelled, global yard utilisation could fall below 50% in 2017.
If the orderbook for 2017 is not filled, China will be hit the worst, because 57% of the Chinese orderbook is scheduled to be delivered during the last three quarters of 2016. Orders for 2017 are currently only capable of employing around 52% of Chinese active yard capacity, the review finds.
Bulk, container and offshore orders currently constitute 51% of the total orderbook. Due to the current market conditions in these segments, more orders could continue to be postponed and the orderbook for 2017 could be “filled up ” solely by postponed orders.
In 2015, 95% of the orders that were postponed for later delivery were pushed into 2016.
“Hence, in a scenario where we assume that the same percentage of orders will be postponed from 2016 to 2017, the orderbook for 2017 could actually increase by 17 million cgt to just above 50 million cgt. Moreover, if we adjust for the new orders that will most likely be placed during 2016 for delivery in 2017, scheduled orders for delivery in 2017 could end up at a similar level as in 2015 and 2016, which would support yard utilisation,” the institute said.
However, the problem is that if the orderbook is filled up with postponed orders, the shipyards do not receive any new capital or liquidity, as final payments are solely delayed. Therefore, there is a reasonable risk that orders will continue to be postponed, and consequently the already financially troubled yards will remain under pressure, the institute adds.
“Currently, there are around 340 yards that have less than one year of order cover. After having entered into the second quarter of 2016, three-quarters of these yards have already emptied their orderbooks and we expect them to close in 2016,” DSF says.
The number of active yards could drop to 530 in 2016
By the end of 2016, Danish Ship Finance expects that the number of active yards could drop to around 530 – and that is only counting those that are currently running out of orders.
Based on the institute’s estimates, around ten first-tier yards will close down in 2016 and 190 second-tier yards. Some of the first-tier yards that are exposed to close down are primarily occupied with repairs and therefore will probably not close down entirely but will put their newbuilding operations on hold. If yards also start to close as a result of financial problems, the amount of yard capacity could go even lower.
“We see no easy solution for the shipbuilding industry. The coming years will be extremely difficult and a lot of yards will have to close down. However, in some ways the demise of the shipbuilding industry is a necessary evil in order for shipping to return to a more normalised state,” the institute concludes, adding that the industry needs to adjust active yard capacity for lower future demand in order to balance the declining orderbook, increase newbuilding prices and avert the growing liquidity crisis.
Image Courtesy: ARMS