MSI: Supply/Demand Better but Shipyards Still in Fight for Survival

Illustration; Image Courtesy: Fincantieri

After a painful decade in which the shipping industry has suffered from an unhealthy supply position, a sustained reduction in contracting has at last begun to move fleet orderbook into closer balance with an improving demand picture. However, shipyards remain underemployed and must still fight for survival, according to independent research and consultancy firm Maritime Strategies International (MSI).

Shipyard prices may still fall as too many yards have too little forward cover and even those considered high-quality facilities must be considered at risk of closure, the latest MSI analysis shows.

Comparing the situation of mid-2015 with today’s orderbook, MSI analysis indicates that orderbook levels across all the main sectors have come down significantly. Even so, several factors weigh on the yards’ ability to compete until demand and earnings pick up towards the end of the decade, Adam Kent, MSI Director, said.

“On an annual average basis, MSI believes there is around another 5% for newbuilding prices to fall in 2018. Obviously, this will be partly dependent on the shipyard and the vessel type, but we think that shipyard forward cover will fall further in 2018, as deliveries outstrip contracting. What this means for newbuild prices as a whole, is that we don’t believe the bottom of the price cycle has been reached yet,” Kent explained.

Many shipyards remain woefully underemployed in 2018. The only facilities looking relatively healthy on a historical basis are European, where cruise ship orders placed in the last 12 months will keep them busy for some time to come, according to MSI.

Scheduled output in South Korea in 2017 is at around 100%, but looking just six months out to 2018, the country’s Tier One yards are only at around 50% utilization. Yards that remain so severely underemployed are expected to continue to price low to attract new orders.

“China is looking a little better at the Tier One yards, though there is still a large swathe of Tier Two yards that have no orders, and the same goes for Japan. There has been a lot of talk about a ‘Chinese White List’ of shipyards but when we look at these, it is apparent that it has been a long time since many of these have taken any orders,” Kent added.

MSI expects shipyard costs to decline marginally in 2018, largely driven by commodity prices and the reduction in steel plate prices in 2018 before some uptick can be seen in 2019 and 2020.

Looking at secondhand vessel prices, where the actual bottom of the price cycle will be found, is also dependent on the sector under analysis, but MSI does not expect a sustained recovery of secondhand prices across the sectors until 2019 or 2020.

“Based on MSI’s quarterly forecasts for secondhand prices, Capesize vessels will actually come off further this year and the bottom of this cycle will be in Q1, 2018. Tankers will hit bottom a little later but MSI believes the worst stage of the cycle has already passed for containerships,” Kent concluded.

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