Many of you will have sat through presentations in which I have spoken to the pending crisis in world shipyards as a consequence of the financial crisis affecting most sectors of global shipping. That crisis has now been with us for the past two to three years depending on the specialization and location of the yard, but most of all, the willingness of the particular national government to subsidize production in the interests of safeguarding a strategic industry and maintenance of social stability. Whatever the case, a global downturn of 71 per cent in orders in 2016 compared to 2015 was bound to have consequences.
To put the issue into perspective, there perhaps needs to be an appreciation of the importance of shipbuilding for developing Asian countries whether for reasons of prestige, a source of mass employment, foreign exchange earnings or simply providing an avenue to industrial modernization and technological innovation. Japan used shipbuilding in the 1950s and 1960s to rebuild its industrial base; South Korea copied the blueprint in the 1970s by declaring shipbuilding to be a strategic industry; closely followed by China in the 1980s in the form of major state-controlled enterprises. Today, we see a new round of Asian shipbuilding growth centred on the Philippines, Indonesia, Vietnam, and to some extent, Singapore which, despite current hard times, specializes in construction and conversion for the off-shore industry. We should also not overlook that in the Arabian Gulf, Saudi Aramco is to build the region’s biggest shipyard in a $5.2 billion joint venture with South Korea’s Hyundai Heavy Industries, and others, with the capacity to produce four offshore rigs and 40 vessels, including three VLCCs a year.
It is therefore of no surprise that despite the steep decline in orders for new vessels over the past five years, and some attempts at consolidation of the industry, state support is as important as ever. South Korea’s so called “Big-Three” shipbuilders — Hyundai Heavy Industries (HHI), Samsung Heavy Industries (SHI), and Daewoo Shipbuilding & Marine Engineering (DSME) — dominate the global market for large container ships but those orders are rapidly drying up as the major container lines place greater emphasis on consolidation and profitability rather than protection of market share. Competition from China, production delays, and massive overcapacity have resulted in the current round of financial distress for South Korean shipyards.
Despite increasing numbers of ultra-large container vessels (ULCVs) joining the global fleet, the last time an order was placed for a ULCV was the final quarter of 2015, and latest numbers indicate that the orderbook to existing fleet ratio has fallen to a record low of 14 per cent despite outstanding orders for 50 ULCVs. This translates to the fact that all new container vessels due for delivery until the end of 2019 will add just 14 per cent to global fleet capacity with the ratio likely to continue in decline given the imperative for the liner trades to bring balance to supply and demand and thereby stem several consecutive years of unsustainable losses.