Slow activity continues to characterize the newbuilding market

Market insight
by Tasos Papadopoulos

SnP Broker

With everyone still recovering from the receptions that took place during Posidonia week, it is not our intention to comment further on the much discussed swollen N/B orderbook and the plummeting freight market, but instead we grab the opportunity - in view of the recent announcement of the takeover of Sasebo Heavy Industries by Namura Zosen - to give an insight into the restructuring which has already taken place in some of the major newbuilding countries.

 This is the second consolidation move of its type in Japan; following the formation of Japan Marine United (JMU) through the merger of IHI Marine United and Universal Shipbuilding, which was set to turn two medium-sized Japanese shipbuilders into one of Japan’s major shipbuilding groups. At the same time it is worth remembering one of last year' failed attempts, when talks between Kawasaki Heavy Industries Ltd. And Mitsui Engineering & Shipbuilding Co. reached a stalemate. Despite setbacks like this, the Japanese government seems to be continuing to push its efforts to reduce the number of Japanese shipbuilders and in effect boosting the competitiveness of its industry against that of lower-cost rivals such as China and South Korea.

China CSSC Holdings Limited is also planning to restructure its facilities and reduce the number of its affiliated shipyards; it is rumoured that mergers of four major shipyards are under firm discussions, Hudong-Zhounghua Shipbuilding with Shanghai Shipyard and Shanghai Waigaoqiao Shipbuilding (SWS) together with Jiangnan Shipyard. Market players consider that the merger would boost up CSSC, by curbing keen competition between companies under its wings for new business and orders, optimizing manpower and improving production efficiency.

Based on the current orderbook, the hardest hit sector has been China’s privately owned small to medium sized shipyards whose market share have considerably declined and it seems realistic that some may soon exit. These “lower standard, lower tech’” shipyards are struggling to survive, with small shipyards like Bluesky and Jingang, amongst others, having already filed for bankruptcy, whilst shipbuilding operations have been suspended at many other private shipyards in China which are struggling with cash flow difficulties; worth reminding that Rongsheng Heavy Industries Group, a mega-sized private yard, has been close to collapse due to similar cash flow issues and has asked the government for a bail out since July of last year. 

Considering the large number of shipbuilders in China, industry experts have predicted that for the industry to stabilize, 30 to 50 percent will probably have to shut down operations over the next five years. This is supported by Yangzijiang’s executive chairman Ren Yuanlin’s statement that "a third of the nation’s yards face the danger of closure in about five years after failing to win orders." However, Xu Minle, an analyst at Bank of China International Ltd pointed out that "compared with shutting down of companies, mergers and acquisitions are less likely to cause social unrest.” It is obvious that shutting down shipyards is a hard choice for any government to make, while mergers and acquisitions are a “soft” alternative. Yet as much as it would benefit the industry to have a decline in shipbuilding capacity through M&A, it is not always an easy task to bring the two parties together. Maybe as a shift from the past, this time around, governments will choose to use incentives to trim the excess fat from their shipbuilding industry, rather than trying to support them all through artificial government-backed ordering and subsidies. The shipping industry could do with less “Sanko Steamship orders” (pertaining to the order of 123 dry bulkers in 1982 rumoured to have been supported then by the Japanese government) and more “Japan Marine United” mergers.   

Chartering (Wet: Softer - / Dry: Stable+ )

The good performance of Capesize rates proved insufficient to inspire the rest of the market, which still operates under soft sentiment, while the Panamax segment has touched new year lows. The BDI closed today (10/06/2014) at 1,004 points, up by 5 points compared to Monday’s levels (09/06/2014) and an increase of 56 points compared to previous Tuesday’s closing (09/06/2014). A poor week for crude carriers with rates correcting downwards across the board. The BDTI Monday (23/05/2014)  was at 636 points, a decrease of 15 points and the BCTI at 528, an increase of 4 points compared to previous Monday (02/06/2014).

Sale & Purchase (Wet: Stable - / Dry: Stable - )

The bad freight market together with the Posidonia event proved to be a bad combo for SnP activity, while Tankers were most popular for yet another week. On the tanker side, we had the sale of the “FORTUNE ELEPHANT” (317,174dwt-blt 11, S. Korea), which was picked up at a court sale by Greek buyers for a price of $ 77.5m. On the dry bulker side, we had the sale of the “EVER REGAL” (23,468dwt-blt 98, Philippines) which was picked up by European buyers, for a price of US$ 6.8m.

Newbuilding (Wet: Stable - / Dry: Stable - )

Slow activity continues to characterize the newbuilding market, although this last week we saw tankers and dry bulkers monopolizing the list of reported new orders after a long time. Greek owners continue to have a strong presence in the action that takes place, while their preference is currently in favour of tankers. The takeaway from this year’s Posidonia as far as the newbuilding market is concerned, is that with a little help from private equity funds, the market most probably moved ahead of itself in terms of new orders, which is pretty much common knowledge by now. Nevertheless, we wouldn't be surprised if a case of good freight markets during the second half of the year, brings another round of over-ordering. After all, in shipping as in most industries, memory  most times proves to be short-term, especially when it comes to mistakes of the past being repeated. In terms of new orders, Norwegian owner, Frontline 2012, returned to New Times in China, to place an order of six firm Capesize vessels (180,000dwt), for a price of US $ 55.5m each and with delivery set between 2016 and 2017.

Demolition (Wet: Stable - / Dry: Stable - )

It was finally time for India to step back and allow the competition to grab some piece of the action. With the Indian Rupee settling lower to the US Dollar last week and the monsoon season approaching, activity in the country slowed down considerably compared to the past couple of months, as Indian breakers were facing both a drop in local steel prices as well as price levels that had possibly been inflated compared to market fundamentals. Prices for dry units softened in both India and Bangladesh, while the rest of the board remained unchanged. Bangladesh has nonetheless managed to achieve most of the action that took place, partly due to the fact that their Indian competitors were absent from the market but mostly due to the fact that the recently announced budget brought no significant changes as far as the import of new vessels was concerned, which offered local breakers the reassurance needed to return to the bidding game. The budget in Pakistan was a difference story though, with sentiment waning and action remaining non-existent, while at the same time China appears to have neither the intention nor the appetite  to increase its bids. Average prices this week for wet tonnage were at around 325-500$/ldt and dry units received about 310-490$/ldt.