Shipowners are on collision course with expensive Asian shipyards as demand is slowing down

Asia’s major shipyards and international shipowners are heading for a clash, as the latter appear reluctant to place new orders unless prices go down. Shipyards, on the other hand, have no intention of backing down, having secured numerous orders until 2009. With shipyards able to wait, any ships ordered now would not be ready before the second half of 2008, making shipowners more hesitant. Recent reports suggest that ship deliveries will reach 28 million tons in size during 2005 against just 18 million tons in 2000. As for 2007 and 2008, this figure will rise as high as 31 million tons per year. It is also clear that in the last few years the shipbuilding community has reached its limits, as since 2000 orders for container ships have risen by 125 percent, with about 9 million tons to be delivered from 2006 to 2008, while in 2007 alone 12.5 million tons of tanker capacity is expected to enter the market. About 6 million tons of carrier ships will be delivered by 2008. However, shipping companies’ expectations are not as optimistic as they were even a few months ago. The recent decline in freight rates across most markets and for the majority of vessels have considerably undermined the optimism of shipowners. They therefore appear unwilling to submit new orders unless costs drop. Clarkson, the international research company, was the first to note a few weeks ago that after three straight years of rate rises, the market is now changing. The market’s negative feelings were reinforced by the recent failures of new listings of companies in international stock markets, mainly at New York’s Nasdaq. Companies involved have not collected the capital they had hoped for and investors have been relatively indifferent to them, which has forced several prospective entrants to postpone or cancel their plans. Such Greek examples are StealthGas of Haris Vafias and Capital Maritime & Trading of Petros Marinakis, who have indefinitely postponed their plans. After all this, the activity in shipyards had to be affected. Recent reports by international analysts have suggested that from 2006 new ship orders could drop to 20-25 million tons and as low as 15 million tons in 2007, from an order level over the last three years remaining at 40 million tons annually. Signs of price drops As a result, shipbuilding prices may stay put for the next quarter, but as the year’s end draws near and new orders seem to lose steam it is likely that shipyards will be forced to adjust their prices downward. This adjustment is expected to involve a 15 percent discount for 2006 and another 15 percent for 2007. Although the shipbuilding community has tried to put on a united front to keep prices at current levels and not succumb to the shipowners’ pressure, many observers believe that the front is already cracking due to pressure from shipyards in China and Vietnam. Interestingly, the price of steel, the main raw material for ships, has dropped in Korea; this is expected to be the first sign for the decline of raw material supply costs for shipyards. The above developments show that even the threat of stopping operations is hanging over the most expensive of shipyards, which had been quick to increase their boat cradles due to the high demand until recently. If they are forced to lower their prices closer to their costs, they will have to render their vacant cradles inactive. On the other hand, some believe that the possible decline in container ship demand, combined with the drop in rates, will lead shipowners with significant liquidity to proceed to additional orders for liquefied natural gas (LNG), tanker and carrier ships.