May 14 2012
Shipyards - Will Winding Down Mean Winding Up?
For many shipyards 2012 will be a tricky year, with the orderbook shrinking and prices under pressure. Chinas orderbook is 146m dwt (43%), whilst S. Korea has 98m dwt (29%) and Japan 61m dwt (18%). Big numbers, but how much work do the shipyards really have in hand?
Ordering to Order
The problem all shipyards face is that they run a complex business assembling materials from outside suppliers using a multi-skilled labour force. Items like engines and pre-assembled units have to be ordered with long lead times. In addition, keeping the various trades and facilities in the yard smoothly occupied is easier with a full orderbook. So as the orderbook shrinks and gaps open up, the pressure on the sales force to find orders increases.
Orderbook % Deliveries
One way to judge how adequate is the forward workload is to track the orderbook as a percentage of deliveries (see bars in graph). In the great boom the ratio climbed to 570% in 2008; the shipyards had almost 6 years of work in hand. But the ratio dropped to 294% in January 2011and to 209% in March 2012. Although that still sounds like a big number, for many shipyards, it is beginning to feel rather tight.
Lead Time Perspective
The last time the ratio was close to 200% was in 1999, one of the most difficult years, when it fell to 193%. But todays statistics suggest that the downward spiral is likely to continue because the ratio of contracts to deliveries (shown by the line in the chart) has fallen to a new low. Normally, this ratio should be 100%, showing that contracts equal deliveries. For example, between 1998 and 2002 the ratio averaged 113%. Then, during the boom, the ratio climbed to 350% in 2007. But, since 2009 the ratio has averaged only 46%, and in 2012 it was only 22%. A clear indication of the difficulty the yards will face in maintaining their capacity levels.
Some yards are better placed than others to handle the rundown. For example, yards which outsourced block construction are able to cut back, allowing them to diversify into more outfit intensive markets such as LNG and offshore. High levels of pre-outfitting also help to smooth the work programme. But, if the present trends continue, the orderbook will soon fall to the lowest percentage of deliveries since the 1980s. At a regional level, contracting in S. Korea and China was running at about half the level of deliveries in 2011, whilst in Japan, contracts were only about 20% of deliveries. In 2012 the world ratio has slipped to only about 20%.
No More Wriggle Room
So there you have it. The statistics suggest that some shipbuilders are getting dangerously close to the cliff edge. If the trends of the first quarter continue, by year end the biggest thing building in some yards will be pressure. No wonder theyre feeling wound up. Have a nice day.