Grand Assembly 'RTM Djulpan'

I'll start off with an apology for the long layoff from the Antipodean Mariner blog. In January of this year, I was moved from a technical specialist to running our Company's Panamax dry bulk trading desk. The change to a trading desk has been an interesting career development, but is a lot less "blogable". Instead of studying ballast systems, I'm immersed in Baltic Panamax Index Average Four Time Charter Routes Freight Futures Agreements (or BPI A4TC FFA's in trader-speak). And I don't go anywhere.

Even though I haven't been spending any time in shipyards, my colleagues have - below is the Grand Assembly of our second caustic soda/bulk carrier 'RTM Djulpan' being built at Oshima Shipyard. The time sequence is over eight days. If Henry Ford ever built ships, this is how he would have done it!.

Many thanks to Cliff and Keel Marine for the photo sequence. Please enjoy

The Antipodean Mariner

Post-Panamax 'RTM Flinders'

The Antipodean Mariner's site supervision team have been sending a steady stream of progress photos and it's time to put some of them up on the Blog. The second ship, 'RTM Flinders' is about 3 months behind RTM Dias, with the first super-block comprising the engine room and No.5 Hold bulkhead going into the Dock in late October.

The first block in the Dock

No.5 Hold tank top

Poop being lifted on over the Steering Flat

With typical Japanese efficiency, her construction continues toward the dock divider where there is a 250,000 DWT ore carrier. When her hull reaches the divider, the ore carrier has to be floated out and the divider repositioned. Like her sister Dias, she will float out stern first to the Fitting Out Quay.

Up against the Dock Divider, No.5 Hold enclosed

'RTM Dias put to sea in mid-December for sea trials and delivery into service in January. Many thanks again to Dr Paul and Asanomi-san for the photos from Imari.

AM

Grim outlook continues for shipping - Lloyd's List

The saviour for any Blogger with 'writer's block' is to re-post articles written by professionals. I liked this one because it goes to the fundamentals of shipbuilding's capacity to renew the global fleet faster than it depreciates. The logical extension of this premise is that ships, like cars, will become technologically redundant (and scrapped) at ever younger ages.

AM

Grim outlook continues for shipping
Sector has become a non-industry for banks that are in no rush to return

Paul Slater
Lloyd's List, Wednesday 14 November 2012

THE third quarter of 2012 has come and gone and various public company reports show the financial results continue to worsen.
As I have said many times, shipping economics is primarily driven by the economics of its customers, the ups and downs of world trade and the macroeconomics of nations for which shipping is an essential service to support their industries.
It is shipping’s ability to respond to these changes that preserves its vitality, but when shipowners get ahead of the markets for their services and order thousands of new ships without contracts for their use, they create their own economic disaster.
Manufacturing industries can stop production, and mines and other mineral producers can slow their activities when demand for their products declines.
Shipping is saddled with fleets of ships of all types and sizes which, unless sold for scrap, can trade globally for 20 years or more. New ships on average take two years to deliver from the date they are ordered and a lot can change in two years.
The cause of the boom in all markets in the middle of the last decade was China’s surging economy. However, although China’s economy is not centralised, its policies are, while its industrial economics are driven regionally.
Thus the extraordinary growth in China’s regional demand for shipping services exceeded the overall requirement, as individual industries needing shipping were themselves governed by the demand for their products, mostly from outside China.
Put simply, China’s own recession was caused by the recessions in Europe and then the US, and Beijing’s new government is unlikely to stimulate its industries financially until the other nations’ economies recover.
Shipowners old and new took advantage of the ignorance of equity investors and the carelessness of the banks to order thousands of new ships of all types.
The abundant supply of public equity acted like a magnet to banks, which grossly overlent to shipping companies to order more and more new ships. These could only be paid for if the freight markets expanded above and beyond the unprecedented levels of 2005 and remained there for another decade.
Worse still, shipyards — mainly in South Korea and China — expanded their capacity to double the levels of the late 1990s and today can statistically replace the world fleet every seven years.
The results of all this are clearly and painfully seen today.
Except for shipping companies in smaller markets or those with ships on long-term charters, as in most of the liquefied natural gas fleet, most are losing money every day.
Bankruptcies and restructurings are the daily norm: “too big to fail” is a mantra that does not exist in shipping. Past collapses in the 1970s and 1980s show that fleet size is no protection if the charter revenues are not there.
Few, if any, public shipping companies have any franchise or goodwill value, and today most have little or no remaining equity value.
As an investment, shipping is viewed today as one of the worst industries and, despite the vitality of the services it provides, it will take a long time for investors to return.
The very recent collapse of Overseas Shipholding Group’s share price, which dropped 90% from its high in 2008 to October 1 this year, then fell a further 80% in the rest of October, leaves a market capital value of only $38m from its five-year high of $2.7bn.
Torm, another very large tanker company, has undergone major restructuring. Its banks now own 90% of a company that in 2008 had an MCV of $3bn. It will probably liquidate its fleet under bank governance.
Another major failure has been Excel Maritime, partly owned by the former major shareholder of Torm. Its peak MCV in October 2007 reached $7bn and it is now just $35m.
There are numerous other public companies whose values have collapsed and that operate under a mountain of debt that greatly exceeds the market values of their assets.
Behind the scenes, numerous private companies are facing similar problems. Even the major Asian owners are reporting sharply reduced revenues and growing losses.
As with all previous market collapses in the 1970s, 1980s and 1990s the shipping landscape changes and the recoveries take longer than upturns.
We still have a way to go before sustained recovery in freight markets is seen. Some are saying the capacity of the wet and dry fleets will need to contract by at least 30% for it to begin.
The container sector was looking to cope with the dramatic increase in ship sizes when the overall demand for slot spaces began to decline.
Today there are more containerships laid up than at any time before, yet the orderbook for jumbo-sized ships still shows a 50% increase by the end of 2013.
Companies such as Seaspan may reduce or defer some of their huge newbuilding programme as their customers face the problems that oversupply is causing.
Some factors may assist fleet reduction over the next few years, however.
The experience of investors in publicly traded shipping companies is as bad as the collapse of the dot.com bubble. Institutional investors are totally absent and short-term traders are very disillusioned.
The shipping banks are all carrying large amounts of non-performing debt, much of which will soon fail altogether. Thus shipping is a non-industry for most banks and it will be a long time before they return.
Private equity is also in short supply, demanding unachievable returns and short-term exit strategies that will mostly not occur.
In summary, there is no new money for new tonnage unless it is covered by charter contracts with real end-users.
The shipyards are already looking at a near 50% reduction in orders from a few years ago and, despite a significant reduction in prices, face further reductions.
The eventual outcome will be smaller fleets of more fuel-efficient ships that can trade profitably in the markets of post-recession economies, but these are far away.
The problems of today’s oversupply of ships will continue to haunt the industry for several more years.

Evolution

The Antipodean Mariner was standing on a hill, overlooking a bustling South East Asian shipyard. Despite the current gloom in the shipbuilding industry, the Yard is new, employs 25,000 workers and has a three year order book of ships.



In a reflective moment, AM wondered whether anyone stood on a hill overlooking Newcastle, Sunderland or Glasgow and foresaw the abandoned wastelands they have become?


Photo credit: thorburn/Flikr

In the First World - shorthand for Europe, USA and even parts of Japan - shipbuilding is a sunset industry. Low barriers to entry, exchange rate appreciations, wage expectations and the demise of heavy manufacturing has left just a handful of Yards, in specialist niches, capable of building competitively priced ships. At the risk of grossly generalising the issue, the post-WWII shipbuilding boom was driven by the recapitalisation of the global fleet using labour desperate for work after the privations of war.

The demand for shipping, driven by China's economic development, has resulted in an intra-Asian shift of dominance from Japan to China, Vietnam and the Philippines. Korea to a large degree has managed to retain its competitive position due to a shift into a higher value product and controlling wage expectations. Taiwan has been through the complete evolutionary cycle from emergent shipbuilder to oblivion in a space of thirty years. The survivors in Japan and Korea have in part succeeded through a relentless quality drive to measure and improve productivity per worker at a rate faster than their wage cost rises.

With China now positioned as the economic savior of the world, the AM wonder how long it will be before Yards reliant on low cost labour are drawn into the death spiral of increasing wage costs and flat-lining productivity. Despite the similarities with the aviation sector, shipbuilding will never see consolidation like the Boeing and Airbus duopoly. The barriers to entry are too low and, despite WTO rules, state intervention and protection remains prevalent.

The evolutionary cycle is shortening, despite the massive capital investment required to develop a productive shipyard. With the professionalisation of the Chinese workforce, the last remaining pool of low cost labour is the Indian subcontinent. The AM wonders whether in his lifetime he will see Asian shipyards closing down to make way for apartments, shopping malls and call centres.

AM

Bulk carrier fleet growth

The Antipodean Mariner has been doing some fleet analysis work, to paint a picture of the current supply situation for a management slide pack. This slide shows the bulk carrier fleet in service at the opening of 2012 and on order by DWT and year of delivery from 70,000 DWT Panamax to 208,000 DWT NewcastleMax Capesize.

Shipbuilding has a normal lead time of about 3 years from contracting to delivery. Up to the 2000's, the global bulk carrier fleet grew incrementally with trade but with no spectacular changes. China's industrial demand increased at the beginning of 2000 and the freight boom started. Between 2004 and 2008, Ship Owners made super-profits with the 'constrained' world fleet while Shipyards booked new contracts at double what they had achieved a few years earlier. In this same freight bubble, container ships, LNG and oil tankers were in demand, leading some Shipyard to spurn simple bulk carriers in favour of higher margin ships. Oil tankers were being converted in to bulk carriers.

Had China's shipbuilding industry not ramped up, the AM believes that Korea and Japan could not have satisfied this spike in demand for new tonnage. But ramp up it has, and the massive increase shown here - in 82,000 DWT KamsarMax and 180,000 DWT Capesize - is testament. This chart doesn't include ore carriers larger than 208,000 DWT. These ships are the workhorses of the coal and iron ore trades

The only way this massive oversupply situation is going to correct is though the voluntary scrapping of young ships - 15 year old ships with another 10 years trading ahead of them in better market conditions. Oil tanker owners have started the painful, but necessary process of scrapping double-hulled ships to reduce supply. Plunging asset values and slow steaming are the other side effects of an over-supplied market. The ship you sold yesterday becomes your competitor tomorrow.

News since drafting this post is that China has officially closed the door to any VLOC larger than 300,000 DWT on 'port safety grounds', effectively bowing to internal pressure from it's own ship-owning community. Will the balance of Vale's 400,000 DWT ore carrier fleet ever see service?

The Antipodean Mariner

Shipbuilding - Korea vs. Japan

I have just returned from a flying visit to shipyards in Korea and Japan. The purpose was to discuss proposals from the various Yards on ice-classed HandyMax (40,000 DWT) bulk carriers. This was my second trip to Korea, but the first time visiting some of the big names of the Korean ship-building industry.

One of the key differences is the fact that Korea itself doesn't have a mature ship-owning sector, Japan has. Where the Japanese Yards can do business with Japanese Owners (often via the Trading Houses), the Koreans are almost totally reliant on selling their designs for export to the shipping capital centres of London, Piraeus and New York.

What does this mean at a practical level? The Korean Yards are early adopters and have developed innovative designs to meet the emerging sectors - LNG, mega-container carriers, deep water oil and gas exploration. At Daewoo (DMSE) we saw the 14,000 TEU container ships under construction for CMA-CGM and MSC. These vessels are innovative for their separation of the accommodation and bridge forward for improved visibility, and engineroom aft for a short tailshaft.


'MSC Daniella' built by DSME Ulsan

Japanese Yards build excellent quality ships, but the initial Outline Specification submitted is often steeped in the last century. Japanese Yard today are offering, and Japanese owners are contracting, new ships where the crew share a common toilet and shower. Hulls are protected with passive zinc anodes, even though imprest cathodic systems have been in use for half a century. My company bareboat chartered a 1996 Japanese-built Panamax bulk carrier, only to find that it had no UMS automation. UMS (Unmanned Machinery Space) automation has been standard since the 1960's. The financial cost of employing additional engineers to keep watch and maintain the machinery was crippling.

Korean Builder's early adoption stance has had a cost though. Shipbuilding is a cyclical business, and Yards must be prepared (and financially resourced) to continue production in the loss-making years as well as the boom years. In the mid-2000's, as shipping rode the spectacular China-driven upturn, the Koreans turned their back on low-margin bulk carriers. The large Yards like Hyundai, STX and Daewoo reasoned that high margin building was best use of capital and resources, and actively targeted LNG, container and VLCC's. The Japanese were less aggressive, and maintained their development of bulk carriers from Handy through to Capesize.

Chinese Yards played catchup during the 2000's, though with a few exceptions these vessels will probably not see 15 years in service such is the overall poor quality of coatings and steelwork.

With the economic crash of 2008 still working its way through the shipbuilding industry, three clear trends have emerged.

The Chinese Yards have experienced significant cancellations of speculative newbuilding orders. However, the Chinese shipbuilding industry is regarded as a strategic State asset by the Central Committee, and China will support those Yards deemed essential for economic growth. Chinese Yards suffered when bulk carrier asset values tumbled in early-2009, but with many 'greenfield' Yards still undeveloped have effectively lost less that had they been in full production.

Japanese Yards, through a more conservative portfolio mix of vessels have maintained forward orderbooks of about four years production. Korean Yards, by targeting high-margin vessel funded through IPO's and aggressive capital raising structures, experienced the 'perfect storm' when the collapse of asset bubbles in LNG and container shipping decimated their existing and forward order books. Many of the Yards visited has forward order books of less than two years, half that of the Japanese Yards. In an Analyst's Note just published, UBS estimate that Korean Yards carry 75% exposure to CMA-CGM's potential default on its current containership order book.

So whose won and lost in the global shipbuilding race? China will undoubtedly become No.1 in the world as they harness low-cost labour and adopt modern technology. Quality as a philosophy is their next step change, and is nacent at Yards like Nantong COSCO KHI and Shanghai Waigaoqao. Japan will maintain a No.3 position through looking at the 'long game' with their traditional Customers, and maintaining a diverse product portfolio. Korea will continue to battle with China for top spot, and have already embraced Demming quality and production philosophies. Some consolidation over the next two to three years may feature as the Korean Yards rebuilt their orderbooks and profitabilty. The financial fallout from the collapse of the LNG and container asset bubbles should make the the Korean Yards and their Export Bank reconsider their aggressive financiang packages. It has been Korea, and not the Owners, who have suffered through the string of newbuilding defaults plaguing the Korean Yards.

The Antipodean Mariner
5th October 2009