Tag: Maritime Business

After the shipbuilding boom: tough times for China’s yards

Shipbuilding in China has become increasingly a struggle for survival. Shipowners around the world have been much less eager in the past few years to order new vessels, both in China and elsewhere, and consequently shipyards’ orderbooks and production have shrunk. Excess shipbuilding capacity in Chinese yards has become a major problem. Although 2013 has seen a welcome improvement in the order inflow compared with last year’s depressed volume, there seems little chance of a return to the extraordinarily high levels recorded earlier. Even a moderately healthy volume is proving elusive.

The recent history of the Chinese shipbuilding industry has been a fascinating and impressive story. Nothing as spectacular in the country had happened since the fifteenth century building boom. At that time, the massive imperial fleet was being constructed for Admiral Zheng He and his treasure-ship expeditions to south east Asia, Hormuz, the Red Sea and East African coast.

Zheng He’s merchant fleets, built for the seven voyages of up to two years in duration which occurred between 1405 and 1433, consisted of many ships, some of which were very large in comparison with other countries’ vessels of that era. The huge scale of activity required vast shipbuilding capacity and timber supplies. The 1405 expedition was comprised of 62 large treasure ships, 190 smaller vessels, and transported 27,800 men. Other expeditions were of similar size. The biggest ships were much bigger than any produced elsewhere, in fact the largest wooden ships ever built, incorporating advanced designs and technology.

In the modern era, within a very short period since the early 2000s, a massive shipbuilding industry emerged from relatively small beginnings, pushing China quickly to top position globally. Ships are built for Chinese owners, but this industry is heavily focused on the international market. During the first three years of the new millennium, deliveries of all types of vessel from Chinese yards averaged 6% of the world total (based on deadweight tonnes), far below the principal competitors, South Korea and Japan. From this modest contribution China’s global market share rose to a sizeable 23% in 2008 and then almost doubled to an astonishing 43% in 2012. Two years earlier, in 2010, China had overtaken South Korea to become the world’s largest shipbuilding country, measured by deadweight tonnage. In that year and the next, Korea’s output was still higher when measured by dollar value, because Korea produced a larger proportion of more sophisticated, and therefore more expensive, ships. Last year, China’s production became the highest by value as well as deadweight tonnage.

Looking at actual shipbuilding volumes emphasises the dramatic expansion. China’s yards delivered only 3-4 million deadweight tonnes of newbuilding vessels annually in the early 2000s. Growth was then very rapid. The annual total reached 21m dwt in 2008, and two years later the volume had tripled to 63m dwt. This highly impressive performance was achieved partly by expanding existing yards, but mostly by opening new ‘greenfield’ sites, with many new Chinese shipbuilders entering the market for the first time. Over the next two years, 2011 and 2012, output was sustained at slightly greater levels, 68m dwt and 66m dwt respectively.

The orderbook for new ships at Chinese shipbuilding yards reached a phenomenal 221m dwt peak at the end of 2008, according to data compiled by shipping information providers Clarksons. This volume comprised over one-third of the entire worldwide 619m dwt orderbook. In the next three years, as orders were delivered, the China orderbook held up remarkably well, supported by a resurgence of optimism among shipowners, many of whom returned to the newbuilding market to order additional ships. Subsequently, new ordering receded greatly and the Chinese shipyard orderbook was almost halved within two years, falling to 113m dwt at the end of 2012. Since then it has diminished further, although only slightly.

Following the 2008 global financial crisis and economic downturn, and the resulting chronic over-capacity in shipping markets, orders for new ships have been much harder to obtain, both for Chinese builders and their competitors. However, the vast orderbook for new ships already accumulated in China, and therefore huge backlog of work, ensured that output did not immediately plunge downwards after 2008. Over several years that backlog has been drastically reduced and now, newbuilding deliveries are falling sharply.

Shipbuilding output at Chinese yards was dominated by tankers and container ships for a number of years. Then from 2009 onwards a dramatic change in the production profile occurred. As a result of many orders placed by foreign and domestic shipowners during the freight market boom, and afterwards, bulk carriers were built in greatly increasing numbers, becoming by far the largest output category. In 2008 about 22% of China’s newbuilding deliveries of all vessel types consisted of bulk carriers (measured by compensated gross tonnes or CGT, indicating the work content of ship construction). A few years later in 2011 and 2012, bulk carriers comprised well over 60% of vastly higher totals. Building other ship types was still an important activity, since actual production volumes were sizeable.

What factors were instrumental in enabling China’s shipbuilders to achieve such a powerful performance? Low labour costs, and low land costs for many new production sites, buttressed by support from local and national governments, accompanied by abundant availability of finance, were reflected in competitive pricing. Improving management skills, assisting greater efficiency and productivity, also contributed while technological advances and enhanced product quality further boosted competitiveness. The extended period of extremely strong global demand for new ships between 2003 and 2008, followed by a brief resurgence in 2010 before a collapse ensued, provided a strong background for progress.

This year, a contrasting downwards step change in the pace of Chinese shipbuilding activity has been unfolding. Currently, the rapidly shrinking (although still large) orderbook is being reflected in noticeably diminishing output, indicating an annual 2013 newbuilding deliveries total possibly below 45m dwt. Many of China’s shipyards are in an increasingly precarious position, despite an upturn during this year in the inflow of new orders for future delivery. In some cases production has completely ceased, following completion of all contracts, and yards have closed. Numerous other shipbuilders are likely to be facing the same problem sometime in the next twelve or eighteen months, when their work schedule is completed.

The recent ordering upturn has provided a partial respite. After taking only 21m dwt of contracts in 2012, less than one-third of the volume seen as recently as two years earlier, Chinese shipbuilders secured an estimated 37m dwt of new orders in the January to September 2013 period, according to Clarksons. That achievement reflected increased optimism among shipowners around the world about an approaching shipping market recovery, coupled with low and therefore attractively priced deals available from yards for new vessel construction. The improvement suggests that China’s annual total for new orders received this year may be more than double last year’s figure. But a massive surplus of shipbuilding capacity remains an existential problem urgently requiring a solution.

How can these difficulties be alleviated? Earlier this year consolidation of shipyards was being encouraged by the Chinese government, designed to enlarge individual shipbuilding business units as a means of improving efficiency and profitability. Then in early August the government stepped in with additional support. The State Council published a plan entitled ‘Accelerating Structural Adjustment and Promoting Reform and Upgrading of the Shipbuilding Industry’. A radical restructuring is envisaged over the next three years, emphasising reduction of excessive production capacity, and promoting enhanced competitiveness in the world market, partly through more innovation. Specific proposals include reducing reliance on production of less sophisticated vessels (such as bulk carriers) and increasing output of high-tech ships (including gas carriers and container ships) and offshore units (service vessels and drilling rigs).

Clearly also a strong upturn in global demand for new ships would benefit Chinese shipbuilders. As mentioned, there have been signs this year that some owners are expecting a shipping market revival within the next two or three years and are moving to have new and more economical tonnage available at the outset. But, even if a market recovery does occur within that timescale (and many market players remain sceptical about both timing and magnitude), it seems unlikely that all existing Chinese shipyard capacity could be quickly redeployed profitably. So pressure seems set to continue for a major overhaul of the industry.

Richard Scott
GMI visiting lecturer and MD, Bulk Shipping Analysis

A Magnificent Transformation: World Shipping 50 Years Ago and Today

It began to take shape fifty years ago. Parts of the outline of the highly efficient global merchant shipping industry we see today started to become visible in the early 1960s. The transformation process was already well under way by then, in the tanker sector. But back in 1963 much of the world’s shipping system, consisting of cargo liner services and dry cargo tramp trades, was not functioning well. Dramatic changes were beginning, however, which would revolutionise the dynamics over the next decade and beyond.

The preceding revolution, the changeover from sail to steam propulsion, had greatly improved performance in the shipping industry. This fundamental technological change had increased capacity and enabled scheduled services to operate, but some inefficient aspects continued. In many trades cargo-handling in ports was said, jokingly, to have remained unchanged since the time of the Phoenicians, except that powered winches had replaced muscle-power. In the next revolution, from the 1960s onwards, old methods and traditions would be swept away by new technology and new working practices.

Industry characteristics and economics were studied in the early sixties by ambitious young men, working in London shipping offices, who enrolled for the shipping certificate course at the City of London College (in this era few women aspired to senior positions in the industry, which was male dominated). The course involved two years of evening classes. These keen students learned that the world fleet of ships at that time was dominated by liners (cargo and passenger), tramps (dry cargo) and specialised ships, including tankers.

Ship 1

 

Cargo liners were versatile, multi-deck ships with installed cargo-handling gear, carrying mostly manufactured goods, often accompanied by refrigerated products, together with some bulk cargo parcels. They operated on regular scheduled services. Tramps (dry cargo), available on the charter market, usually carried full shiploads of bulk commodities. Many of these tramps were similar, in size and specification, to cargo liners and their role was often interchangeable between the sectors. Tankers mainly transported oil and oil products. During the early sixties, two changes were prominent. Bulk carriers, including ore carriers and dual-purpose combined carriers (able to carry either oil or dry bulk cargo), were coming in strongly, and passenger liners (operating on regular routes) were going out.

Fifty years ago many ships spent a large proportion of their working lives stationary in port. In the cargo liner trades especially, cargo handling – loading and discharging – was often slow, or very slow, caused by labour-intensive methods. This sluggish performance frequently was exacerbated by poor labour relations with dock workers. Consequently, a huge global fleet of ships was chronically under-utilised. Expensive, sophisticated cargo liners could be in port for up to 60 per cent of available time for transport movements (equivalent to 200 or more days annually) and much of that was idle time, when no cargo was being handled. Profitability suffered heavily, and the system struggled to perform adequately. A more efficient service was needed to cope with fast trade expansion and the solution was containerisation, which developed quickly from the late-1960s onwards.

Containerisation proceeded apace through the 1970s and 1980s, and was truly a revolutionary upheaval, enabling manufactured goods to be transported around the world rapidly, securely and cheaply. Cargo liner trades became integrated into a through-transport system providing a door-to-door service for manufacturers, a new way of organising transport involving vast capital investment in ships, ports and cargo-handling equipment. This reconfiguration hastened and greatly assisted the world’s transition to a globalised economy, with its extended supply chains, as we know it today.

In other shipping sectors, bulk (dry and wet) and specialised trades, developments were also dramatic, although not quite so revolutionary. But notable changes greatly enhanced efficiency and provided more economical transport. In a large number of international trades much larger ships of improved designs were utilised. Different types of specialised vessel were introduced. Coupled with high speed shore-based cargo loading and discharging equipment, this amounted to a transformation.

Over the past five decades world seaborne trade growth has been astounding. Global seaborne trade of all types totalled 1.35 billion tonnes in 1963, according to UNCTAD statistics, of which 53 percent was liquids, mostly oil (tanker cargoes). The 2013 figure, based on calculations by shipping information providers Clarksons, could be 9.9bn. This total represents a more than seven-fold expansion over the fifty year period, having already reached an estimated 9.5bn last year, of which oil cargoes comprised 29 percent.

Another aspect is longer voyage distances in numerous trades. More remote supply sources for commodities and other goods were located and became economical to use, while globalisation and reduced transport costs altered geographical trade patterns. Tonne-miles, the standard measure of shipping demand because it reflects both cargo volume and voyage distance, was further boosted. A great enlargement of carrying capacity was required.

Shipowners responded to this requirement with huge investment in new tonnage, continuously expanding the global fleet of ships. Measured in gross tons, the world fleet of all types of merchant vessel in mid-1963 totalled 145.9 million GT, comprising 39,571 ships, according to Lloyd’s Register statistics. Fifty years later the mid-2013 fleet, based on Clarksons data, was 1,114.8m GT, consisting of 85,642 ships. This growth, over seven-fold, was similar to the trade volume percentage increase. But the productivity of the fleet had also improved. More specifically, a typical ship’s annual carrying capacity, as distinct from the single cargo capacity measured by vessel tonnage, had risen. Higher speeds at sea, less time spent in port, coupled with enhanced operational efficiency was instrumental in ensuring that each ton of ship’s capacity carried more cargo in a typical year. Another feature accompanying fleet tonnage growth was the 253 percent rise in the average ship size, from 3700 GT in 1963, to 13000 GT in 2013.

Currently, in the early 2010s, the world fleet of ships meeting the needs of cargo movements is comprised of three main sectors. Today’s students, such as those pursuing post-graduate maritime studies at Greenwich Maritime Institute, London are well aware that bulk carriers, tankers and container ships dominate. These vessels are accompanied by what has become a very large group of special purpose ships, such as liquefied gas carriers and car carriers. A prominent feature in many trades has been the great increase in the size of vessels typically employed, demonstrating advantages to be gained from economies of scale, amid pressure to reduce the unit cost of providing services.

From these brief highlights we can see that a fascinating and impressive period of progress has evolved in the global shipping industry, during the past 50 years. World seaborne trade has expanded enormously. The fleet of cargo-carrying ships, of various types and varieties, has been required to tackle an ever more challenging task, and has done so pretty effectively. Sometimes though, fleet growth in various sectors has been far too rapid, as investors collectively misjudged – always a difficult judgement – or ignored the shipping market cycle. What is abundantly clear is that great improvements have been made in the efficiency and sophistication of the sea transport system, restraining costs and freight rates and contributing massively to the globalisation era.

Richard Scott, GMI visiting lecturer and MD, Bulk Shipping Analysis

China’s sparkling maritime business achievements

The China maritime business story over the past ten years has been dazzling. By the end of 2012 Chinese shipowners’ share of the world’s entire merchant ship fleet had risen to 10 percent. This Chinese fleet is now more than three times its size one decade earlier. Last year shipbuilders in China produced 43 percent of the world’s newbuilding ship deliveries (based on deadweight tonnage), up from a relatively small six percent share at the start of the 2000s. Equally impressively, importers in China last year received an enormous volume of cargo by sea, comprising almost one-fifth of all world seaborne trade, compared with a six percent proportion a decade earlier.

An opportunity is approaching to examine this amazing narrative and its causes in more detail. At Greenwich Maritime Institute on 10th June, a one-day short course entitled ‘A Leading Global Player: Maritime Business Activities in China’ will look closely at the trends and assess the current position. Any clues to how events will unfold in the period ahead also will be discussed.

What has made these achievements so remarkable is not only the sheer magnitude, but also the speed at which expansion occurred. During a period of a little over ten years, China has transformed the global maritime business scene, overtaking other major players to become the most prominent and influential participant in several key activities. A dizzying velocity of sustained growth year after year became a defining feature, a pattern which was not widely foreseen. Few people would believe a forecaster predicting advances of that intensity or longevity.

Chinese shipowners, shipbuilders, ship recyclers, and importers and exporters of commodities and products carried by sea have become the principal, immediate focus of attention in international shipping markets. The first question asked by market operators, brokers and analysts in weighing up the current position and attempting to predict a pattern of events in the future is usually “what are the Chinese doing”?

From a global freight market viewpoint, the most prominent aspect has been the vast expansion of seaborne bulk commodity imports into China. In their offices during the late 1970s and early ’80s, some shipbrokers and analysts sat around talking about the possibility of China one day (within the foreseeable future) becoming a key factor affecting global bulk trade movements. Labelling this agreeable vista as a ‘great white hope’ did not seem too exaggerated. But the reality would take a long time to appear. Although in the 1990s there were distinct signs of a strong upwards trend from a low base, it was not until well after the millennium celebrations that China rapidly started becoming the most influential element.

In the early 2000s China’s dry bulk commodity imports averaged 8 percent of the global total. The 2002 figure was 217 million tonnes. Ten years later, in 2012, the total reached 1300 million tonnes, according to data compiled by Clarksons Research, raising the Chinese share of global dry bulk trade four-fold to 32 percent. This astonishing performance was driven by enormous expansion of iron ore imports for the steel industry. Other commodities also contributed strongly. Coal, for power station usage (steam coal) and for steel mill consumption (coking coal), was a key growth component, especially towards the end of the period. Rising soyabeans purchases and import volumes of several ‘minor’ bulk commodities were additional features.

The Chinese shipbuilding scene merits particular attention as well. When the 2000s began newbuilding vessel deliveries of all types from China’s shipyards totalled 3-4 million deadweight tonnes annually, a modest volume. In 2012 the total was massively larger at 65m dwt, comprising over two-fifths of the global total. Two years earlier, in 2010, China had become the world’s largest shipbuilder based on deadweight tonnage, overtaking South Korea. Then, last year, China also became number one on the basis of both deadweight tonnage and the dollar value of output.

Explanations for these striking developments (and for other prominent trends including oil imports, container trade and ship recycling) and perceptible pointers to the future will be examined intensely in the forthcoming GMI course. What is well known is that China’s economy has been a star performer, raising living standards sharply for a large proportion of the population. Sustained export competitiveness has been a notable achievement, both in shipbuilding and in sales of many other products including the vast quantities of consumer goods bought by countries around the world. Infrastructure building has greatly augmented growing Chinese domestic demand for manufactured goods, in turn adding to requirements for more raw materials and other commodities than could be provided from internal resources. Benefits for the world’s shipowners from the resulting imports have been very obvious.

Richard Scott
GMI Visiting Lecturer and MD, Bulk Shipping Analysis

A Leading Global Player: Maritime Business Activities in China (A one-day short course)

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The China Maritime Centre is holding a one-day course on Monday 10th June 2013 in Greenwich, UK.

Over the last decade China has become the leading influence shaping global seaborne trade, as result of a remarkable upsurge in trade volumes. This GMI short course will be led by the Director of China Maritime Centre Dr Minghua Zhao, international shipping analyst Richard Scott and researcher Yifan Liao who specialises in ship recycling. The aim of the course is to investigate how, and explain why, China has become such a prominent part of the global maritime scene within a relatively short period since the early 2000s, and to provide some clues about future trends.  

The course will focus on three specific areas of growth within the maritime industry in China:

 •China’s maritime trade and ports: a remarkable expansion

 •The rapidly growing China-owned merchant ship fleets

 •A new era for shipbuilding and ship recycling in China

The cost is £90 per person which includes lunch, refreshments, course materials and a certificate of attendance. A booking form can be found on the Greenwich Maritime Institute website: http://www2.gre.ac.uk/about/schools/gmi/study/short/programmes

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Chinese Port

Too Many Ships in the World Merchant Fleet

For ship spotters and maritime historians, it was an event of great significance. Back in 2005 the world fleet of cargo-carrying ships reached the symbolic 50,000 number. Today there are many more, and their capacity has risen enormously. For shipowners and market analysts, this enlargement is also significant, but has worrying overtones: expansion in many categories has greatly exceeded the growth of seaborne trade and demand for these vessels. The result has been varying degrees of depressed shipping markets over much of the past few years.

The world merchant ship fleet is very large, probably larger than most people would guess. But just how many vessels are there? What is their cargo carrying capacity? How did this fleet develop in recent years and why? And what is the outlook for the future? The answers to these questions are of interest not only to those participating in, or merely observing, this remarkable industry; they are scrutinised intensely within academic maritime studies at GMI.

Fleet statistics weave a fascinating pattern. By mid-2011 the world’s entire fleet of all types of commercial ships over one hundred tons had increased its gross tonnage to 1 billion. At the end of last year the total reached 1.09 billion GT, numbering 86,300 ships. This gigantic armada includes not only the vast fleets of bulk carriers, tankers and container ships, but also a wide range of other types. General cargo vessels, multi-purpose ships, car carriers, roll on-roll off vessels, gas carriers, reefer tonnage, cruise ships, offshore service vessels and others (such as tugs and dredgers) are represented. Many perform services which do not involve carrying cargo, of course.

According to figures compiled by shipping information providers Clarksons, another (nautical) milestone was attained recently. The world’s fleet of vessels actually carrying cargo – which had numbered 50,000 over seven years ago – reached 1 billion GT in September last year, and since then has grown to 1.01 billion, comprising 57,400 ships, today. It is especially significant that this achievement resulted from cumulative growth of an astounding 43 percent over the past five years, averaging 7.5 percent annually.

Looking at the fleet statistics in more detail reveals some impressive performances over the past few years. Expansion rates in the largest sectors have been rapid. Measured by deadweight volume, the tonnage measurement normally used in the bulk markets, the world fleet of bulk carriers has grown by 73 percent in the past five years. At the end of 2012 there were 9,500 bulk carriers totalling 679 million dwt. The tanker fleet’s growth was 29 percent during the same period, to a total of 515 million dwt (13,500 ships, including 7,700 small tankers below 10,000 dwt). In the container ship sector, where the standard measurement is TEUs (twenty-foot-equivalent units), the world fleet reached 5,100 ships totalling 16.2 million TEU at the end of 2012, after growing by 50 percent over a five-year period.

Why is all this a problem? Unfortunately (for shipowners and their bankers), expansion of transportation capacity in the main fleet sectors has outpaced the growth of global seaborne trade and demand for shipping services. The market’s two sides are often out of balance, to some extent, but in the present cycle the imbalance (oversupply) is particularly large and persistent and is having a brutal impact on freight earnings and profitability.

Contrary to many perceptions, international cargo movements have been growing quite vigorously in recent years. There has been a good recovery from the damaging setback experienced in late 2008 and 2009, when the global financial crisis caused the ‘Great Recession’, which severely but temporarily reduced world economic activity and trade volumes. The upwards trend in seaborne trade resumed and continues, with most forecasts suggesting further strengthening through 2013. A positive trade scene is therefore evolving; some other factors which affect shipping demand have been beneficial as well. On the other side of the balance sheet, enormous amounts of new shipping capacity coming in to the marketplace (partly offset by higher scrapping) has greatly swelled the fleet, as discussed. Much of this new tonnage, or ‘newbuildings’, was ordered at shipbuilding yards in better times when the shipping markets were booming. The result – more rapid fleet expansion than needed – is still unfolding and signs suggest it will continue.

Where do we go from here? Forecasters in this notoriously hard-to-predict industry are frequently wrong-footed by unanticipated events. If the world economy soon takes off again and stays there, boosting trade, surplus shipping capacity could be quickly eliminated, but few expect that to happen. Although China’s economic growth appears to be reviving, the USA is picking up, and Japan could start regaining momentum, Europe’s economy is still in the doldrums and probably will remain there for a while. Political events could disrupt trading patterns and potentially add to demand for ships, but these circumstances are essentially unpredictable. There are other factors, of course, but no indications at present of a quick solution to the fleet over-capacity problem. The scale of the problem, although diminishing, is still so large that adjustment towards a better balance may yet take some time to complete.

Richard Scott
GMI visiting lecturer and MD, Bulk Shipping Analysis