Defence Industry

Shipbuilders dilemma and the way ahead
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Issue Vol 25.4 Oct-Dec 2010 | Date : 14 Mar , 2011

The global economic crisis has brought steepest decline in the shipbuilding industry across the world. The shipbuilding industry is facing tremendous head winds with no significant relief in sight. New orders are sparse even with falling prices. Many existing orders are in peril due to lack of financing and tight credit facilities. The shipbuilder’s dilemma can be steered through “Mergers”, “Consolidation”, “Diversification” and “Exports”. These are national issues and will need respective governments active support and directions.

The examples of nations who have successfully achieved and adopted the above measures have been illustrated in this paper. In addition, the lean time available to the shipbuilding industry can be utilized with focus on offshore sector, emerging technologies, military ships and rapid delivery of naval auxiliaries like OPVs to meet the new threats of terrorism, piracy etc at sea.

The above ‘way ahead’ through mergers and acquisitions across state lines (country boundaries) have not been attempted and need to be explored in the interest of healthy shipbuilding industry in the long run.

Shipbuilding Boom (2000 to mid 2008)

Shipping and shipbuilding are vital to the economic growth. There was consistent boom in the shipbuilding since the year 2000. The main reason for this was the rise in the volume of international trade due to healthy long range economic and energy demands. In addition, the replacement of single hull oil tankers had also contributed to growth in shipbuilding. The above trend in the growing demands for new shipbuilding had been known and predicted. In order to take advantage of this boom in the shipbuilding in the world, countries like Japan, S. Korea and China took timely steps to enhance their shipbuilding capacity and opened new shipyards. These countries have been reaping the benefits of their timely actions. During the year 2007, orders for 155m GRT ships were placed to keep pace with the growing economy.

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The total shipbuilding on order was about 300m GRT as in Dec. 2008. To deliver this huge order book on schedule, the shipbuilding capacity would have needed to double last year’s output. However the capacity shortfall problem is self correcting with a down turn, as contracts are cancelled and new orders significantly decrease and some contracts get renegotiated for later deliveries.

Cyclic Nature of Shipbuilding Industry

Till July, 2008, everything was fine and the shipping and shipbuilding industries were growing steadily. The boom lasted for 7 to 8 years. The shipbuilding capacity had expanded at an unprecedented rate, both at established and new Greenfield Shipyards. A considerable percentage of the world order book is now with new and inexperienced shipyards. This will result in growing percentage of slippage of scheduled deliveries.

The European region shipyards have completed a lengthy process of consolidations and mergers. There exists one major shipbuilder within each of the big countries.

The current financial crisis since 2008 has brought the steepest decline in the shipping industry. The economic slow down has reduced the shipping demands, hurting some market sectors more than others. There would be significant demand destruction over the next few years. Many contracts are in peril due to lack of financing. The Greenfield ship yards and the expansion plans are at risk. The world shipbuilding order book will steadily decline over the next few years as the deliveries outpace the new orders.

The new shipbuilding cancellations and scrapping levels will dramatically increase. The steel prices will sharply drop. The new ship prices will continue to decline with some yards going out of business. Owners are pushing delays until market improves. Lack of anticipated capacity will continue due to dropped expansion plans. The shipyards are deliberately slowing production to preserve work force.

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The views expressed are of the author and do not necessarily represent the opinions or policies of the Indian Defence Review.

About the Author

Vice Adm Rajeshwer Nath

Vice Adm (Retd) Rajeshwer Nath.

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