Shipbuilding

Currently, the order book backlog for bulk carriers at Chinese shipyards numbers some 1060 bulk carriers totaling about 100 mdwt - with about 70% of these scheduled for delivery by the end of 2010.

Recently, there have been a lot of rumours about a lack of funding for these projects and it is said that a substantial share of these newbuildings will never be completed and delivered. Not only has it become more difficult for ship owners to secure funding, but new, "greenfield", yards are experiencing funding problems due to an increase in costs: steel, equipment, labour, funding, etc. With a total order book backlog of some 234 mdwt bulk carriers and expectations for double digit net fleet growth rates each year 2008-10, one can really understand how these rumours came to exist. It is quite evident, in our opinion, that the dry bulk market cannot sustain such fleet growth, and that 2010, in particular, could become a pretty difficult year, freightwise.

The question is: how bad is the situation? And if it is really bad - what will be the consequences? We have taken a closer look at all the 176 shipyards in order to see if some of them are dodgier than the rest. Obviously, we believe that one should not worry too much about state, or semi-state owned, shipyard groups. In addition, a number of yards do not build bulk carriers. Adjusted for this, the number of yards is reduced to 62. In addition to this, there are a number of yards that are subsidiaries of major Korean and Japanese shipbuilding companies and a number of yards that already have a favourable track record. To cut a long story short, we arrive at 27 greenfield and brownfield yards that could, potentially, crumble under financial pressure. These yards have, altogether, about 208 bulk carriers totaling about 10.2 mdwt on order. As far as we can see, no Capesize bulk carriers are on order at these yards. In a worst case scenario (or wager - depending on how you look upon it), none of these vessels will be delivered. Hence, the total bulk carrier order book backlog is reduced by about 4%. We doubt this will have any impact whatsoever.

Now, the argument of poorly funded yards and shipowners could be widened to include more shipyards in China as well as in South Korea. If the figure for China is tripled and we include all bulk carrier orders at Korean shipyards (outside the majors), we arrive at about 57/58 mdwt - still less than 25% of what´s on order.

In this connection, we believe it is also important to have a look at recent history. During the Asian financial crisis the Halla Shipyard in South Korea went bankrupt. However, the same yard was quickly taken over by HHI and all contracts were honoured. Today the yard is known as Hyundai Samho and has an order book of more than 100 vessels totaling about 15 mdwt. We believe this is what will happen if any of the new and private yards go bust - somebody will see an opportunity to take over and it will be business as usual (in simple terms, of course). Going back a little further, we believe the situation in the mid-1970s is relevant to consider, although we are not great believers in history repeating itself. Still, at the end of 1973 the VLCC/ULCC order book numbered 491 vessels scheduled for delivery 1974-81. 462 of these were scheduled for delivery during 1974-77. The 1974 VLCC market was much weaker than the preceding year, but still not awfully bad. The following three years, however, were worse than dismal! The average freight rate for the AG-West trade was WS 24.1 - Still, four out of five vessels on order at the time, or altogether 364 vesels, were actually delivered. Shipowners, yards, and banks were all in plenty of financial hot water, and it is quite remarkable under the circumstances that so many vessels were actually delivered.

We believe that one must expect that most of the bulk carriers currently on order will eventually be delivered. There could be delays, of course, but don´t bet on a significantly lower fleet growth than the order book indicates during the next few years.