The global shipbuilding industry has been on an upswing over the past few years. In the period between 2000 and 2005, the world shipbuilding output has grown at a compounded annual rate of 8.3% based on gross tonnage (GT), as opposed to a growth of 4.8% achieved in the past 20 years (1985 to 2005). Strong demand and capacity constraints has led to the world's shipping order book to sales ratio increase to 3.5 times in 2005, higher than the historical average of 2.1 (between 1982-02).
Shipyards remain fully booked in the medium-term with the delivery period, for the first time since the seventies, extending beyond three years. Since it is the waiting period, which new building prices closely follow as compared to freight rates, the strong new building prices are expected to be maintained over the medium-term. Also, the ships that have been currently booked at higher prices will have full impact on the shipbuilder's profitability in the next two to three years.
The global shipbuilding industry is primarily dominated by conventional vessels like tankers, bulk-carriers and container vessels. As can be seen from the chart below, conventional vessels accounted for 69% of the world shipping order book at the end of 2005, followed by LNG carriers at 9%. In addition, there exist specialised categories like cruise ships that fall under 'Passenger Vessels' category and Offshore Supply Vessels (OSVs) that come under 'Other Non-cargo Vessels' category.
Demand drivers: Being a global industry, the fortunes of the shipbuilding industry are closely tied to the growth in world trade. The demand for ships can be classified into incremental demand and replacement demand. In case of incremental demand, growth in world trade increases the demand for vessels, which in turn leads to higher freight rates. The resultant higher freight rates trigger the demand for new vessels from the shipping companies. In case of replacement demand, the demand for vessels is dependent upon the age profile of the existing fleet as well as steel prices. Every ship has a useful life (25 to 30 years) after which it becomes uneconomical to operate them. Replacement demand is triggered when ships approach the end of their useful life. Higher steel prices also decide the extent of replacement demand as they lead to an increase in value of ships to be scrapped.
Major players in the shipbuilding countries: Global market environment in the shipping industry has undergone fundamental changes over the last two decades. For nearly three decades in the post World War II era, shipbuilding industry was dominated by Europe and the US. Shipbuilding being a labour intensive industry, the cost of labour plays an important determinant in a country's competitiveness position vis-a-vis others. With rising labour cost, shipbuilding activities have slowly moved away from 'high wage' Europe and US to low-wage Asia. Over the past 25 years, we have observed the decline of shipbuilding capacity in Europe coinciding with the growth of Japanese shipbuilding. As can be seen in the chart, the share of European Union has declined from 28% in 1983 to 7% in 2005. With the rising labour cost in the late 1980s, Japan was forced to scale down its shipbuilding activities and Korea emerged aggressively. In the past few years, China is taking away an increasingly larger market share of the new building contracts.
The shipbuilding industry is currently dominated by the Japanese and Korean shipyards. In 2005, they together accounted for 73% of the total world output (in number terms), followed by China at 13.5% and European Union (EU) at 7%. The largest shipbuilding companies in terms of capacity are Hyundai Heavy Industries, Daewoo Shipbuilding and Marine Engineering and Samsung Heavy Industries (all Korean).
The conventional large vessel segment like tankers, bulk carriers and container vessels is dominated by Korea, Japan and China. China's ambitions to become the world's largest shipbuilder for conventional vessels has resulted in Korea taking a back-seat in this segment and instead focus on new ship development areas like super-large LNG carriers. Japan has been struggling to maintain its market share due to dwindling workforce and higher labour cost. It is currently investing in technology to construct conventional vessels in a short period and thereby compete with China in this segment. Realising its inability to compete with Asian countries in the conventional segment, the EU shipyards have been focusing on 'Passenger Vessels' and 'Offshore Vessels' segment.
Next article in this series will cover an analysis of the Indian ship building industry.