Credit Crunch Not A Factor For Overall Shipbuilding Industry

Implications: The impact of the "credit crunch," while real for individual companies, is not a factor for the overall shipbuilding industry.  The few building slots that have been canceled by owner default have been readily resold at higher margins.  The drop-off in post-2010 orders has its roots in oversupply of new ships and shipbuilding capacity.

Analysis: The extreme demand for new ships had its roots in the concurrent fleet renewals/expansion of container shipping, liquid bulk shipping, and dry bulk shipping.  Container shipping was a result of robust demand.  Liquid bulk shipping was an artificial early fleet renewal due to regulatory changes.  Dry bulk was a combination of fleet age and unprecedented demand for the Chinese steel industry.

As with other historical shipping cycles, we have overbuilt capacity in each of these trades.  Container shipping is already seeing weak rates.  Liquid bulk will be quick to follow, with dry bulk shipping a close third.  Each of these will experience different recovery times.

For shipbuilding, new orders are being placed this year at roughly half the level of last year.  These orders are being spread over an increased number of facilities.  These orders (2011+ delivery) are also much more suspect than orders during the 2005-2010 time frame.

While some yards are well-positioned to take advantage of the continuing boom in rig construction, FPSO conversion, and other E&P activities, we are already seeing facilities moving to take advantage of this market to replace softening demand for traditional shipbuilding.  Korean and Chinese yards have received orders in this area, and others will follow.

With the exception of a few, well-entrenched specialty yards, it will be a very difficult market post-2011.