Wrong Timing For Shipyard Consolidation

Implications: Tradewinds reported that the list of suitors for the 50.4% stake being offered in Daewoo Shipbuilding & Marine Engineering (DSME) includes Hyundai Heavy Industry, Posco, the GS Group, and Hanwha Group.  Analysts expect a bidding war to result.  While a great time for sellers to unlock the value of the business, this is a terrible time for the competitors to acquire Daewoo. 

Analysis: The shipbuilding industry has enjoyed some very heady times the last few years.  Demand has been unprecedented, and most established builders have at least a three year orderbook.  Prices have doubled over the last five years and canceled orders can be refilled within days.

With three years to "coast," it seems a bit odd to be sounding a warning about shipbuilding equities.  The main issues are the excessive expansion of world shipbuilding capacity aligned with current demand against the inevitable drop-off in orders post-2011.

We have renewed the tanker fleet and have substantially expanded the drybulk and container shipping fleets simultaneously.  Shipbuilding demand cannot maintain the levels seen in the 2007-2010 time frame.  We have seen new orders placed this year at half the pace of last year, giving validation to the position that the good times are coming to an end.

The timing of consolidations should be in the 2010 to 2013 time frame.  The drop-off in new orders will make competition fierce and will spell the end for a number of competitors.  Consolidating now ensures that an excessive price will be paid for an asset that will have a very difficult time being profitable post-2010.