High newbuild prices forces slowdown in orders

Asia’s major shipyards and international shipowners are heading for a clash, as the latter appear reluctant to place new orders unless prices go down. Shipyards, on the other hand, have no intention of backing down, having secured numerous orders until 2009.

With shipyards able to wait, any ships ordered now would not be ready before the second half of 2008, making shipowners more hesitant. Recent reports suggest that ship deliveries will reach 28 million tonnes in size during 2005 against just 18 million tonnes in 2000. As for 2007 and 2008, this figure will rise as high as 31 million tonnes per year.

It is also clear that in the last few years the shipbuilding community has reached its limits, as since 2000 orders for container ships have risen by 125%, with about 9 million tonnes to be delivered from 2006 to 2008, while in 2007 alone 12.5 million tonnes of tanker capacity is expected to enter the market. However, shipping companies’ expectations are not as optimistic as they were even a few months ago. The recent decline in freight rates across most markets for the majority of vessels has considerably undermined the optimism of shipowners. They therefore appear unwilling to submit new orders unless costs drop. Clarkson, the international research company, was the first to note a few weeks ago that after three straight years of rate rises, the market is now changing.

Recent reports by international analysts have suggested that from 2006 new ship orders could drop to 20-25 million tonnes and as low as 15 million tonnes in 2007, from an order level over the last three years remaining at 40 million tonnes annually. As a result, shipbuilding prices may stay put for the next quarter, but as the year’s end draws near and new orders seem to lose steam it is likely that shipyards will be forced to adjust their prices downward. This adjustment is expected to involve a 15% discount for 2006 and another 15% for 2007.

Although the shipbuilding community has tried to put on a united front to keep prices at current levels and not succumb to the shipowners’ pressure, many observers believe that the front is already cracking due to pressure from shipyards in China and Vietnam. Interestingly, the price of steel, the main raw material for ships, has dropped in Korea and this is expected to be the first sign for the decline of raw material supply costs for shipyards.