Engine manufacturers face cancellations

Wartsila is reportedly facing losing up to ?800m of its existing orderbook due to potential cancellations. With a current ship power orderbook of ?4.5bn ($5.8bn), this represents almost 18% of its engine orders and 11% of its total orderbook, which includes engineering services and shore power plants.

Wärtsilä said that up to 400 vessels in the large tanker and bulker segments were cancelled in 2008, and that it lost $333m in cancelled engine orders itself. While Wärtsilä has a record orderbook, 9% higher than last year, and has recorded healthy profits for 2008, up 38% to ?525m, the value at risk provides an insight into the health of the marine supply industries. “All engineering is suffering,” one analyst said after the Wärtsilä announcement.

“Cancellations and delays are the topics everywhere while clients assess their ability to pay, their need for the product and also their chances of changing the contract price if they think they have paid too much.”

Wärtsilä has a 37% share of the medium-speed main engine market and a 15% share of the low-speed engine market. If other European manufacturers have a similar portion of their orderbook at risk it could mean a potential ?3bn of marine engines and other propulsion system orders are at risk of being cancelled.

Last month a MAN spokesman said that it too feared that 10% of its ?4.3bn orderbook could be cancelled or postponed.

While Wärtsilä?s orderbook risk is mostly associated with deliveries in 2010, a drop in orders could mean that while 2009 is a good year for engine makers, next year might become more challenging if orders do not start to pick up, one Nordic analyst said.

Wärtsilä chief executive Ole Johansson said during the company?s fourth quarter presentation that the value of orders at risk was not a certainty. He added it not only included orders from less well capitalised owners but also those that are looking at changing their orders due to lower prices in the market or with a desire to delay their deliveries.

Wärtsilä was monitoring on-going discussions between owners and yards regarding cancellations and postponements carefully and would be tough on cancelled orders, he said. “There are few factual numbers but there is a lot of speculation,” he said. “When we talk about cancellations, we also talk about compensation and so far we have not returned a single cent and we will play hardball here.”