Wartsila reports profits up, lower orders, and summarises the shipbuilding market

Finnish engine company Wärtsilä has recorded higher profits than expected for the second quarter of 2008, but is seing a slow down in new orders for the ship power division. The whole group recorded a 37% rise in sales for the quarter, with ship power still proving profitable, but new orders in the division are down.

The company reports that the trend of lower new vessel ordering continued, bringing the market to the same level as in 2003 and 2004 in terms of the number of new vessels ordered. As demand has remained relatively stronger in bigger tonnage vessels, Wärtsilä’s overall market size measured in tonnage is at 2006 levels. Some of this is attributed to general global uncertainty.

Looking at the world situation, the group says that following the somewhat slower first quarter of this year for Chinese shipyards, China has regained its leading position during the second quarter in terms of new vessel orders. For the first part of 2008, China?s share of new vessels ordered was 41% and Korea?s 37%. Europe?s share of the market was about 10% and Japan?s 4%. Other countries accounted for 8% of new orders. Measured in tonnage, Korea is dominant with almost 60% of the market. This is due to the market?s concentration on bigger tonnage for which Korean ship yards are most suited. As regards new orders for larger size vessels, June was the strongest ordering month so far, and after the dry bulk boom, there has been an increase in demand for big container vessels and tankers. Demand for bulk carriers has continued, driven by the attractive development in freight rates. Demand in the offshore segment during the period focused mainly on anchor handlers and bigger tonnage for deeper waters. The Brazilian oil discoveries, as well as Petrobras? announcement of its intention to significantly increase the size of its fleet, are very positive signals to the market. Demand in the cruise and ferry segment remained steady, while in the special vessel segment demand was strongest for tugs.

Wärtsilä?s market share for medium speed main engines declined to 32% (36% at the end of the previous quarter). This is mainly due to the slowdown in demand of the North Sea offshore market where Wärtsilä has a strong position. Wärtsilä?s market share for low speed engines increased to 16% (13) due to the success of the company?s medium size low speed engine series. The market share for auxiliary engines increased slightly to 8% (6) as a result of the positive trend in the Chinese market.

The order intake for ship power was at a good level and totalled EUR 467 million (673) for the second quarter of 2008, though this was 31% lower than the corresponding period last year. This, says Wärtsilä, is partially a reflection of the slowdown in the shipbuilding market that started at the beginning of 2008, which has affected Wärtsilä Ship Power earlier than expected, and partially due to capacity limitations. More capacity has been allocated to the currently strong power plant market.

For the review period January-June 2008 ship power?s order intake was ?1,224 million, a 3% growth from the corresponding period last year. Merchant vessel orders continued to be dominant with 50% of total ship power orders, with orders for general cargo and bulkers being the strongest within this segment. Offshore segment orders represented 25%, special vessels and cruise and ferry had 11% and 10% of orders received whereas navy received 4% of the total ship power orders for the review period.

Raw material prices have increased which will impact production costs globally in the future. Wärtsilä says that it monitors cost development closely. Other risks remain mainly related to the capacity constraints of the suppliers as a result of high global demand in key components. Wärtsilä?s measures to secure the availability of key components continue in close collaboration with the supply chain.

The group says that during the second quarter of 2008 no major shifts in the fundamentals of the shipping sector occurred. Freight rates remained very strong and ship prices still very high. The unrest in the financial markets put investment plans on hold especially in emerging shipbuilding countries, but business for established shipbuilders is still strong.

In 2008 the activity level of new vessel ordering is expected to be at significantly lower levels than during the past highly active years. From a historical perspective, markets remain active and the ordering activity in June evidenced, at least momentarily, a renewal of stronger ordering.

Investments in new projects are still being made and short term indicators remain favourable for Wärtsilä. During the third quarter, Wärtsilä Ship Power expects its ordering activity to continue at the same good level as during the second quarter. In the fourth quarter some slowdown is foreseen.