Shipyard Capacity Conundrum: What Next? Dr Adam Kent - Maritime Strategies International (MSI) 8th Annual Marine Money London Ship Finance Forum 25 th Jan 2016
Agenda Shipyard Capacity Conundrum: What Next? 1. The Issue 2. Current Situation 3. Solutions 4. The Link 5. When does NB begin to make sense? Maritime Strategies International 2
Shipyard Capacity Conundrum The Issue Maritime Strategies International
Contracting Perfect Storm Timeline Maritime Strategies International Ltd. 4
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 60 Mn CGT Evolution of Effective Shipyard Capacity Other Europe China Korea Japan 50 40 Orders supported a rapid increase in shipyard capacity 30 20 10 0 Maritime Strategies International 5
2000 2007 2016 2000 2007 2016 2000 2007 2016 Chinese Yard Proliferation China and Korea adopted different growth strategies 200 175 150 125 100 200 175 150 125 100 75 50 25 0 75 50 25 0 South Korea 200 175 150 125 100 75 50 25 0 China Japan # of yards taking contracts for ocean going vessels Maritime Strategies International 6
Shipyard Capacity Conundrum Current Situation Maritime Strategies International
2016 Example Bankruptcies & Restructurings Year Reported Shipyard Country Status 2016 Samsung Heavy Industries South Korea Self Restructuring 2016 STX Offshore & Shipbuilding South Korea Restructuring 2016 Zhong Chuan Heavy Industry Shipbuilding China Bankrupt 2016 DSME South Korea Self Restructuring 2016 Hyundai Heavy Industries South Korea Self Restructuring 2016 Sainty Marine Co. China Bankrupt 2016 Wuzhou Shipbuilding China Filed for bankruptcy 2016 Sinopacific Zhenjiang China Bankrupt 2016 Sinopacific Yangzhou Dayang China Restructuring 2016 Dung Quat Yard Vietnam Possible bankruptcy 2016 Qingdao Yangfan Shipbuilding China Bankrupt Maritime Strategies International 8
South Korea China Japan Europe Others 2016 Juxtaposition Mn CGT 14 12 10 Deliveries Contracts Orderbooks eroded rapidly in 2016 8 6 4 2 0 Maritime Strategies International 9
Quarters Since Last Order Increasing number of yards redundant Maritime Strategies International 10
2014 2015 2016 2017 2018 2019 2014 2015 2016 2017 2018 2019 Mn CGT 2014 2015 2016 2017 2018 2019 2014 2015 2016 2017 2018 2019 Is there still an issue? Actual/Scheduled Deliveries Empty Capacity South Korea China 12 10 8 6 4 2 0 16 14 12 10 8 6 4 2 0 Japan Others 9 8 7 6 5 4 3 2 1 0 5 4 3 2 1 0 Maritime Strategies International 11
China Japan South Korea Other 2016 The Reality Mn CGT 25 2016 scheduled 2016 actual 20 15 Chinese phantom orderbook strikes again 10 5 0 Maritime Strategies International 12
Phantoms The Rationale Explanation Fate of 2016 Non Deliveries 2016 Non Deliveries Year of Contract Slipped 1 year Slipped 2 years Cancelled pre 2010 2010 2011 2012 2013 2014 2015 2016 Non Deliveries Sectors to Blame Reoccurring Nightmare 2015* Tanker Bulker Gas Container Other S Korea China Japan Other * Vessels scheduled for 2015 delivery that are still on order Maritime Strategies International 13
0 to 12 months 12 to 18 months 18 to 24 months 24 to 30 months 30+ months Q4 2016 Orders and Time to Delivery 20 18 16 14 # of vessels China Japan S Korea Recent orders support the view that over a third of the Chinese orderbook will disappear into the night 12 10 8 6 4 2 0 Maritime Strategies International 14
Shipyard Capacity Conundrum Solutions? Maritime Strategies International
Contracting Drivers Cargo Demand Replacement Tonnage Earnings Obsolescence Herd Mentality Market Insight Calculated Strategy Investment Thesis 16
Cargo Growth Increase in cargo growth although average levels Maritime Strategies International 17
Oil Tanker Bulker Chemical LPG LNG FCC MPP Reefer RoRo Cruise ship Vehicle 250 200 150 100 Mn CGT Replacement Tonnage 25+ Yrs old 20-24 Yrs old 15-19 Yrs old 10-14 Yrs old 5-9 Yrs old 0-4 Yrs old % over 20 years (RH Axis) Fleet remains young (looks better in 5yrs time) 80% 70% 60% 50% 40% 30% 50 20% 10% 0 0% Maritime Strategies International 18
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Contracting Forecast Mn CGT PCC/RoRo/RoPax/Cruise MPP 120 FCC Gas Container Bulker Tankers % Commodity 100 80 60 40 20 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0 0% Maritime Strategies International 19
Business Model - Grass is Always Greener SE Asia China Korea Germany Maritime Strategies International 20
2011 China Shipyard Evolution- Contracting Share by Vessel Type 2016 2019 % Share 100% Others Containerships Gas Carriers Chemical Tankers Bulkers Oil Tankers 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Maritime Strategies International 21
A Cog in a Larger Machine - Diversification Source: Hyundai Heavy Industries I.R. Maritime Strategies International 22
2010 2011 2012 2013 2014 2015 2016 2010 2011 2012 2013 2014 2015 2016 Domestic Ordering Japan China % Share 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% International Domestic % Share 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% International Domestic China cannot rely on domestic orders unlike Japan Maritime Strategies International 23
2017 Chinese Shipyard - Extreme Self Help Scenario 2018 2019 14 Mn CGT Incremental Chinese shipping demand * Chinese 20+ year fleet replacement ** 12 10 Enough to keep Chinese yards busy for a couple of years 8 6 4 2 0 * Incremental demand taken from MSI s econometric models (tanker, bulker, container only) based on cargo moved translated into requirement for shipping ** Chinese 20+ year fleet assumes all Chinese vessels are scrapped once they are 20 years old and are replaced with new contracted tonnage Maritime Strategies International 24
Shipyard Capacity Conundrum The Link Maritime Strategies International
Why s it Important? Newbuilding Prices part of the secondhand price jigsaw Shipyard Capacity is no longer a limiting factor Maritime Strategies International 26
Q1 09 Q2 09 Q3 09 Q4 09 Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11 Q4 11 Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 Q1 14 Q2 14 Q3 14 Q4 14 Q1 15 Q2 15 Q3 15 Q4 15 Q1 16 Q2 16 Q3 16 Q4 16 Directional Analysis VLCC QoQ % Change NB Price 1 Yr TC Rate 5 Yr Price 40% 30% 20% 10% 0% -10% -20% -30% -40% Maritime Strategies International 27
Supramax Quarters Where 2 nd hand Price Moves with NB Price Only Panamax Capesize MR Aframax VLCC Since 1990 # of Quarters 120 No Yes 100 80 60 40 20 0 Maritime Strategies International 28
NB Price Outlook FC Pricing Power - YARD FC Pricing Power - OWNERS FC = forward cover Maritime Strategies International 29
Yards Don t Just Disappear Yards have become ghost towns but haven't disappeared Source: Google Earth Maritime Strategies International 30
1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 60 Mn CGT Shipyard Elasticity Other Europe China Korea Japan 50 40 30 20 10 0 Maritime Strategies International 31
Shipyard Capacity Conundrum When does NB begin to make sense? Maritime Strategies International
MSI - FMV MSI Forecast Marine evaluator (FMV) is the first web-based tool to provide forecast and historical price data covering virtually all of the deepsea shipping fleet. Data includes forecasts of newbuilding, second-hand prices, 1 year timecharter rates and operating costs for specific vessels. MSI FMV draws on MSI s proven, proprietary models and a consistent cross-sectional view across all principal shipping sectors. It puts asset values in the context of the near term market to enable reliable benchmarking with outputs based on annual averages. Coverage: Crude Oil Tanker Chemical Tanker Multi Purpose Product Oil Tanker LPG Carrier Containership Dry Bulk Carrier LNG Carrier PCC/PCTC AHTS /fmv PSV Maritime Strategies International 33
IRR - NB versus Modern Tonnage Maritime Strategies International 34
Thank you for listening Maritime Strategies International 35
MSI Background For over 30 years, MSI has developed integrated relationships with a diverse client base of financial institutions, ship owners, shipyards, brokers, investors, insurers and equipment and service providers. MSI s expertise covers a broad range of shipping sectors, providing clients with a combination of sector reports, forecasting models, vessel valuations and bespoke consultancy services. MSI is staffed by economists and scientists offering a structured quantitative perspective to shipping analysis combined with a wide range of industry experience. MSI balances analytical power with service flexibility, offering a comprehensive support structure and a sound foundation on which to build investment strategies and monitor/assess exposure to market risks. Maritime Strategies International 36
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