The economic downturn has hit shipbuilding hard. New orders have contracted by up to 90% and cancellations have increased, which is likely to result in significant excess shipbuilding capacity. This outlook is unlikely to improve for some time. There was agreement that governments should avoid actions that increase protectionism or distort the shipbuilding market, and that serious efforts should be made to restart the paused Shipbuilding Agreement negotiations.
Statement from Ambassador Harald Neple (Norway), Chairman of the OECD Council Working Party on Shipbuilding (WP6)
The OECD Council Working Party on Shipbuilding met in Paris on 9-10 July 2009 to discuss the impact of the global economic crisis on shipbuilding, government responses to the crisis and possible future measures to deal with the longer term effects. The meeting concluded that:
In virtually all economies, the unprecedented financial crisis has led to a sharp contraction in investment, economic activity, employment and international trade. While initially shipbuilding was to some degree insulated from these effects because of very strong order books, in the last six months new orders have fallen by over 90% and cancellations are increasing. There is therefore growing concern about significant overcapacity.
Few of the economic stimulus packages introduced by governments have directly benefited the shipbuilding industry. So far support provided to the shipbuilding sector has largely been restricted to improving liquidity through loans, and providing guarantees in order to assist buyers to finance orders and shipyards to finance new construction.
There was a need for concerted action to address the growing problem of overcapacity in the shipbuilding industry, and participants agreed that governments should avoid measures that increase protectionism and distort the shipbuilding market.
Market distorting factors will be examined in detail at a workshop to be held back-to-back with the December 2009 meeting of the WP6, and the detailed Inventory of support measures maintained by the WP6 will be updated in preparation for that workshop. Non-OECD economies with significant shipbuilding sectors would be invited to participate in both the updating of the Inventory and the workshop.
In view of the rapid development in the market all participants agreed to full transparency of any government measures that may affect the shipbuilding industry.
There is considerable uncertainty as to the timing of any improvements in the shipbuilding sector, but a sustained recovery is unlikely for some time, given the oversupply in the world’s commercial shipping fleet, the size of the orderbook that will continue to add to that fleet as new vessels are delivered, and the potentially large excess in shipbuilding capacity.
The shipbuilding industry has been hit late, but very heavily, by the economic downturn
The recent falls in orders, which are virtually unprecendented, were triggered by the economic downturn, but that impact too ksome time to filter through to the shipbuilding sector. There are two principal reasons for this.
First, the construction of ships is a significant undertaking with long lead times and the impacts of economic downturns need to work their way through the global demand and supply chain before ordering patterns for new vessels are affected, so that changes in economic conditions do not impact immediately on the industry.
Second, shipbuilding has experienced an ordering boom over the past decade, and most yards have strong order books. Although shipbuilders are now under pressure from ship buyers to cancel or defer contracts, the order books have to some extent cushioned the immediate impact of the crisis.
However, there has been strong evidence over the last six months that shipbuilding has not escaped the effects of the economic crisis. The Baltic Dry Index, a measure of the demand for dry bulk capacity, and an indirect proxy of global economic trends, fell dramatically (from a peak of around 11,000 to below 1,000) in the second half of 2008, although it has to some degree recovered in the first half of 2009, although it is not clear whether this recovery will be sustained. This is a very strong indication that the supply of shipping exceeds demand, and this, together with the significant orders already held by shipbuilders has meant that new vessel orders have now virtually dried up.
New orders reported fell from 22.2 million cgt in Q3 2007, and 12.3 million cgt in Q3 2008, to just over 1 million cgt in each of the last quarter of 2008 and the first quarter of 2009, a fall of around 90% from its peak. Virtually every shipbuilding economy has experienced an almost unprecedented fall in new orders, with some economies having reported no new orders at all in the last 12 months. New order patterns of the last six months have been erratic, indicating a weak and uncertain market. Expectations are that this will continue for some time.
Korea, Japan and China remain the largest shipbuilding economies, and their combined orderbooks totalled around 151 million cgt at the end of March 2009; more than 80% of the total world orderbook. This represents around 48 months of production, based on 2008 production results, but, it is unclear how seriously those order books will be affected by requests for cancellations or deferment.
There is considerable concern that excess shipbuilding capacity, which was already looming as a problem despite the full order books, may now become significantly more serious, as capacity freed up by ship completions will no longer be absorbed by new orders.
Impact of government interventions
Some governments have responded by extending loans and credit guarantees to both yards and ship buyers. Their aim is to minimise bankruptcies among enterprises unable to deal with the combined effects of tightening capital and liquidity and a collapsing order book.
Reports on support measures benefiting shipbuilding, indicate that governments have so far largely resisted providing direct or indirect subsidies to their industries. Instead, they have preferred to inject liquidy into the shipbuilding market, and providing guarantees to facilitate the completion of newbuilding contracts.
While some government support was understandable in the circumstances, and especially the given support offered to other sectors of the economy, participants nevetheless recognised that government interventions can have undesirable consequences on markets, and that measures for assisting industries must be transparent, temporary and WTO consistent, to minimise distortion on trade and investment.
There were also calls for the early resumption of negotiations at the OECD aimed at Shipbuilding Agreement to provide additional disciplines on subsidies and other support measures, and market distorting practices. Those negotiations, which involved both OECD and non-OECD economies, were paused in 2005.
As well as the OECD members, the meeting was attended by Romania as a full participant, and Brazil, China, Russia, Chinese Taipei and Ukraine as ad-hoc observers. Together, the participants accounted for around 95% of world shipbuilding production in 2008.
For further information about the work of the OECD Council Working Party on Shipbuilding (WP6), journalists are invited to contact Danny Scorpecci of the OECD’s Science, Industry and Technology Directorate (firstname.lastname@example.org) or phone +33 1 45 24 94 33.