shipyards and the rise of the phoenix

A critical factor in offshore projects is the role of the shipyard as fabricator and integrator; however, in recent years those who might have chosen to invest in shipyards have been rewarded with burned fingers. 2017 midyear analysis [1] indicates that now might be the time for the phoenix to rise from the ashes, and the role of the shipyard to return to prominence. That said, we must still recognise that we live in interesting times; the landscape has changed, and so where will this ascension occur?

Clarksons Research[2] reports that in July this year there were 358 active shipyards (defined as yards with at least one unit of 1,000 gross tonnes, or greater than, on order). This is down by 62% from the 934 yards that were active in 2009, just before the shipbuilding cycle last peaked. In some cases, this decline has had catastrophic consequences. An example of such suffering is Korea’s STX Offshore & Shipbuilding. The corporation filed for bankruptcy protection in Texas, and the Seoul District Court approved a bankruptcy and rehabilitation plan in 2016. STX had already been heavily supported by the Korean banks for some considerable time as part of a ‘Voluntary Business Normalisation Plan’. As a result of these financial structures, STX has been forced to extensively rationalise its portfolio: withdrawing from China; the Saint-Nazaire yard looks likely to be acquired by Fincantieri, subject to French government approval; in Finland, STX Europe’s Rauma yard was closed, the Turku yard sold to Meyer Werft and the STX share of the Helsinki yard has been bought by their Russian joint venture partners. Meanwhile, buyers are still sought for the Jinhae yard in Changwon, South Korea. The legendary ex-chairman, Kang Duk-Soo, built STX into South Korea’s 12th largest conglomerate in just 10 years. On its collapse he was jailed, accused of diverting funds within the corporation to support ailing affiliates[3]

Likewise, ex-DSME Chairman, Ko Jae-ho, was indicted in 2016 for fraudulent accounting and dishonestly taking out loans. His sentence was reduced from 10 to 9 years in jail by the Seoul appellate court in July this year.[4] DSME now has the Korean Development Bank holding 79% of its ownership[5].

The pain has not just been felt in Korea. Between 2004 and 2014, the European shipbuilding market experienced a decrease in orders in compensated gross tonnage (CGT[6] of nearly 40%[7]. The bankruptcy of Poland’s two biggest shipyards has caused a 75% reduction in the shipbuilding workforce[8].

Brazil saw its almost extinct shipbuilding industry recapacitated in 2003 when Petrobras took to building all the tankers, rigs and production platforms it needed. In 2014, Petrobras had a $221 billion investment plan in place; this included building over 100 production platforms, drilling rigs and oil tankers. While the Brazilian shipyards once employed 82,000 workers, 2014 also saw the uncovering of a graft scheme at Petrobras and, by the close of 2015, Petrobras had written off $2billion, cancelled orders and stopped paying some of its suppliers, which resulted in 52,000 ship workers becoming unemployed[9].

There has also been some significant restructuring across the industry in response to these challenging times. Japan’s Mitsubishi Heavy Industries (MHI) consolidated its scattered shipbuilding and design workforce, bringing them together at the new vessel and marine technology centre which opened in Yokohama in July this year[10].  Even more significantly, MHI has agreed a basic alliance agreement with Imabari Shipbuilding and Namura Shipbuilding, while a further alliance with Oshima Shipbuilding is also on the cards[11].

The changing landscape of shipyards can be exemplified by looking to China. In 2011 there were 244 Chinese facilities which had delivered at least one ship (1,000+ GT). By the end of 2016, there were 117 active yards[12]. China also saw mergers and acquisitions continuously in its shipbuilding industry in 2016. COSCO Group created COSCO Shipbuilding Heavy Industry Co. Ltd, by integrating 13 large shipbuilding facilities and over 20 supporting service companies. In addition, China Shipbuilding Industry Corporation (CSIC) has combined Qingdao Beihai Shipbuilding Piping Processing Co. with Qingdao Wuchuan Heavy Industry Co. and CSIC (Wuhan) Marine & Offshore Engineering Co. CSIC has also looked to expand its offshore capability, joining with McDermott to create Qingdao McDermott Wuchuan (QMW). Yet just around the corner, the Qingdao Yangfan yard has gone into a bankruptcy restructuring process and is seeking new investors. CSIC is showing that in this challenging business environment survival, and ultimately success, will come from having a nimble business strategy for growth and expansion.

There is also evidence of different business strategies being employed at this time. For example, some of the major Chinese shipbuilding and repair organisations owned by China State Shipbuilding Corporation (CSSC), including Shanghai Shipbuilding, Guangzhou Shipyard International, and China Chengxi, have actively cut down stock and capacity. Others, including Hudong-Zhonghua, Waigaoqiao Shipbuilding, and Huangpu-Wenchong, have also proposed action plans consisting of capacity control and asset disposal.

So that is the landscape we saw in the rear-view mirror as we left 2016. What does 2017 look like?

Clarksons Research analysis indicates that in 2017 things are finally beginning to look better[13]. Initially, the Koreans might not have seen it that way. In January 2017, Japan’s backlog of 873 ships (20.06 million CGT) overtook Korea’s 473 ship backlog (19.89 million CGT)[14]. This must have stung, given that in 1999 Korea overtook Japan as industry leader, and although subsequently losing the crown to China, it has remained ahead of Japan for 17 years.

A primary reason for Japan’s resilience is that approximately half the ships built by Japanese companies are destined for the domestic market. Contrast this with Korea, where there is limited domestic need, and therefore about 90% of ships produced are for global clients[15], clients who are subject to the global downturn.

Another key differentiator is that Korea’s shipbuilding capability is concentrated in fewer yards than its rival’s capabilities. In 2010 China’s shipbuilding output was 19.0 million CGT, while South Korea accounted for 16.0 million CGT and Japan was in third place with 9.7 million. But this was produced by China’s 223 yards, and Japan’s 78 yards versus only 30 in Korea[16]. This results in the Korean top three yards, HHI, Samsung and DSME, still dominating the world market.

With what must have been an undoubtable sigh of relief from the Korean banks, at the close of the first half of 2017 Korea has regained its predominance over Japan, signing the most orders of any nation in the first half of the year. Clarksons Research [17]report for mid-2017 shows the Korean yards taking orders for 2.56 million CGTs, representing 34% of all ship orders from January to June. This order book resurgence was led by the Korean big three. The Hyundai yards (Hyundai Heavy; Hyundai Samho; Hyundai Mipo) took 72 ships worth $4.2 billion, Samsung booked 13 worth $4.8 billion, and DSME 7. It should be noted that $3.77 billion of Samsung’s order book is from two offshore plant orders, showing the value of offshore projects to the yards[18].

Meanwhile in China, Shanghai’s Changxing Jiangnan Shipyards have delivered Asia’s largest post World War II warship, last matched by the Japanese Tone heavy cruisers built in 1937-38. Two cruise ships are set to be developed between Fincantieri and China State Shipbuilding Corporation’s Shanghai Waigaqiao Shipbuilding, and the two companies have signed a letter of intent aimed at creating a cruise ship industrial park in Shanghai[19]. The signing took place at the Baoshan District, during a workshop for the Chinese government’s “One Belt, One Road” initiative.

So, things are beginning to look up: the slimmer Korean leviathans are getting orders once more. Japan is consolidating in alliances. China is looking hungrily at the more technically complex sectors of the marine construction market. They will doubtless make inroads into both the passenger ship and offshore markets, supported by the Chinese wanting home grown holiday cruises, and by China’s own oil companies. The above reveals a landscape that has suffered major changes and is experiencing the beginnings of an upturn, but with clear need for new ways of looking at how best to take advantage of new possibilities: an ideal environment for io’s systems thinking and disruptive approach.

As a result, in early July this year, an io team, led by CEO Richard Dyson, travelled to Qingdao to hold exploratory workshops with CSIC and QMW. Touring the yards revealed both breadth and depth of construction and design capability. It also highlighted the many synergies and opportunities for collaboration to bring greater value and certainty to our clients. To find out how working with io to leverage this collaborative approach and bring value to your projects, contact us at hello@iooilandgas.com.

 

[1] Gourde, S (2017), Shipping Half Year Report – any Better This Year? Clarksons Research, London

[2] Rumynin, I (2017), The Disappearing Shipyards: Not Much Of A Mystery? Clarksons Research, London

[3] http://english.yonhapnews.co.kr/full/2014/10/30/81/1200000000AEN20141030003751315F.html

[4] News Staff (2017), Report: Former DSME CEO Sentenced to 10 Years over Accounting Fraud, World Maritime News,

[5] Chambers, S (2017), ‘KDB ups stake in DSME’, Splash 24/7

[6] The CGT system was developed in 1977 by the OECD, and is the Gross Tonnage (GT) of the ship weighted to reflect its work content, by the shipbuilder, per GT.

[7] Ludwig, T. (2015), Survey on employment in European shipbuilding countries – selected results, Sector Committee Shipbuilding, Brussels.

[8] Eurofund, (2017) Representativeness of the European social partner organisations: Shipbuilding Sector, Dublin

[9] D. Phillips, (2017), In Lula’s Shadow, Brazil’s Shipbuilders Struggle to Right Themselves, New York Times

[10] Nikkei (2017), Mitsubishi Heavy to combine shipbuilding teams for overhaul, Nikkei Asian Review

[11] http://www.mhi.com/news/story/1706142066.html

[12] Cheng, Y (2017), Shipbuilding Capacity Consolidation: China Presses On, Clarksons Research, London

[13] Gourde, S (2017), Shipping Half Year Report – any Better This Year? Clarksons Research, London

[14] gCaptain (2017), Japan Overtakes South Korea in Ranking of Biggest Shipbuilding Nations, gCaptain

[15] Cho, K (2017), South Korean shipbuilding looming over a cliff as its overtaken by Japan, The Hankyoreh

[16] Kim, J. H. (2017), Shipbuilders come roaring back in first half, Korea JoongAng Daily, Kores

[17] Gourde, S (2017), Shipping Half Year Report – any Better This Year? Clarksons Research, London

[18] Kim, J. H. (2017), Shipbuilders come roaring back in first half, Korea JoongAng Daily, Kores

[19] Lin, J & Singer, P.W. (2017), China launches Asia’s biggest post-WWII warship, Popular Science