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Global Shipping Industry Suffers Late Arrival Of Downturn

by Ulrika Lomas,, Brussels

16 July 2009

An investigation by the Organisation for Economic Co-operation and Development (OECD) has confirmed that the economic downturn has hit shipping hard – new orders have contracted by up to 90% and cancellations have increased. It believes the situation is unlikely to improve for some time. Government officials at the OECD Council Working Party on Shipbuilding agreed to avoid enforcing protectionist policies or distorting the shipbuilding markets. Participants also agreed to restart negotiations on the Shipbuilding Agreement.

The OECD Council Working Party on Shipbuilding met in Paris on July 9-10, 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 will 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 very heavily by the economic downturn but the impact has taken some time to filter through the shipbuilding sector. There are two principal reasons for this according to the OECD:

Firstly, 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.

Secondly, 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.

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. The index recovered to a certain degree in the first half of 2009, although it is not yet 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 fell from 22.2 million compensated gross tons (cgt) (an internationally used unit of measurement that provides a common yardstick to reflect the output of commercial shipyard activity) in Q3 2007, to 12.3 million cgt in Q3 2008. This fell again to just over 1 million cgt in both 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 reported no new orders at all in the last twelve 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.

There is considerable concern that excess shipbuilding capacity, which was already looming as a problem despite the full order books, may now become more serious, as capacity freed up by ship completions will no longer be absorbed by new orders.

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 liquidity into the shipbuilding market, and have provided guarantees to facilitate the completion of new building contracts.

While some government support was understandable in the circumstances, and especially support offered to other sectors of the economy, participants nevertheless 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 towards a Shipbuilding Agreement to provide additional disciplines on subsidies and other support measures, as well as preventing market-distorting practices. Negotiations involving both OECD and non-OECD economies were put on hold 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.

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