BRS predicts market recovery amid collapse in yard capacity

French broker believes the removal of nearly half of the world’s shipyards could be the saving of the market

Barry Rogliano Salles (BRS) is tipping the shipping markets to recover on the back of a huge collapse in shipbuilding capacity.

Ordering levels have fallen back to their lowest since the 2009 crash and world shipbuilding capacity has been slashed to cope with the new market realities.

A combination of less capacity and limited ordering is now constraining new supply to over-tonnaged markets.

Since the peak in 2000, BRS estimates that in response to the shipping recession and lower contracting, global capacity has declined 35% to 45 million compensated gross tons (cgt) and that a further three million cgt could be lost this year.

But it is the fall in the number of yards that is the most striking. BRS estimates there are only 630 active shipyards today compared to a peak of 1,150 in 2000.

Commenting on 2016 in the brokers annual review, BRS president Tim Jones said: “The most significant and important step towards a healthier market was arguably the decline in global shipbuilding capacity.”

He believes the decline is set to continue and that yards across the Far East will be forced to cut back further.

“The effective supply of reliable yard capacity is clearly being rationalised,” Jones said. “BRS research leads us to believe that up to 50% of South Korean capacity, 20 to 30% of Chinese and 10 to 20% of Japanese capacity will disappear by 2018.”

He also believes a dramatically reduced global ship finance capability is playing a part in restricting investment in new ships. BRS estimates that debt and equity capital market funding for new ships halved in 2016 from $10bn to $5bn compared to the previous year.

“New banking regulations with Basel III ratios and compliance obligations have essentially made access to funds impossible unless, ironically, you don’t need them,” Jones said.

“This is a huge brake on supply, which will continue over the foreseeable future.”

Reflecting on a painful year for yards in 2016, Jones talked of the “quasi-extinction” of newbuilding orders and of newbuilding prices in “freefall”.

“The entire shipping market is under pressure and large swathes of the shipbuilding industry are now under threat from contraction or elimination,” he said.

Shipowners’ money and investment has headed for what was perceived as better value in the secondhand market rather then newbuildings.

According to BRS figures, 107.7 million dwt was ordered in 2015, falling to just 34.1 million dwt in 2016.

“The newbuilding market has also had to compete with the secondhand market, which offered many opportunities in 2016,” Jones said.

“As a matter of fact, about 88 million dwt was bought or sold on the secondhand market versus a total 34 million dwt in newbuilding orders.”

While orders have collapsed across all sectors, the fall in newbuilding contracts has been most marked for containerships, reflecting the chronic over-capacity and recession in that market.

Around 26.9 million dwt of boxship tonnage was ordered in 2015 but that fell back to just 3.3 million dwt in 2016.

“For the first time ever, the active containership fleet seems to have stalled,” Jones said.

Cancellations also continue to be a problem for yards, although not to the same extent as in previous years. BRS has revised its estimate of cancellations in 2015, up from nine million dwt to 13.2 million dwt.

It estimates a similar level of cancellations — 13.1 million dwt — in 2016, although it admits the figure may also have to be revised upwards because cancellations often take time to come to light.

Some 57% of cancellations in 2016 came in the dry bulk sector.

There have been much higher cancellations levels in the past. Cancellations accounted for 36.6 million dwt in 2009 and 38.6 million dwt in 2010. However, that reflects the significantly larger orderbook at the time as well as higher price levels.