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Global shipbuilding

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  • 1. Global shipbuilding: An overview The global shipbuilding industry has been on an upswing over the past few years. In the period between 2000 and 2005, the world shipbuilding output has grown at a compounded annual rate of 8.3% based on gross tonnage (GT), as opposed to a growth of 4.8% achieved in the past 20 years (1985 to 2005). Strong demand and capacity constraints has led to the world's shipping order book to sales ratio increase to 3.5 times in 2005, higher than the historical average of 2.1 (between 1982-02). Shipyards remain fully booked in the medium-term with the delivery period, for the first time since the seventies, extending beyond three years. Since it is the waiting period, which new building prices closely follow as compared to freight rates, the strong new building prices are expected to be maintained over the medium-term. Also, the ships that have been currently booked at higher prices will have full impact on the shipbuilder's profitability in the next two to three years. The global shipbuilding industry is primarily dominated by conventional vessels like tankers, bulk-carriers and container vessels. As can be seen from the chart below, conventional vessels accounted for 69% of the world shipping order book at the end of 2005, followed by LNG carriers at 9%. In addition, there exist specialised categories like cruise ships that fall under 'Passenger Vessels' category and Offshore Supply Vessels (OSVs) that come under 'Other Non-cargo Vessels' category. Demand drivers: Being a global industry, the fortunes of the shipbuilding industry are closely tied to the growth in world trade. The demand for ships can be classified into incremental demand and replacement demand. In case of incremental demand, growth in world trade increases the demand for vessels, which in turn leads to higher freight rates. The resultant higher freight rates trigger the demand for new vessels from the shipping companies. In case of replacement demand, the demand for vessels is dependent upon
  • 2. the age profile of the existing fleet as well as steel prices. Every ship has a useful life (25 to 30 years) after which it becomes uneconomical to operate them. Replacement demand is triggered when ships approach the end of their useful life. Higher steel prices also decide the extent of replacement demand as they lead to an increase in value of ships to be scrapped. Major players in the shipbuilding countries: Global market environment in the shipping industry has undergone fundamental changes over the last two decades. For nearly three decades in the post World War II era, shipbuilding industry was dominated by Europe and the US. Shipbuilding being a labour intensive industry, the cost of labour plays an important determinant in a country's competitiveness position vis-a-vis others. With rising labour cost, shipbuilding activities have slowly moved away from 'high wage' Europe and US to low-wage Asia. Over the past 25 years, we have observed the decline of shipbuilding capacity in Europe coinciding with the growth of Japanese shipbuilding. As can be seen in the chart, the share of European Union has declined from 28% in 1983 to 7% in 2005. With the rising labour cost in the late 1980s, Japan was forced to scale down its shipbuilding activities and Korea emerged aggressively. In the past few years, China is taking away an increasingly larger market share of the new building contracts. The shipbuilding industry is currently dominated by the Japanese and Korean shipyards. In 2005, they together accounted for 73% of the total world output (in number terms), followed by China at 13.5% and European Union (EU) at 7%. The largest shipbuilding companies in terms of capacity are Hyundai Heavy Industries, Daewoo Shipbuilding and Marine Engineering and Samsung Heavy Industries (all Korean). The conventional large vessel segment like tankers, bulk carriers and container vessels is dominated by Korea, Japan and China. China's ambitions to become the world's largest shipbuilder for conventional vessels has resulted in Korea taking a back-seat in this segment and instead focus on new ship development areas like super-large LNG carriers. Japan has been struggling to maintain its market share due to dwindling workforce and higher labour cost. It is currently investing in technology to construct conventional vessels in a short period and thereby compete with China in this segment. Realising its inability to compete with Asian countries in the conventional segment, the EU shipyards have been focusing on 'Passenger Vessels' and 'Offshore Vessels' segment. Indian ship building industry to reach Rs 9,200 crore by 2015 The Indian shipbuilding and ship repair industry is likely to reach Rs 9,200 crore from the current level of just over Rs 7,310 crore, according to a study done by the industry body ASSOCHAM. The study 'Shipbuilding Industry in India: An overview', by The Associated Chambers of Commerce and Industry of India (ASSOCHAM), said that India accounts for just about one per cent of the global shipbuilding industry worth about Rs 7.3 lakh crore but is growing at a compounded annual growth rate (CAGR) of about 8 per cent. Globally, this industry is growing at a CAGR of about 24 per cent and is likely to reach Rs 14 lakh crore by 2015 owing to rising global sea borne trade, according to the study.
  • 3. "Lower costs of labour, availability of skilled workforce together with robust demand in the domestic market and a growing steel industry are certain factors that build up a strong case for shipbuilding sector in India," said Mr D.S. Rawat, secretary general of ASSOCHAM. "For a well balanced and comprehensively developed domestic shipbuilding and ship repair industry, the government should provide fiscal incentives to develop strong research and development facilities, designing capabilities and set up an auxiliary base to encourage the growth of the sector," said Mr Rawat. The overall cargo traffic at major ports in India is about 600 million tonnes and is likely to reach 1,230 million tonnes by 2015 and 3,000 million tones by 2020 growing at a compounded annual growth rate (CAGR) of about 20 per cent, said ASSOCHAM study. "For this India needs to furbish up its ports and the whole shipping infrastructure to enhance the handling capacity and facilitate operation of larger shipments to increase its share in the global maritime business," said Mr Rawat. "The government should rope in maritime states to identify and make land available, thereby seeking their contribution for setting up a new port or a shipyard in each of these states." "This also denotes huge scope for private sector and foreign direct investment (FDI) in the shipping industry and the maritime states can develop a composite project on the public-private partnership model," he said. China, South Korea and Japan are leading shipbuilding nations and cater to over 80 per cent of the global shipbuilding industry. China alone accounts for over 35 per cent of this global industry. India and Vietnam are upcoming centres for global shipbuilding. High input costs and rising costs of raw material, freight together with miscellaneous duties and taxes being imposed amounts to a huge price differential of about 50 per cent in building a ship in India and other countries, said ASSOCHAM. Besides, though the costs of labour in India is low compared to that in other nations but shipbuilding being a labour-intensive industry, fulfilling the requirement of skilled workforce is another significant problem being faced by the shipbuilding companies.
  • 4. World Shipbuilding Performance New Orders Completions Order Books

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