Shipyards in Germany tells last year's decline in new orders is expected to continue this year.
Shipyards in Germany -- Europe's largest shipbuilder -- expect a price war with Asian rivals to break out this year amidst a drop in orders that has pushed four companies into insolvency, a top official said. Werner Lundt, managing director of the German Shipbuilding Association (VSM), told last year's decline in new orders is expected to continue this year.
With worldwide shipbuilding capacity forecast to be much higher than expected demand for years, conditions are ripe for a bruising battle to win business by cutting prices.
Lundt said estimates by European and Japanese shipbuilders see demand for all kinds of ships worldwide for the years starting 2010 until 2020 would be 35 million compensated gross tonnes (CGT) and for the period 2015 to 2020, it will be around 32 million. Expected capacity would rise to 70 million CGT.
This compares with 42 million CGT of completed ships in 2008 with a value of $97 billion, said VSM, citing broker Clarkson Research.
"This (overcapacity) makes us very nervous because we don't know how the other countries in Asia would react when they could not fill their capacities. We fear that a new competitive action will start over prices," he said.
Steep price falls in second-hand ships are already evident and make shipowners hesitate to order new vessels he said.
"The bubble in over-production has to evaporate and before that happens, the level of new orders would be very low," he said.
"But (price cuts) could come up in the course of the year. I am expecting that a certain amount of new orders will emerge in the market," he said.
He expected potential contracts would be for all types of ships except containers and bulkers, two areas marked by overcapacity.
Temporary staff cuts expected in 2009
Lundt said he expected shipyards to cut temporary staff this year. Some could also apply to put staff on short working hours late this year.
ThyssenKrupp is Germany's biggest shipbuilder, followed by two family-owned companies.
Germany -- ranked fourth after South Korea, Japan and China -- last year built 84 ships worth 4.45 billion euros ($5.63 billion), up from the 74 produced the year before, with new orders off by 34 percent to 46 ships.
He said 29 orders-- mostly container ships and general cargo types -- were cancelled in the fourth quarter, when two companies went insolvent. One more filed for insolvency in January.
Industry sources said the 29 orders had to be cancelled because German shipyards could not find around 900 million euros in financing to cover the cost of building them.
Before the credit crisis, German shipbuilders had the competitive advantage of getting bridging loans from local banks to buy materials and services for projects while awaiting final payments from owners.
Germany's HSH Nordbank, the world's biggest ship financier, has run into problems after being pummelled by the financial market crisis, forcing it to seek liquidity guarantees of as much as 30 billion euros from the government. Lundt said one of the reasons the 29 ships were cancelled was because there were no guarantee that owners would pay them.
The average annual new orders in German shipyards is 60-70 ships but Lundt said this year the new order level may not be enough to cover production for a full year.
The order backlog as of end-December was 172 ships, enough to cover production until possibly 2012, he said.
He said shipyards for small container ships -- the sector worst hit -- have switched to making ro-ro ships, passenger ships, yachts, dredgers, heavy lifts, practically "all the niches where the big ones in Korea are not engaged". He said a few shipyards have tapped the state-owned bank KfW's special credit programme for assistance.
"We are also asking our government to create orders for the navy. There is a certain amount of workload which can also come from the government," he said.
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