Global commercial vessel orders to rise 47% in 2013
By Feynman Jeon
Global commercial ship orders are forecast to increase significantly in 2013 as shipbuilding financing recovers from the worst plight in the first quarter and the order placement glut during 2006 to 2008 subsides in 2013.
Commercial ship order growth should boost growth potential of the Korean Big Three shipmakers _ Hyundai Heavy Industries, Samsung Heavy Industries and Daewoo Shipbuilding & Marine Engineering _ and their share prices upside. In particular, Korea’s second-tier shipbuilders appear to benefit from the positive order prospects as the charterage of oil tankers looks likely to return to positive territory in the second half.
In the wake of the eurozone crisis that began in August 2011, the shipbuilding financing market has contracted sharply, and the fallout is felt heavily in commercial vessel orders. Lending from European banks that accounts for 70 percent of syndicated loans have dried up because they were busy writing off insolvent loans to the troubled European countries.
In late November 2011, the EU Summit agreed to have banks in Europe increase their capital ratios by June this year. Until that happens, loans to commercial vessels will be out of reach. We expect the ship financing market will come back to life only after June.
A meaningful recovery in the ship financing market should come when credit becomes available again and charterage rates rise. All in all, the ship financing market will not regain full strength until 2013 when the supply glut of commercial vessels is resolved and charterage rates rises.
The ship financing market recovery in 2013 will coincide with a rise in charterage. The past recovery pattern of the fourth quarter in 2008 lends credence to our forecast. When the 2008 global financial crisis hit, banks wrote off assets and erased exposure to shipbuilders. The ship financing market's recovery came five quarters after banks beefed up their capital.
The five-quarter time gap can be explained by the following factors: firstly, the recapitalization of the banks had to precede the revival of loans and; secondly, after the completion of recapitalization in the second quarter of 2009, loans did not flow into the shipbuilding market until charterage rates, or freight rates, took a meaningful upturn in 2010.
Commercial vessel deliveries are projected to decline sharply from 2014 onward. The excessive orders placed during 2006 to 2008 will have lingering impacts until 2013. Given a two year period from order placement to delivery, commercial vessel supply will continue to fall short of demand into late 2014 or 2015 unless new orders pick up in 2013.
Commercial vessel orders are forecast to shrink 30 percent to 20 million compensated gross ton (CGT) in 2012, comparable to the levels of the early 2000s. Compensated gross ton is a unit of measurement for shipbuilding activities. The sharp decline in orders is the combined outcome of the 2008 crisis, the eurozone debt crisis and slowing GDP growth. More than anything, the main culprit is a supply glut created by excessive orders placed in 2006 to 2008.
Until 2013, ship supply growth will outpace traffic growth. Starting in 2014, the supply glut will begin to recede and new deliveries sharply decline. Based on orders placed so far, there will be few new deliveries for 2015 and beyond. If global economic growth recovers, shippers will need new vessels as early as in 2015 to catch up with traffic growth.
Orders for containers and oil tankers are forecast to increase sharply in 2013. The oversupply conditions of bulkers will be resolved a year later because of the order overhang from 2010.
The key earnings variables for order growth in 2013 are shipping companies' ability to obtain new orders and the freight rates' direction, which are still weak.
Global oil carriers have been operating in the red for seven quarters since the third quarter of 2010, and they will not be able to return to profit until after 2012. Based on Bloomberg’s consensus on net profit in 2013, many shipping companies still remain in the red. We expect shipbuilding orders from oil carriers to stay weak, and only a handful of resource carriers will be able to lead global order growth in 2013.
Bulker operators are performing better than oil tanker operators, which is somewhat unexpected as bulkers are the type of vessels ordered most excessively. Many bulker operators are forecast to turn to black in 2013 after incurring operating losses in 2012. Despite their relatively strong results, bulker operators’ 2013 shipbuilding order volume growth is likely to come in lower than an appropriate level, due to the excessively large volumes of existing shipbuilding orders.
Container ship operators are displaying the most favorable operating results among the three vessel types. Many of them, which turned to red in terms of operating profit in the first quarter of 2011, will likely turn back to black in the second quarter of 2012 and significantly boost net profit in 2013. Fewer container ships are to be delivered in 2015, and most operators will likely turn to black in 2013.
The global commercial vessel order volume is projected to register 29.2 million CGT in 2013. This will quench shipbuilding companies’ thirst to some extent, although it is much smaller than the global total shipbuilding capacity of 52 million CGTs.
Order volumes will grow most significantly for container ships. This will likely benefit Korean shipbuilders most significantly, as they command an 80 percent share in the ultra-container ship market.
Commercial vessel prices are displaying bearish movements for all vessel types, except for LNG carriers, due to sharp reductions in order volume. Historically, vessel prices rose about six months after order volume rebounded. Thus commercial vessel prices will likely hit bottom in the first half of 2013 and then make a gradual rebound.
The commercial vessel order growth expected in 2013 will come as a boon for all shipbuilders, although its extent and timing will vary. In particular, the order volume growth will boost to mid-term growth of the “Big Three” shipbuilders with immediate impacts on their share prices. However, the commercial vessel order growth will not contribute significantly to overall order growth because commercial vessels are still a relatively small portion of their order backlog.
On the other hand, positive effects on the share prices of the three second-tier shipbuilders ― Hyundai Mipo Dockyard, STX Shipbuilding, and Hanjin Heavy Industries ― will materialize later but with bigger impacts because commercial vessels take up a larger portion of their order backlog.