Shipyard Capacity Conundrum: What

Next?
Dr Adam Kent - Maritime Strategies International (MSI)
8th Annual Marine Money London Ship Finance Forum – 25th Jan 2016
 Agenda

Shipyard Capacity Conundrum: What Next?

1. The ‘Issue’

2. Current Situation

3. Solutions

4. The Link

5. When does NB begin to make

sense?

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 Shipyard Capacity Conundrum

The ‘Issue’

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 Contracting Perfect Storm Timeline

4
© Maritime Strategies International Ltd.
 Evolution of Effective Shipyard Capacity
Mn CGT
60
Other Europe China Korea Japan

50
Orders supported a rapid
increase in shipyard
40 capacity

30

20

10

0
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
© Maritime Strategies International 5 www.msiltd.com
 Chinese Yard Proliferation

200
China and Korea adopted
175
different growth strategies
150
125
100
75
200
50 200
175
25 175
150
0 150
125

2000

2007

2016
125
100
100
75 South Korea
75
50
50
25
25
0
0
2000

2007

2016

2000

2007

2016
China
Japan

# of yards taking contracts for ocean going vessels

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 Shipyard Capacity Conundrum

Current Situation

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 2016 Example
Bankruptcies & Restructurings

Year
Shipyard Country Status
Reported
2016 Samsung Heavy Industries South Korea Self Restructuring
2016 STX Offshore & Shipbuilding South Korea Restructuring
2016 Zhong Chuan Heavy Industry Shipbuilding China Bankrupt
2016 DSME South Korea Self Restructuring
2016 Hyundai Heavy Industries South Korea Self Restructuring
2016 Sainty Marine Co. China Bankrupt
2016 Wuzhou Shipbuilding China Filed for bankruptcy
2016 Sinopacific Zhenjiang China Bankrupt
2016 Sinopacific Yangzhou Dayang China Restructuring
2016 Dung Quat Yard Vietnam Possible bankruptcy
2016 Qingdao Yangfan Shipbuilding China Bankrupt

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 2016 Juxtaposition
Mn CGT
14
Deliveries Contracts
12
Orderbooks eroded rapidly
10 in 2016

0
South Korea

Japan

Europe

Others
China

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 Quarters Since Last Order

Increasing number of
yards redundant

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 Is there still an issue?
Actual/Scheduled Deliveries Empty Capacity

South Korea China

12
16
10
14
8 12
10
6
8
4 6
4
2
Mn CGT

2
0 0
2014

2015

2016

2017

2018

2019

2014

2015

2016

2017

2018

2019
Japan Others
9
5
8
7 4
6
5 3
4
2
3
2
1
1
0 0
2014

2015

2016

2017

2018

2019

2014

2015

2016

2017

2018

2019
© Maritime Strategies International 11 www.msiltd.com
 2016 – The Reality
Mn CGT
25
2016 scheduled 2016 actual

20
Chinese phantom
orderbook strikes again
15

10

South Korea

Other
Japan
China

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 Phantoms – The Rationale Explanation
Fate of 2016 – Non Deliveries 2016 Non Deliveries – Year of Contract

pre 2010
2010
Slipped 1 year 2011
Slipped 2 years 2012
Cancelled 2013
2014
2015

2016 Non Deliveries – Sectors to Blame Reoccurring Nightmare – 2015*

S Korea
Tanker
Bulker China
Gas Japan
Container Other
Other

* Vessels scheduled for 2015

delivery that are still on order

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 Q4 2016 Orders and Time to Delivery
# of vessels China Japan S Korea
20

18
Recent orders support the view that over
16 a third of the Chinese
orderbook will ‘disappear into the night’
14

12

10

0
12 to 18

18 to 24

24 to 30
months

months
months

months

months
0 to 12

30+
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 Shipyard Capacity Conundrum

Solutions?

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 Contracting Drivers

Cargo Demand Replacement Tonnage Earnings Obsolescence

Herd Mentality Market Insight Calculated Strategy Investment Thesis

16 www.msiltd.com
 Cargo Growth

Increase in cargo growth

although ‘average’ levels

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 Replacement Tonnage
Mn CGT
250 80%
25+ Yrs old 20-24 Yrs old 15-19 Yrs old
10-14 Yrs old 5-9 Yrs old 0-4 Yrs old
% over 20 years (RH Axis) 70%
200 Fleet remains young
(looks better in 5yrs time) 60%

50%
150

40%

100
30%

20%
50
10%

0 0%
LNG

FCC

RoRo

Vehicle
Bulker

Reefer
LPG

MPP

Cruise ship
Oil Tanker

Chemical

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 Contracting Forecast
Mn CGT PCC/RoRo/RoPax/Cruise MPP
120 FCC Gas 100%
Container Bulker
Tankers % Commodity 90%
100
80%

70%
80
60%

60 50%

40%
40
30%

20%
20
10%

0 0%
2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019
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 Business Model - Grass is Always Greener

SE Asia China Korea any

Germany

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 China Shipyard Evolution-
Contracting Share by Vessel Type
Others Containerships Gas Carriers
% Share Chemical Tankers Bulkers Oil Tankers
100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%
2011

2016

2019
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 A Cog in a Larger Machine - Diversification

Source: Hyundai Heavy Industries I.R.

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 Domestic Ordering

Japan China
International Domestic International Domestic
% Share % Share
100% 100%
90% 90%
80% 80%
70% 70%
60% 60%
50% 50%
40% 40%
30% 30%
20% 20%
10% 10%
0% 0%
2010

2011

2012

2013

2014

2015

2016

2010

2011

2012

2013

2014

2015

2016
China cannot rely on domestic orders – unlike Japan

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 Chinese Shipyard -
Extreme Self Help Scenario
Mn CGT Incremental Chinese shipping demand * Chinese 20+ year fleet replacement **

14

12
Enough to keep Chinese yards
busy for a couple of years
10

0
2017

2018

2019
* Incremental demand taken from MSI’s econometric models (tanker, bulker, container only) based on cargo moved translated into requirement for shipping
** Chinese 20+ year fleet assumes all Chinese vessels are scrapped once they are 20 years old and are replaced with new contracted tonnage

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 Shipyard Capacity Conundrum

The Link

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 Why’s it Important?

Newbuilding Prices part of the secondhand price jigsaw

Shipyard Capacity is no longer a limiting factor

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 0%
10%
20%
30%
40%

-40%
-30%
-20%
-10%
Q1 09 VLCC
Q2 09
Q3 09
Q4 09
QoQ % Change

Q1 10
Q2 10
Q3 10

© Maritime Strategies International

Q4 10
Q1 11
Q2 11
NB Price

Q3 11
Q4 11
Q1 12
Q2 12
Q3 12

27
Q4 12
Q1 13
1 Yr TC Rate

Q2 13
Q3 13
Q4 13
Q1 14
Q2 14
5 Yr Price

Q3 14
Q4 14
Q1 15
Q2 15
Q3 15
Q4 15
Q1 16
Directional Analysis

Q2 16
Q3 16
Q4 16
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 Quarters Where 2nd hand Price Moves with NB
Price Only
Since 1990
# of Quarters
120
No Yes

100

80

60

40

20

0
Supramax

Panamax

VLCC
Aframax
Capesize

MR

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 NB Price Outlook

FC Pricing Power - YARD

FC Pricing Power - OWNERS

FC = forward cover

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 Yards Don’t Just Disappear

Yards have become ghost

towns… but haven't disappeared

Source: Google Earth

© Maritime Strategies International 30 www.msiltd.com
 Shipyard Elasticity
Mn CGT
60
Other Europe China Korea Japan

50

40

30

20

10

0
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
2022
© Maritime Strategies International 31 www.msiltd.com
 Shipyard Capacity Conundrum

When does NB
begin to make
sense?

© Maritime Strategies International www.msiltd.com

 MSI - FMV
• MSI Forecast Marine eValuator (FMV) is the first web-based tool to provide forecast and historical price
data covering virtually all of the deepsea shipping fleet.

• Data includes forecasts of newbuilding, second-hand prices, 1 year timecharter rates and operating costs
for specific vessels.

• MSI FMV draws on MSI’s proven, proprietary models and a consistent cross-sectional view across all
principal shipping sectors. It puts asset values in the context of the near term market to enable reliable
benchmarking with outputs based on annual averages.

• Coverage:
Crude Oil Tanker Chemical Tanker Multi Purpose

Product Oil Tanker LPG Carrier Containership

Dry Bulk Carrier LNG Carrier PCC/PCTC

PSV
AHTS www.msiltd.com/fmv

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 IRR - NB versus Modern Tonnage

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 Thank you for listening
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 MSI Background

For over 30 years, MSI has developed integrated relationships with a diverse client
base of financial institutions, ship owners, shipyards, brokers, investors, insurers
and equipment and service providers.

MSI’s expertise covers a broad range of shipping sectors, providing clients with a
combination of sector reports, forecasting models, vessel valuations and bespoke
consultancy services.

MSI is staffed by economists and scientists offering a structured quantitative

perspective to shipping analysis combined with a wide range of industry
experience.

MSI balances analytical power with service flexibility, offering a comprehensive

support structure and a sound foundation on which to build investment strategies
and monitor/assess exposure to market risks.

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 Disclaimer

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Strategies International assumes no responsibility for errors of fact, opinion or
market changes, and cannot be held responsible for any losses incurred or action
arising as a result of information contained in this document.

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