All time high market – but low profitability;

The last couple of years have been adventurous for most Norwegian newbuilding yards – in terms of new orders.
Never before has the industry experienced a better market. At the time of writing (December 2007) the combined orderbook is at astonishing close to NOK 70 billion. The comparable figure only four years ago, in 2003, was only NOK 3bn. In this business it is undoubtedly a short way from misery to boom.
But the record figure doesn’t only reflect joy and glory and a booming market fuelled by the high oil price, leading to a record demand for new offshore vessels. It also reflects that an increasing number of ships are being delayed from the yards, mainly because the equipment suppliers seem to have problems with delivering on time. The delays contribute to the aggregating figure.

Nevertheless, it is a fact that Norwegian shipbuilding is enjoying all time high activity. But it is also a fact that 80 per cent of the ships built by Norwegian yards are offshore vessels, which means that the shipbuilding industry is heavily dependent on the oil and gas industry. So where will the offshore industry go in the future?

The Norwegian Maritime Cluster is established as a sustainable phrase. Here illustrated by shipowner Ellen Forland (left) and yardowner Magnus Stangeland (right). The occasion is the naming seremony of MV “Geo Celtic”.

It seems that many players in the market have forgotten the near history, when the oil price was 10 dollars a barrel and many yards were idle. The history also shows that contracting of rigs falls suddenly, with severe consequences for the demand of ships. There are signs in the market that we are getting close to overcontracting now, at least in certain segments. The signals are both positive and negative. On the positive side is that very many shipowners have excellent results and high activity. The pressure is so high that many oil companies have to postpone projects because they don’t get access to equipment. The reason for the high pressure is of course the high oil price and the good access to capital.
On the negative side is the high cost pressure in the industry, shortage of labour, more expensive procurement of equipment and increased competition for both yards and shipowners. Many newcomers are tempted to enter the market in booming times, and this does not always lead to sound competition.

 

A typical Norwegian shipyard.

The overcontracting is nevertheless the main threat, illustrated by a few figures. In November 2007 the world fleet of anchorhandlers were 1,400 plus. 463 were under construction or on order. Although many of the existing will be replaced by newbuildings in the years to come, many of the new ones will be bigger and stronger and thus have increased capacity.
In addition to the anchorhandlers there are 705 “pure” supply vessels, with 225 under construction or on order. Both types have for the time being fantastic rates, but what will happen when alle the newbuildings enter the market in 2010? No doubt that the shipowners’ margins will come under severe pressure.
It is also a concern for Norwegian yards that foreign shipbuilders seems to take advantage of the squeezed capacity in Norway, by building up own capacity. Likewise is it a problem that Norwegian ship’s design find its way to foreign yards. Norwegian design is no longer a foreign word in low cost countries.
And now to the most serious problem for Norwegian shipbuilding industry:
Last year we wrote in this coloumn that the sad fact is regretfully that most of the industry have not been able to make a profit over the last years, despite the boom. And we expressed hope that the picture would change when the 2006 accounts were made public in the spring of ’07.
Sadly, it didn’t. The picture is if possible even darker. Approximately 50 per cent of Norwegian yards have red figures on the bottom line. The other half have just a small profit. Those who obviously benefit on Norwegian shipbuilding are the shipowners, the designers and equipment fabricators. Even the previous so successful Aker Yards has become less profitable during 2007, mainly because of the problems attributed to the acquisition of Kleven Florø and the cruise and ferries yards in Finland, illustrated by the NOK 400m write-off in Q2. It remains to be seen what will happen to the group after Korean STX Corporation took over 39 per cent of the shares.
The profitability of the industry is excellently exposed in a report by the Norwegian research institution Møreforskning. While 25 shipowning companies in the offshore business in 2006 achieved a profit margin of  impressive 32.5 per cent, 22 yards had a margin of only 3.6 per cent (Aker Yards’ offshore division 6.6 per cent). In between are the ship consultants (engineers/naval architects) with a profit margin of 25.3 per cent and the equipment fabricators with surprisingly only 6.8 per cent. These are figures that give reason for contemplation.
This ought to lead to the conclusion that consolidation, economies of scale and flexibility are key elements in a profitable future for Norwegian shipbuilding industry.

There is another dimension to the general picture, and that is the importance of the shipbuilding industry in the Norwegian society at large – the importance of it in terms of employment and subsequently basic settlement in rural areas. Most of the yards are scattered along the coastline, and are often cornerstone enterprises in the local communities. Local authorities are usually not concerned with the ownership structure of the yard as long as the activity is high, but they need to understand that there is a connection between the existence of employment, structuring of the industry and profitability. So it is also in the interest of society at large that the shipbuilding industry shapes itself into a structure which provides profitability.

Back to the major issue that occupies everybody’s mind these days. How long will the boom last? Have we seen the peak, or will the growth continue to escalate well into 2010 – and maybe 2011? Nobody knows. The only thing which is for sure, is that it will not continue forever. So what will happen when the downturn comes?

Norwegian yards have previously demonstrated an ability to adapt to changing times, and will certainly do it again. In a global world of shipbuilding Norwegian yards can be regarded as a niche industry, specialised in building smaller high tech vessels up to 20,000 dwt. Probably will we see a turn from the building of offshore vessels to smaller special ships, like oil products, chemical and gas tankers, reefers, ferries and fishing vessels. In these segments there has so far been limited competition from the big yards in the Far East and some Europeans countries.

stig.ottesen@skipsrevyen.no