Chinese shipyards will continue to churn out more vessels in the tanker, dry-bulk and container segments although there is a surplus of tonnage in market and the global economic slowdown, panelists at the DNB investors conference in Singapore said this week.
"The Chinese will do what is in their power to make sure that [new] orders will come in. These measures could be market distorting," said Philip Clausius, CEO of First Ship Lease Trust, adding that it is difficult to predict how much further newbuild prices would fall.
Although China saw a 52% fall in orders for new ships in 2011 from levels seen in 2007, it was still the world's largest shipbuilder, accounting for 41% of the global share.
According to a Singapore-based sales and purchase broker, China has some 350 shipyards that are actively in business. An estimated 2,000 yards are currently operational in China. Beijing is targeting the inclusion of five Chinese shipyards among the top 10 in the world by 2015.
"The Chinese state will have tonnage directed to state-owned yards. For private yards, the incentive to take new orders is reduced. So this will create a floor for the new building price over the next couple of years," said Julian Proctor, managing director of Tiger Group Investments, adding that for social reasons, Chinese shipyards would not drop prices.
Panelist were also worried about various governments offering support to shipbuilding yards. Clausius expressed concern over major shipbuilding nations subsidizing their yards to attract ship buyers.
Also, debate ranged over whether shipowners would go for newbuilds or retrofit their ships with efficient engines and equipment.
"We want ships that are efficient or can be retrofitted to make them more efficient," said Jonathan Hill, managing director of Tufton Oceanic. But Proctor pointed out that retrofitting did not make economic sense and that the shipowner's decision would be to look at newbuilds.
On scrapping of tonnage, the speakers said it was at an all-time high at the moment and that the decision to scrap depended on the earnings received. "If the ship is bringing in negative cash flow, then you should scrap it. The scrapping rates have reached an all-time high," Khalid Hashim, CEO of Thailand's Precious Shipping Company, said.
The panelists noted that currently there is a two-tier market with the freight rate for older vessels lower than for modern ships, which could boost scrapping activity.
The slackening of China's economic growth could have a big impact on all segments of shipping, the speakers said. China's economy grew an annual 8.1% in the first quarter of 2012, which is the slowest in three years. Beijing has also cut its economic growth target for this year to 7.5%, down from a growth of 9.2% seen last year and 10.4% in 2010.
"Without China there would be no shipping market. If China sees serious slowdown, it would have great impact on all markets," Hashim said.
SLOW STEAMING HELPING THE VLCC MARKET
With bunker fuel prices going up, VLCC owners have resorted to slow steaming. Supertankers are currently steaming at 30 knots instead of the normal spread of 15-16 knots to cut down on bunker fuel consumption.
Slow steaming has helped shipowners garner better earnings from their vessels since the beginning of this year with time charter equivalent in the region of $30,000/day compared with last year's $20,000/day.
According to Nicolay Dyvik, head of DNB's Equity Research for Shipping, slow steaming has helped keep the utilization of the global VLCC fleet at 90% while only 70% of the tonnage would be tied up in the absence of it.
Delving into the potential of product tanker segment, First Ship Lease's Clausius said he was more positive on the long range tankers with an imbalance seen in global refining capacity, which is expected to see demand for these tankers swell.
"There is a disconnect in the market with the Medium Range tankers outperforming Long Range I and Long Range II," he said, adding that he expected to see a rearrangement in the freight rates between the MR and LR segments.