VSM calls for fleet renewal to offset COVID-19 effect

Malcolm Latarche

Malcolm Latarche · 20 May 2020

ShipInsight


VSM, the German body representing shipbuilders and marine equipment manufacturers, has predicted a slump in demand and called for an increase in government ship building to protect the industry from the impact of COVID-19.

In a statement issued yesterday, VSM said shipbuilding has always been a seismograph for long-term development lines in world trade. 95% of the global exchange of goods is handled by ship. New ships are ordered when the market expects positive developments. SARS-CoV-2 (COVID-19) not only leads to short-term distortions, but also to considerable uncertainties for the medium-term development. The sharp increase in public and private sector debt will result in high consumption losses. Existing trends that impede the global exchange of goods will be reinforced. Global systemic tensions, especially between China and the USA, are intensifying.

German corona

In such an environment, investment decisions related to capital goods such as ships are typically postponed. Therefore, the shipbuilding sector should prepare for an extended period of low demand around the globe. Considering the weakness of the shipbuilding market since 2016 – with the global newbuilding orderbook remaining more than 40% below production over the past four years – this additional drop in demand will severely worsen the current under-utilisation of the world’s shipbuilding capacity. Cancellations of confirmed orders could further exacerbate the situation. Intensified price dumping practices and subsidy races can be observed already today.

So far, both German and European shipbuilding have been able to decouple themselves from the weak global shipbuilding economy by successfully focusing on high-tech segments. On average, the European pre-Coronavirus orderbook would have kept shipyards busy for more than four years, much longer than in other shipbuilding countries such as China, South Korea or Japan, where the current orderbooks would last roughly two years only.

However, the larger order backlog cannot hide the fact that the European market segments are hit particularly hard and that complex projects require longer lead times. Across the range of products made in Europe, more than 3.5 years on average pass between the signing of a newbuilding contract and the ship's delivery; in the case of passenger ships and yachts, the pre-contract phase sometimes takes a similar amount of time.

To date the most successful shipping segment – the cruise sector – has ordered its ships predominantly (95%) in Europe. But this ship type has been hit the hardest by the pandemic. While cargo vessels are suffering from a reduced cargo volume, the cruise industry has seen its operation come to a total standstill. therefore, it is unlikely that any new orders will be placed in this segment for years to come.

However, for VSM it is important to underline that the shipbuilding crisis will not be limited to the cruise segment alone. Even order from public entities (naval and other government vessels) will not be exempted from the consequences of the pandemic, as the increasing public debt in the wake of the crisis management will limit investment capacity worldwide. Therefore, when considering crisis management in the shipbuilding industry, the industry as a whole must be considered. Particularly high employment effects are achieved in the complex value chain, which in shipbuilding has a particularly high domestic share. In Germany there are about 2,800 companies and about 200,000 employees active in shipbuilding and ocean industries. Together they generate a domestic value added of approx. 85% on deliveries from German shipyards. Europe is by far the most important market for the maritime supply industry The export-oriented maritime machinery and system suppliers generate about a quarter of their turnover with shipyards in Asia.

The VSM, together with its colleagues throughout Europe, is therefore campaigning for a temporary fleet renewal programme based both on public contracts coastguard, police, fire brigade, research vessels, public transport and similar.) and on incentives for environmentally friendly commercial ships. The purpose of this initiative is to compensate for at least some of the expected loss of demand so as to prevent an uncontrolled breakdown of the entire sector.

The industry must now make every effort to reduce its cost basis while maintaining its technology leadership and keeping most of its skilled workforce on board. For the same reason it is imperative to continue research and development efforts and maintain the focus on maritime climate and environment protection, even during the crisis. A well-designed fleet renewal programme can be a decisive factor in getting a head start on tomorrow's technology.

Furthermore, it is time to finally introduce effective measures to fight unfair competition in the shipbuilding sector so that once the market recovers, a healthy and competitive shipbuilding industry can make a lasting contribution to national prosperity and a clean maritime economy.

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