Increasing regulation and geopolitical uncertainties are almost certainly affecting shipbuilding at the current time and the result is certain to be fewer players in the construction arena in the long run. The impact is likely to hit hardest in the major shipbuilding countries as, after decades of sucking business away from smaller players, there is little left for them to pillage.
The history of shipbuilding in the 21st Century is a complex one where orders have been driven by several factors beyond the normal commercial needs of growing trade and replacement of obsolete vessels. Shipowners have long been hostages to fortune in world affairs such as wars, oil crises, sanctions and embargoes and they have learned to live with the uncertainties those bring but for almost two decades those traditional factors have been supplemented by a stream of regulatory burdens.
For tanker operators it was firstly the accelerated phase out of single hull tankers between 2005 and 2010 and simultaneously the introduction of the IACS common structural rules (CSRs) in 2006. Bulk carrier operators were also subject to CSRs at the same time. From 1 June 2015 the new harmonised CSRs covering both types became effective. While the phase-out of single-skin tankers was responsible for a direct replacement of existing vessels, the CSRs were seen by many shipowners as adding structural weight at the expense of cargo space and as a consequence on both occasions there was a spike in orders to pre-empt the changes.
A similar situation has occurred across a wider range of vessel types with the advent of the IMO’s Energy Efficiency Design Index (EEDI) designed to reduce shipping emissions. The first phase (Phase 0) came into effect in 2013 and ran until 2015 but was little more than a paper exercise that set a base line and required no actual emission reductions. When Phase 1 kicked on 1 January 2010, ships affected were required to cut emissions by 10% from the earlier limit. Phase 2 will begin in just a few months’ time on 1 January 2020 and will require ships emissions to be 20% below the initial baseline.
The date in each case effectively refers to the order date, so shipowners that believe – as many do – that the EEDI rules will impact negatively on their operating strategies have opted to order ships that will meet earlier phases of the EEDI rules. With most ship types now covered by EEDI rules, the result is that there has been excess ordering of almost all ship types.
To accommodate the IMO’s ambitious decarbonisation plans, there is even talk of bringing forward the final 2025 Phase 3 and adding a new Phase 4 around 2030. Whether this will happen depends upon the will of IMO member state delegations as well as upon the ability of naval architects and equipment makers to make the necessary leaps in technology that will be needed to achieve the IMO’s targets.
It is interesting to note that prior to the IMO’s decarbonisation plan, the main thrust of environmental regulation was the 2020 reduction in the global sulphur cap. One of the ways of meeting the new rules was for newbuildings to be built to run on LNG. While an increasing number of ships are being built that can do just that, LNG cannot be considered as anything other than a small step on the way to decarbonisation. Even so, LNG is seen as helping to meet global targets and as a consequence demand for LNG carriers is growing, making them a bright spot in an otherwise dull market.
It is hard, if not impossible, to separate out the excess tonnage in each ship type that can be attributed to over-optimistic world economic forecasts or to attempts to pre-empt tighter regulation and in any case doing so will not change what has happened. Perhaps, though the biggest influence in creating excess tonnage is not so much the ups and downs of world trade but the obsession for growth that is prevalent in just about every boardroom in every country in every industry.
Once, consolidation would have allowed smaller players to fall or be absorbed but as the number of players shrinks, that no longer applies and if one is determined to grow market share that can only be done by ordering more vessels and hoping to undermine the competition.