The phenomenal growth of yards in Asia is firing concerns of a possible 'disaster'.
Shipyard overcapacity is rapidly becoming one of the greatest fears plaguing the shipping industry.
The production volume of the world's major shipbuilding countries has undergone phenomenal growth over the past decade in order to keep up with the seemingly insatiable demand for tonnage from owners.
Statistics compiled by London-based Maritime Strategies International (MSI) paint an astonishing picture.
At the turn of the millenium, Japan was the world's top shipbuilder with capacity to build 10.9 million gt per year. This has since grown by 177% to 19.3 million gt per year. South Korea's capacity stood at 10.3 million gt per year a decade ago but it has since overtaken Japan, climbing by 364% to 37.5 million gt per year.
But the biggest growth has taken place in China, which 10 years ago was capable of building a mere 1.9 million gt per year. Today, its shipbuilding capacity is in the region of 22.3 million gt per year, an astonishing 1,173% rise.
This huge increase has many in the industry extremely worried.
Owners who gathered at the Marine Money conference in Dubai earlier this month all concurred that the capacity situation will have a far more damaging effect on the industry than the current orderbook if yards create an ordering spree by offering bargain newbuildings.
"These are very scary numbers. This new unprecedented high capacity in shipbuilding will cripple the industry, especially if yards are not subject to market [pressures] with things such as government subsidies," said Per Wistoft Kristiansen, chief executive of Dubai-based Gulf Navigation.
China is causing the most worry. Growth in Japan and Korea has come mainly from existing yards that have scaled up production. But many of these have now begun to scale back.
The situation in China is very different. Yards have seemingly sprung up everywhere along its coast over the past decade and their stakeholders are loath to lose any business, as it would have a negative effect on employment as well as make it difficult for them to recoup their substantial investments in the necessary infrastructure.
The Chinese government has been keen to protect its investment in shipbuilding and has therefore been promoting it through various incentives such as making available cheap and easy financing and subsidising orders from domestic owners. But it is not just Chinese yards that are prepared to offer substantial discounts on newbuildings.
Scott Jones, head of Abu Dhabi-based Eships, says plenty of yards the world over are willing to make huge price cuts.
"Yards are telling me that their governments are prepared to subsidise shipbuilding to an enormous level to protect jobs and I expect this will result in a flood of excess ships," he explained.
The flood may have already begun. Last year, orders were at a standstill but a spate of new contracts in recent months - something that is not welcomed by the more conservative owners.
"The orderbook status quo is OK at the moment but going forward, if too many people order too many cheap ships it will affect the market," said Wistoft.
"It will be a disaster," added Jones.
It is quite easy to understand why some owners may be tempted to take advantage of the incentives that yards are offering. A cheap newbuilding makes far more economic sense than acquiring a resale, as it comes with a substantial cost reduction. This also makes financing far easier.
Whether or not yards will be successful in their quest to attract a flood of new orders to keep their facilities and workers busy remains to be seen. But the owners present in Dubai said they hope the industry will be sensible and exercise restraint. Otherwise they fear it will only be damaging its long-term prospects.
