The 20-year ship cycle is expected to enter a new upward stage

Core view: The cyclical attributes of the ship industry are obvious, and the demand for new shipbuilding mainly comes from the "expansion demand" affected by the prosperity of maritime trade and the "replacement demand" affected by factors such as ship age expiration, environmental protection policies, and technological upgrading. In terms of expansion demand, the shipping boom in 2021 has recovered significantly, and the global new ship orders (according to the statistics of 10,000 deadweight tons) have increased by 97.2% year-on-year, and the caliber of new orders in 2022 has increased by -36.5% year-on-year, but the amount of new orders still increased by 8.2% year-on-year, mainly due to the current full production schedule of shipyards. Shipbuilding has entered the single link of "volume reduction and increase"; In terms of replacement demand, the average age of ships dismantled around the world is about 25 years, the last round of delivery peak ship replacement cycle is coming, and environmental protection policies may further accelerate the replacement demand for ships. We judge that the two major demand resonances of "expansion" and "replacement" in 2023 are expected to promote the shipbuilding industry to enter a new round of upward cycle.

1. Historical review: Twenty years a cycle, supply and demand mismatch is the main factor in the shipbuilding cycle

Shipbuilding belongs to the middle stream of the industrial chain, its upstream includes raw materials and basic equipment, such as steel plate, anchor chain, power engine, etc., and its downstream is mainly shipowners, including shipping and ship leasing companies. The middle reaches are ship final assembly manufacturers of China Shipbuilding, China Heavy Industry, Yangzijiang Shipbuilding, China Shipbuilding Defense, etc., including ship design, hull construction, power system research and development and production.

The shipbuilding industry has a long manufacturing time. Ship manufacturing from the order signing to the final delivery, the time span varies from 16 months to 36 months, according to the announcement of China Shipping Company, bulk carrier general ship type from the start to delivery about 10-12 months, container ship general ship type from the start to delivery about 14-20 months, It takes about 12-14 months for crude oil vessels to start and deliver, while the construction cycle for large LNG carriers is about 2 years. The delivery method of the contract payment shall be agreed upon in the agreement according to the changes of the market.

In the century-old history of the shipbuilding industry, ship delivery is mainly affected by the macroeconomic impact and the mismatch between supply and demand. It is difficult for the supply and demand of the ship industry to form a balance, and it is also affected by policy, war and other factors, and the industry cycle attribute is obvious. Looking at the history of shipping industry delivery, since 1886, we can roughly divide the shipbuilding industry into five cycles, each cycle of about 20-25 years, including recovery, prosperity, recession, depression four stages, each round of the big cycle up time may last for decades, the downward cycle will continue to maintain more than 10 years. And in the short term will be affected by economic, policy and other factors, with the characteristics of large cycle, medium cycle and small cycle superimposed three cycles: 1) 1886-1919: The international trade cycle was on the rise, while the demand for maritime ships was driven by the First World War, and the shipbuilding industry showed a fluctuating upward trend, reaching the peak of 7.14 million GRT in this cycle in 1919. 2) 1920-1940: Economic depression led to a sharp decline in trade volume, the outbreak of the financial crisis in the 1930s, while shipbuilding overcapacity made the shipbuilding industry enter nearly 20 years of downturn, production fell to 490,000 GRT in 1933; 3) 1940-1973:1940-1945 World War II ship demand superimposed on the previous cycle of ship age expiration replacement demand, initial capacity shortage, a round of growth, rapid growth of international trade, shipbuilding industry orders rose steadily, in 1973, the global new orders reached a record high, the round of upward cycle lasted nearly 28 years; 4) 1974-1987: Global trade volume fell due to the impact of the oil crisis, while the supply side of the new entrants mainly South Korea to develop the shipbuilding industry led to overcapacity on the supply side, the price of new ships began to decline, 1987 global shipbuilding output fell to 9.8 million GRT; 5) 1988-2010: The growth of global trade combined with the expansion of shipyard capacity, and the shipbuilding industry entered a new round of great cycle. Around 2003, global shipbuilding production had recovered to the historic high level of 1975, reaching nearly 63 million GRT in 2007. China's shipbuilding industry has also been developed in this expansion cycle, forming a "three-pillar" shipbuilding pattern among China, Japan and South Korea. 6) 2011-2020: After 2008, the global financial crisis led to a decline in trade volume, superimposed early overcapacity, and the global shipbuilding delivery reached a high of 167.44 million DWT in 2011, after which the global shipbuilding industry began to enter a period of adjustment.

In summary, the international situation is generally stable, the global economy is growing rapidly, the shipping volume is growing rapidly, the shipping rate continues to run at a high level, the shipowners have accumulated a large amount of booking funds, and the second-hand ship trading activities are active, which will gradually be transmitted to the new shipbuilding market, thus promoting the prosperity of the new shipbuilding market. At the same time, global economic fluctuations and declines, war and other factors will make the ship cycle face a decline in demand.

We further detailed the specific analysis of the last upward cycle (2002-2010) of new orders and shipbuilding prices, we can find that the shipbuilding industry will experience relatively obvious four stages: volume price rise, volume parity rise, volume price rise and volume price decline. 1) Stage 1 (volume and price rise) : 2002 is the starting point of the cycle recovery of the ship industry, thanks to the early stage of the cycle recovery, shipbuilders have flexibility in their own production scheduling, shipbuilders can increase the number of new orders according to their own capacity, and ship orders appear volume and price rise. 2) Stage two (volume reduction and rise) : With the order capacity schedule more full, the shipyard orders are relatively full, shipbuilders in the no clear expansion plan under the order is more cautious, began to enter the single stage, although the order volume growth began to decline, but the shipbuilding price still maintains an upward trend. 3) Stage 3 (volume price leveling) : Around 2006 began to enter this stage, the second stage of shipyard expansion capacity began to further release, with downstream demand upward, the industry as a whole into a more balanced supply and demand volume price stability stage. At the same time, if the growth rate of the demand side is still much higher than the growth rate of the supply side at this stage, the corresponding new orders will also show a small price increase. 4) Stage four (volume and price decline) : The downward cycle ship demand began to weaken, the supply side capacity is still being released, and the industry began to enter the new order volume and price decline stage.

2. Expansion demand: The recovery of the downstream shipping market has promoted the increase of new orders this round

From the historical data, the maritime market often leads the recovery of the shipbuilding cycle, and the high freight rate of the maritime market drives the expansion demand of new shipbuilding. In general, the upward movement of shipping prices makes downstream shipowners more willing to place orders, and the demand for new ships increases, thus driving the increase in the number of orders held by shipyards. According to the data of Clarksons, the sea freight index began to rise in 1996, and the number of orders held by shipyards increased. In 2008, the sea freight went down, and the freight rate and the number of orders held by shipbuilders went down simultaneously. After a long ten-year low period in the sea freight market, the sea freight began to enter a recovery cycle in 2017, and the freight rate continued to rise. With the increase in the number of new orders received by shipyards, the number of orders held by global shipyards in 6M20 fell to $1,118.7 billion and began to bottom out.

In 2021, global maritime trade volume will pick up, shipyards will gradually digest orders in hand, and global maritime demand is expected to attract a new round of recovery. The global seaborne trade volume has shown a continuous upward trend for many years. In 2009, affected by the financial crisis, the seaborne trade volume declined briefly. In 2020, affected by the epidemic, the seaborne trade volume also declined, and the global seaborne trade volume began to recover step by step in 2021. The proportion of order capacity in hand is generally affected by three factors: the number of newly signed orders, the number of deliveries and the size of the fleet. According to Clarksons data, the growth rate of shipping fleet capacity has slowed down in recent years, and the proportion of shipyard orders in hand capacity has continued to decline, falling to the lowest 8.4% in 2021, and the proportion of order in hand capacity has recovered in 2022. It reached 10.3%, which means that the orders accumulated by the shipyard have been gradually digested and have basically bottomed out. The fleet capacity caused by the previous round of shipyard capacity expansion is basically cleared, and the future fleet size is expected to begin to grow.

Judging from the global shipbuilding new orders and orders in hand, the recovery of the current cycle of the shipbuilding industry has begun in 2021. According to Clarksons data, in 2021, the economic recovery began to benefit, the demand side of downstream shipowners picked up, and the new orders for global shipbuilding began to show a rebound trend. In 2021, the global new ship orders reached 138.78 million DWT, an increase of 97.2%, and the new orders reached US $128.2 billion, an increase of 130.3%. The number of new orders received in 2022 is 88.1 million deadweight tons, down 36.5% on the same basis, but the amount of new orders received in 2021 under the condition of a high base, still an increase of 8.2%. We believe that the main reason is that the current upward cycle has been in the stage of "volume reduction and increase", the shipyard's capacity is relatively rigid, and the order schedule has reached 2025. But the price of new ships continues to rise. In terms of orders in hand, in 2022, global shipbuilders achieved a bottom recovery in orders in hand, reaching 226.34 million deadweight tons, and the order value reached 271.1 billion US dollars, an increase of 19%. The global new shipbuilding market is showing signs of recovery.

Ship new orders indicators are generally 3-5 years ahead of ship deliveries, and delivery times have accelerated in recent years. According to the data of Clarksons, according to the statistics of 10,000 deadweight tons, the global new orders received in 3M06 reached the peak, followed by another peak in 12M06, corresponding to the global ship delivery reached the peak in 1M11, and the index of new orders received by ships was about 5 years ahead of the ship delivery volume. The new orders for ships reached the peak again at the end of 2013, and the corresponding ship deliveries reached the peak at 1M17, corresponding to about 38 months. The first peak of the new rising cycle of ship orders in this round appeared in 3M21, and the ship delivery is expected to peak in 2024-2025, according to the historical leading rhythm.

By observing the obvious growth of downstream shipowners' performance, sufficient monetary funds are expected to promote the increase in demand for new orders. In 2021, with the recovery of the shipping market and the continuous improvement of shipping prices, the performance of downstream shipowners has achieved substantial growth. According to the company announcement, 1-3Q22 COSCO Sea Control/COsco Sea Energy/China Merchants Shipping operating income increased by 37%/33%/65%, respectively, and net profit increased by 44%/44%/139%. Taking COSCO Offshore Control as an example, as of 1-3Q22, the currency amount of COSCO Offshore Control reached 297.3 billion yuan, an increase of 106%, and sufficient cash promoted the willingness of shipowners to place orders.

From the perspective of specific maritime market demand, the prosperity of consolidated and bulk freight transportation will take the lead in recovering in 2021, and the bottom recovery of oil tanker and LPG ship shipping will begin in 2022 to achieve relay. In general, the freight rate index reflects the overall prosperity of shipping. In 2021, benefiting from the economic recovery, the global maritime trade volume rebounded, the shipping index rose, and the bulk carrier and container shipping rates led the rise. In 2022, with the port congestion link and the release of capacity, the container freight rate has been adjusted back, but it still remains at a high historical fraction. In 2022, affected by the Russia-Ukraine conflict and high oil prices, the demand for oil and gas vessels has increased significantly, and freight rates have risen successively. Driven by high transport prices, new orders for gas vessels such as oil tankers and LPG vessels are expected to be further expanded.

On the whole, the three major shipping vessel types, container ships, bulk carriers and oil tankers, have different recovery rhythms in this upward cycle. We believe that in the short and medium term, it is driven by container ships and bulk carriers, and oil tankers are expected to further contribute to shipbuilding orders in the long term. In the short term, the recovery of trade after the epidemic will push up the freight rates of containers and dry bulk cargo. Since the outbreak of the financial crisis in 2008, the shipping industry has entered a 10-year adjustment period, with the Baltic Dry bulk Index (BDI) and Container Freight Index (SCFI) continuing to be depressed. In 2021, with the economic recovery, the demand for bulk commodities increases, and the prosperity of the dry bulk maritime market increases. In 2021, the Baltic Dry Index (BDI) exceeded 5000, the highest level in nearly 10 years. In 2022, port congestion has been alleviated to a certain extent, and under the superposition of factors such as the rapid increase in fleet capacity, the freight rate of 2H22 consolidated and dry bulk freight has been adjusted back. According to the IMF's latest forecast, China's economic growth rate will increase from 3% in 2022 to 5.2% in 2023, which will promote the increase in global demand for bulk commodities, consumer goods and other maritime transportation, which is conducive to the stability and activity of dry bulk freight and consolidation.

Container and bulk carriers benefited from the recovery of trade after the epidemic, and new orders increased significantly in 2021. Among them, the container ship shipping market in 2021 boom, new orders of 45.03 billion US dollars, an increase of 444%, while the economic recovery to promote the increase in demand for large goods, 2021 new bulk carrier orders of 20.97 billion US dollars, an increase of 139%. With the gradual easing of container supply and demand in 2022, new orders for container ships fell somewhat in the case of a high base in 2021, but still remained at a high historical level, reaching $34.647 billion. Bulk carrier orders declined significantly in 2022, mainly due to high commodity prices in 2022, high inflation has a certain impact on the dry bulk maritime market, and the dry bulk market is still full of uncertainty in the long run.

In the medium and long term, the demand for crude oil continues to grow, and the prosperity of the tanker market is expected to relay. In 2020, due to the impact of the global epidemic, the macro economic downturn and the replacement of new energy and other factors, the global crude oil trade has declined significantly. With the gradual recovery of the global economy and the increase in trade volume, the demand for transportation and industrial oil has begun to recover. At present, crude oil is in the destocking stage, and the crude oil inventory of the world's major economies is at a low level. Oecd countries' commercial crude oil inventories fell to 3.968 billion barrels, has basically bottomed out, replenishment cycle is expected to resume, according to the improvement of crude oil demand under the corresponding fleet capacity increase, the current oil transport prices have shown signs of recovery, oil tankers are expected to become another support market development after container ships.

According to the improvement of crude oil demand and the increase in fleet capacity, the current oil transport price has shown signs of recovery, and oil tankers are expected to become another main ship type supporting the development of the market after container ships. According to Clarksons data show that since the beginning of 10M20, the crude oil transportation index (BDTI) and the refined oil transportation index (BCTI) began to rise, 12M22 the EU banned the import of Russian seaborn crude oil, and the 11M22 freight rate was pushed to a high. The increase of oil shipping routes and the rise in Chinese demand are good for the long-term demand of oil tankers. Considering that the current order schedule of other ship types is full, the available capacity of oil tankers is limited, and the orders on hand of oil tankers are relatively low in the short term, and the new orders of oil tankers are expected to rise in the future.

Overall, the current cycle needs