The shipbuilding industry has strong periodicity, and the mismatch of supply and demand is the underlying logic of cycle initiation

Summary of shipbuilding industry attributes: The shipbuilding industry has a strong cyclical, supply and demand mismatch is the underlying logic of cycle start

Strong cyclical: the shipbuilding industry has a mature market trading mechanism and a free circulation market, and there is a clear valuation for both new and second-hand ships (shipping exchange or brokerage institutions evaluate the value according to the use of ships inspected by classification societies). Therefore, during the shipping bull market, speculative funds have a role in promoting the cycle of the shipbuilding industry, for example, the price of second-hand ships will have a certain expected guidance effect on the price of new ships. The resonance of "quantity" and "price" leads to sharp fluctuations in ship prices, when the economy is rising, the industry performance is "volume and price rise", and when the cycle is down, it is "volume and price fall".

The shipbuilding cycle lags behind the shipping cycle: Usually when the shipping industry is highly prosperous and shipowners are profitable, shipyards receive a large number of new ship orders. The manufacturing cycle of new ships is generally 2-4 years, so the peak of new ship delivery is generally 2-3 years after the order is obtained. If there is a large fluctuation in the global economy and shipping during this period, it will cause a mismatch between supply and demand, and a large excess of shipping capacity will lead to a long-term depression in the shipping industry. Therefore, the industry has a typical "boom-bust" huge cycle.

Long cycle: the downstream shipping industry of the shipbuilding industry mainly undertakes the transportation of crude oil, dry bulk cargo, LNG and other commodities, and the commodity cycle is often related to the rise of great powers, monetary policy easing and global industrial changes, and the demand cycle of shipbuilding is more consistent with the commodity cycle, generally up to 20-30 years. In addition, the service life of merchant ships is generally 20-25 years, and the replacement needs of products take longer to be released.

Industry with the transfer of manufacturing: the shipbuilding industry is labor-intensive, capital-intensive and technology-intensive characteristics, history shows that the transfer of shipbuilding industry is always with the transfer of global manufacturing, from countries with high labor costs to countries with low labor costs, the global shipbuilding center has experienced four transfers: Europe - Japan - South Korea - China. In terms of revised gross tonnage, China's global ship delivery market share in 2022 has exceeded 50%, but in the field of high value-added ships such as luxury cruise ships and large LNG carriers, the core technology and manufacturing capacity are basically mastered by Europe and South Korea.

Globalization and the rise of China spawned the 2002-2008 maritime and shipbuilding supercycle

Globalization and the rise of China led to a severe mismatch between supply and demand that spawned the 2002-2008 maritime and shipbuilding supercycle. From the demand side, the economic prosperity brought by globalization and China's accession to the WTO have better integrated into the development of the global economy and become a global manufacturing center to export cost-effective commodities to the world. Meanwhile, the rapid development of China's industrialization and urbanization has also increased the demand for bulk commodities. Since 2002, the demand for global maritime trade has maintained rapid growth. On the supply side, the long slump in shipping and shipbuilding in the 1990s led to massive capacity dismantling and shipyard capacity liquidation. Since then, although demand has maintained moderate expansion, new ship orders and new capacity supply have remained low, in the face of rapid demand growth, idle capacity began to show a significant decline in 2003, and new capacity will take time. To sum up, the long-term clearance of supply and the sudden surge in demand led to a serious mismatch between supply and demand, and the BDI and BDTI freight indexes began to rise sharply in 2002 and remained high until 2008. The dramatic increase in shipowners' profitability and the urgent need to replenish capacity also led to record new ship orders and ship prices from 2003 to 2007, creating this shipping and shipbuilding supercycle.

This cycle: the supply side of the rigid clearance and lack of elasticity is the main contradiction, the head ship enterprises benefit significantly

Since 2020, the driving factors of the shipping cycle have more appeared on the supply side and different ship type cycles have formed misalignments. The supply chain disruption caused by the epidemic in 2020-2022 combined with monetary easing policies led to a substantial increase in consumer demand in Europe and the United States contributed to this round of consolidation super cycle. The surge in demand for LNG seaborne trade caused by the European energy crisis and the Russia-Ukraine conflict in 2021-2022 and the tight capacity of the spot market contributed to this LNG seaborne super cycle. The continuous fermentation of the Russia-Ukraine conflict from 2022 to now has led to the European oil ban and price cap, which has reshaped the global oil trade pattern and routes on an unprecedented scale, and is pushing oil transportation into a strong cycle. Overall, the shipping cycle drivers from 2020 to the present are more due to supply-side factors such as global supply chain chaos and restructuring, and different ship type cycle processes have also formed corresponding dislocation. In the future European and American economic recession and China's economic recovery is expected, the demand side will become a key factor in the continuity of this cycle.

Improved profitability, tight capacity and IMO's decarbonisation policy have led to an increase in the willingness of ship owners to place orders for new vessels, with container vessels and LNG carriers driving the ship manufacturing cycle. Overall, in 2021-2022, the total global new ship orders were 53.3 million (up 113.6%) and 42.78 million CGT, and the total value of global new ship orders was 117.3 billion (up 129.6%) and 124.3 billion US dollars, respectively. The total volume and total value of orders in two years hit a new high since the last super cycle (2002-08). From the perspective of order structure, in terms of CGT, the shares of new ship orders for tankers, bulk carriers, container ships and LNG carriers in 2021 will be 12%, 23%, 38% and 13% respectively, and the shares of new ship orders in 2022 will be 6%, 13%, 30% and 35% respectively. In addition, under the influence of IMO's decarbonization and environmental protection policy, the proportion of LNG and methanol dual-fuel power ship orders has increased significantly. In terms of CGT, the proportion of LNG dual-fuel power ship orders and methanol dual-fuel power ship orders in 2021 is 9% and 1% respectively, and the proportion will increase to 16% and 3% in 2022.

The price index of new vessels and the number of years covered by shipbuilders' orders in hand have moderated in 2022. In 2021, the global new shipbuilding orders (container ships, LNG carriers) increased significantly, and the continued tight capacity of shipyards led to a continuous rise in the new ship price index. In terms of container ships, due to the recent rapid decline in freight rates in the container transport market, and shipowners' concerns about the continued deterioration of future supply and demand, new orders for container ships have decreased significantly. In terms of LNG carriers, based on the continued tension in the future LNG shipping supply and demand expectations, the recent correction in freight rates has not had much impact on the LNG carrier market, and the new ship price index is still strong. In terms of oil tankers, the continuation of the conflict between Russia and Ukraine will lead to a substantial increase in crude oil seaborne trade, the future new shipping capacity will be at a low level, the tight trend of supply and demand will gradually become prominent, and the price index of new ships will remain high. In terms of dry bulk carriers, the recovery process of China's economy will become a key factor, and freight rates will continue to recover. Overall, the cumulative increase in the price index of new ships in 2022 fell by 16 percentage points from the same period in 2021, and the number of years covered by orders in hand was stable at about 3.5 years, but the current shipyard capacity is still in a tight state.

The EEXI/CII environmental regulations have come into effect and are expected to reduce capacity efficiency while accelerating the exit of older vessels. As of January 1, 2023, ships must obtain an Existing Ship Energy Efficiency Index (EEXI) energy efficiency certification, while also collecting CO2 emissions data and reporting annual Operational Carbon Intensity Indicators (CII). According to Vessels Value, only 21.7 per cent of vessels in the global active fleet (bulk carriers, tankers and container ships) are EEXI compliant. Among them, the compliance rate of bulk carriers is the lowest, the compliance ratio is only 10%; Container ships, one of the largest sources of CO2 emissions, had a compliance rate of 25.6%; In terms of the number of vessels, although oil tankers performed best, the compliance rate was only 30.4%. According to Clarksons' benchmark ship type data, 60% of the current fleet of tankers and bulk carriers in operation will theoretically meet EEXI requirements (including the use of shaft/engine power limiting systems), and 40% of vessels that do not meet the requirements may need to adopt various means to meet the requirements or be forced to withdraw from the market. We believe that the implementation of EEXI and CII will result in a large number of ships reducing speed to meet carbon emission regulations, while also accelerating the exit of some older ships from the capacity market.

The number of active shipyards in the world has fallen sharply, effective dock supply has fallen by two-thirds from the previous peak, and shipyard capacity is tight. Due to the long-term depression of the shipbuilding industry in the past 10 years, a large number of shipyards have closed down, and the rigid capacity of the shipbuilding industry has been cleared. According to Clarksons, the number of active shipyards (with at least one 1000+GT vessel on hand) worldwide has fallen from a peak of 758 in 2007 to 164 in 2022. The number of active shipyards in China declined from a peak of 428 in 2009 to 118 in 2022. The number of large shipyards (> 20,000 DWT) with capacity to receive orders fell from 320 in 2009 to 119 in 2022, leaving only about one-third of the peak. The 2021-2022 new ship orders (million CGT) have been half the level of the 2006-2007 cycle peak, and the tension between supply and demand has intensified, resulting in rising ship prices.

The overall supply of the industry is difficult to increase in the short term, and the supply is extremely inflexible. We don't think the shipyard is likely to expand significantly in the next three years. In China, due to the Yangtze River Protection Law and the restrictions on the approval of land and shoreline resources, there is basically no possibility of new shipyards. Since 2009, the National Development and Reform Commission has not approved any new shipyards, and the increase mainly comes from the relocation and expansion of Waigaoqiao Shipyard. And some have been out of the dock to return to life (recently Hengli Heavy Industry injected capital to restart STX (Dalian), but personnel training, equipment installation and commissioning and mass production take time). In South Korea, Hyundai Heavy Industries restarted Gunsan Shipyard in 2023H1 (but the increase is limited), but the bigger problem is the decline of employees and a large gap of skilled workers. On the whole, the new supply is very limited at present, and the supply side is extremely lacking in elasticity. According to Clarksons' forecast data, the overall utilization rate of the dock in the industry will gradually increase from the current level of less than 80% to about 95% in the next five years.

In 2023-2024, the tension between supply and demand of the ship market will not be effectively alleviated, and the ship market will continue to improve. From the demand side, this shipping and shipbuilding cycle is more structural than systematic, and the driving factors are more on the supply side. Compared with the last round of ship manufacturing super cycle (2002-08), the cycle process of different ship types in this cycle is quite different, and the market of container ships, LNG carriers, car ro-Ro ships, oil tankers/offshore, dry bulk carriers has improved in turn, so the new ship order cycle of this round is relatively flat compared with the previous round. From the supply side, the rigid clearance of shipbuilding industry capacity and the extreme lack of elasticity have led to the ongoing tension in shipbuilding capacity, which has supported the rising ship prices. Overall, the future benefit from the LNG carrier and car carrier market continued to improve, as well as offshore equipment, oil tankers and bulk carrier market recovery, is expected to 2023-2024 ship market supply and demand tension will not be effectively alleviated, new ship prices are expected to continue to rise, the ship market continues to improve.

This cycle is dominated by large new energy ships with high added value, and the advantages of head shipyards are prominent. In this cycle, the demand for high-value ship types (container ships above 12,000 TEU, LNG carriers above 140,000 square meters) is far better than that for low-value ship types (dry bulk carriers, small container ships, small tankers, etc.), and the value of new orders per DWT in 2022 will reach 1,455 US dollars /DWT (the same ratio +69.8%). Head shipyards and small and medium-sized shipyards face big differences in supply and demand patterns. The dominant ship types of head shipyards are mainly oversized container ships, LNG carriers, VLCC, wind power ships, car carriers, luxury cruise ships, etc., all of which are difficult/high-view ship types, difficult to obtain in a dock. Small and medium-sized shipyards are limited by shoreline resources, personnel and technology, the main ship type is small and medium-sized dry bulk cargo ships and container ships, more to undertake spilover demand (large shipyards are fully booked), orders are sustainable, no actual bottleneck supply. According to Clarksons statistics, only 150 shipyards in the world have received new orders in 2022, while about 400 have not received any orders, and the leading shipyards have benefited significantly in this cycle.