The outlook for FPSO and wind power engineering vessels continues to improve

Offshore equipment market: FPSO and wind power engineering vessels continue to drive the demand for offshore engineering equipment recovery

FPSO and wind power engineering vessels led to a strong recovery in the offshore industry market. According to Clarksons data, from 2020 to 2022, the global new orders for offshore equipment will be 4.01 billion, 9.16 billion and 16.71 billion US dollars, respectively, and the offshore equipment market will recover strongly. Among them, FPSO (floating production, storage and unloading equipment) and wind power engineering ships are the backbone to support the recovery of this round of offshore industry; In 2022, a total of 137 offshore equipment were sold in the world, with a value of 25 billion US dollars, and 23 production, storage and transportation equipment represented by FPSO were sold, with a value of about 16.5 billion US dollars, accounting for 67%. The number of construction equipment transactions based on offshore wind power engineering construction ships was 94, with a value of 7.8 billion US dollars, accounting for 32%. Among them, Chinese shipyards won 68 offshore orders in 2022, about $15 billion.

FPSO: Orders show a high correlation with oil prices, and contract awards are expected to continue to grow in 2023

The number of FPsos awarded has a high correlation with oil prices. The number of new contracts awarded for global FPSO (floating production, storage and offloading units) has a strong correlation with the trend of global crude oil prices, and the strong recovery of crude oil prices in 2021-2022, and the rapid growth of new contract orders for FPSO. The number of new FPSO contract orders globally in 2021-2022 is 10 and 9, respectively, a significant increase from 3 in 2020. With the optimization and adjustment of China's epidemic prevention policy, the growth prospects of crude oil demand have improved. On the supply side, geopolitical conflicts have added to the uncertainty, coupled with slowing production growth in the United States, further delays in the Iran nuclear deal and continued production restrictions by Opec +, crude oil prices are expected to remain high in 2023.

The number of new FPSO orders globally is expected to continue to grow in 2023. Rystad Energy FPSOCube forecasts that the number of new FPSO contracts awarded globally in 2023-2024 is expected to reach 16 and 14, respectively, up from 10 and 9 in 2021-2022. Among them, there will be 12 FPSO contract projects in Brazil in 2022-2024, which will occupy about 1/3 of the global FPSO market order share. In terms of orders, five Chinese shipyards (Ofena, COSCO, CIMC Raffles, Waigaoqiao and China Merchants Heavy Construction) have secured around 80 per cent of the global FPSO share, with CIMC Raffles Marine Engineering taking the top spot and around 80 per cent of Petrobras orders.

Wind power engineering ships: The global offshore wind power construction is accelerating, and the demand for wind power engineering ships is growing rapidly

Global offshore wind power construction is accelerating, with an average of 31.5GW of new capacity expected to be installed annually from 2022 to 2031. GWEC's 2022 Global Offshore Wind Report, released in June 2022, predicts that 315GW of offshore wind capacity will be added globally between 2022 and 2031, with an average annual new capacity of 31.5GW. Among them, the new offshore wind power installed capacity in Europe and China will reach 141GW and 98GW in 2022-2031, accounting for 45% and 31% of the global new installed capacity, respectively. Offshore wind will also account for more than 30 percent of global wind power installations by 2031, up from 23 percent in 2021.

Clarksons predicts that the demand for wind power engineering vessels is expected to reach $26 billion in 2023-2028. According to Clarksons data, the total value of new ship orders for wind power engineering vessels in 2022 is as high as 6.2 billion US dollars. Among them, wind turbine installation vessel (WTIV) orders reached 27 new vessels, an increase of 9%, and total investment of $4.1 billion, an increase of 32%, of which Chinese shipowners placed orders for 21 vessels. Wind power operation and maintenance (C/SOV) new ship orders also reached a record 24, up 60% year on year. Clarksons predicts that, thanks to the accelerated construction of offshore wind power, the world will invest more than $26 billion in the construction of new offshore wind vessels from 2023 to the end of 2028, including the construction of 70 WTIVs at a cost of $21 billion. Another $5 billion to build 90 C/SOV and transfer vessels.

New ship order value forecast for 2023-2024 by ship type

The order value of oil tankers and dry bulk carriers in 2023-2024 is expected to recover strongly and relay this cycle. (1) Oil tankers: We forecast that the value of new ships in 2023-2024 will be 14.656 billion US dollars and 20.966 billion US dollars, respectively, +157.8% and +43.1% year-on-year. (2) Dry bulk carriers: We forecast that the value of new ships in 2023-2024 will be 15.344 billion and 25.341 billion US dollars, respectively, +25.6% and +65.2% year-on-year. (3) Container ships: We forecast that the value of new ships in 2023-2024 will be 13.293 billion US dollars and 10.335 billion US dollars, respectively, which is -60.0% and -22.3% year-on-year. (4) LNG carriers: We forecast that the value of new ships in 2023-2024 will be 23.481 billion US dollars and 16.437 billion US dollars, respectively, which is -40.0% and -30.0% year-on-year. (5) Auto ro-ro ships: We forecast that the value of new ships in 2023-2024 will be 7.840 billion US dollars and 7.056 billion US dollars respectively, 56.1% and -10.0% year-on-year. (6) Offshore equipment: We predict that the value of offshore equipment in 2023-2024 will be 23.8 billion and 22.44 billion US dollars, respectively, +42.4% and -5.7% year-on-year. (7) Overall ship market: We forecast that the total value of new ships of all ship types in 2023-2024 will be 115.781 billion US dollars and 128.594 billion US dollars, respectively, which is -11.2% and +11.1% year-on-year.

Market pattern: China and South Korea occupy most of the market share, and China is expected to continue to break through to the high-end

Competitive landscape: China's market share is the first in the world, and South Korea occupies more of the high value-added ship market

The global shipbuilding industry is dominated by China and South Korea, with a combined market share of 87% in 2022. The world's new ship orders in 2021-2022 will be 53.295 million and 42.779 million CGT respectively, and the value of new ship orders will be $117.26 billion and $124.26 billion, respectively. China has become the global shipbuilding center. Since the 1990s, with the rise of China's economy and the rapid development of manufacturing industry, China's shipbuilding industry has risen rapidly. In terms of CGT, China's global market share of new ship orders has gradually increased from less than 10% in the 1990s to 49% in 2022, which is the same as in 2021. South Korea's market share has been stable at about 30% since 2000, and its market share in 2022 will reach 38%, an increase of 4 percentage points from 2021. The overall market share of Europe and Japan is gradually shrinking, with a market share of 3% and 8% respectively in 2022.

South Korean ship companies occupy more market share of high value-added ships, and Chinese ship companies' product structure is constantly high-end. Among the new orders received in 2022, Chinese shipbuilders are mainly container ships, bulk carriers and LNG carriers, accounting for 30.9%, 16.5% and 22.7% respectively in terms of CGT. South Korean companies are dominated by container ships and LNG carriers, accounting for 27.3% and 65.6% respectively in terms of CGT. According to Clarksons data, the global new ship market in 2022 orders for high value-added vessels such as large liquefied natural gas (LNG) carriers, large container ships and very large oil carriers (VLCCS) reached 270 units with 20.79 million revised gross tons. In the field of large LNG carriers, South Korean ship companies to undertake large LNG carrier orders reached 10.12 million revised gross tons, accounting for nearly 70% of the world's large LNG carrier new ship orders, Chinese ship companies also made a historic breakthrough, winning about 30% of the market share; In the field of large container ships, Chinese and South Korean companies are evenly divided; In the very large tanker (VLCC) field, orders are mainly occupied by Chinese shipping companies.

The global shipbuilding industry market is highly concentrated, and the market share of the five major shipyards will reach 63% by 2022. According to Clarksons data, by the end of 2022, the world's top five shipyards with orders in hand are CSSC, Hyundai Heavy Industries, Samsung Heavy Industries, Daewoo Shipbuilding and CIMC Group, with orders in hand of 19.3 million, 17.86 million, 10.19 million, 8.48 million and 5.05 million CGT, respectively. The market share is 18%, 17%, 9%, 8%, 5%, a total of 57%, in 2022, CSSC, Hyundai Heavy Industries, Samsung Heavy Industries, Daewoo Shipbuilding, CIMC five shipyards new ship orders are 9.01 million, 8.08 million, 3.83 million, 3.64 million, 2.15 million CGT, respectively. The market share is 21%, 19%, 9%, 9%, 5%, a total of 63%.

Advantages and disadvantages of China's shipbuilding competition: obvious advantages of labor and raw materials, ship supporting is still lacking

According to the data of the European Shipbuilding Association, from the perspective of cost structure, the value of the ship includes three parts: Marine equipment, raw materials and materials, and ship manufacturing assembly, accounting for 43%, 27%, and 30% respectively. These three components correspond to three key competitive factors: 1) skilled and cheap labor; 2) Stable and cheap raw materials; 3) Punctual delivery of key equipment.

The advantages of China's shipbuilding industry are first reflected in the cost of human resources. According to the South Korean Financial Supervisory Service (FSS) data, in 2021, the average annual salary of the three major shipyards in South Korea, Samsung Heavy Industries, Daewoo Shipbuilding, and Hyundai Heavy Industries shipbuilding employees is 423,000, 378,000, and 359,000 yuan respectively (according to the average exchange rate of 1 yuan to 177.4 won in 2021). According to our industry research, in 2021, the average salary of employees of China Shipbuilding and CIMC Shipbuilding, the two largest shipyards in China, will be about 100,000 yuan. Shipbuilding industry needs a large number of skilled workers engaged in welding, painting and other working environment is relatively harsh work, labor costs account for about 30% of ship manufacturing costs, compared with Japan, South Korea and other developed countries, young and middle-aged labor supply is relatively sufficient, education level is also constantly improving. Considering that the global shipbuilding industry, even in good times, has an average gross profit margin of only 10% and a net profit margin of about 5%, labor costs are undoubtedly an important influencing factor.

The most important raw material for the shipbuilding industry is steel, and China also has an absolute advantage in the cost and supply of steel. The cost of steel directly purchased by the whole ship production enterprise accounts for 25% of the cost of the ship, and about 40% of the cost if the parts purchased are added. China's steel products have a relatively obvious price advantage in the world, so it also provides the cost advantage of raw materials for domestic shipbuilding enterprises, such as medium and thick plate products, the current Chinese market price is about 20% lower than the price in Japan and South Korea, while most of the domestic steel industry ship plate production enterprises have established a long-term strategic partnership with shipbuilding enterprises in the common development. It provides a stable supply of raw materials for the shipbuilding industry.

High-end ship outfitting rates are still low, but breakthroughs are being made. However, for shipbuilding enterprises, Marine equipment belongs to the purchased part, and the products mainly include Marine power equipment, communication and navigation equipment, electrical equipment, etc., which accounts for about 43% of the value of the entire ship. Most of the ship supporting equipment are produced by a number of manufacturers, shipbuilding enterprises can be bidding according to the design needs, and obtain products with competitive prices. According to the "Analysis on the transformation and Upgrading Strategy of China's Shipbuilding Supporting Industry" (Gong Chaoyan), in 2020, the localization loading rate of South Korea and Japan's Marine equipment will reach 85% and 90% respectively, while the localization loading rate of China's three ordinary ship types will be about 80%, and the localization matching rate of high-tech ships such as large tankers and large LNG carriers will be less than 40%. At present, high-end ship types and core equipment are also rapidly catching up (low-speed machinery, Yinwa steel, etc., are realized). It should be pointed out that the key ship equipment is mostly licensed production, and the brand technology of the product is mostly from European enterprises. The Marine medium and low speed diesel engine is monopolized by the brand technology of MAN and Wartsila, two European enterprises, and the LNG liquid cargo containment system is monopolized by the French GTT company. Both Chinese and South Korean ship companies need to obtain brand certification and patent authorization of these companies, therefore, the competition between Chinese ship supporting enterprises and South Korean ship supporting enterprises is manufacturing capacity, labor costs, raw materials and other aspects of competition, there is no insurmountable technical barriers.

China's shipbuilding development trend: product structure continues to high-end, industry concentration continues to improve

High-end product structure: China's ship manufacturers continue to make breakthroughs in the field of high-end products, in the global new ship market, large liquefied natural gas (LNG) carriers (more than 170,000 square meters), large container ships (more than 20,000 TEU) and very large oil tanker (VLCC/ULCC) three types of high value-added vessels, by the end of 2022, Chinese shipyards accounted for 67%, 21% and 8% of global shipyards' orders in hand, respectively. It is worth noting that in 2022, the only two VLCC orders in the world were all undertaken by Dalian Shipbuilding Industry, a subsidiary of China Shipbuilding, and Chinese shipyards also made a historic breakthrough in the field of large LNG carriers. We believe that with the continuous breakthrough and precipitation of China's core technology and the continuous improvement of the shipbuilding industry matching rate, with China's leading advantage in the global manufacturing industry, China is expected to achieve a higher market share in the field of high-end products.

Increasing industry concentration: During the 2002-2008 super cycle, a large number of private shipyards flooded into the shipbuilding industry, resulting in a relatively low concentration of China's shipbuilding industry at that time. In 2009, the market share of the top three shipyards was less than 20%. After a long period of depression, the order reserve of small and medium-sized shipyards was rapidly exhausted, and the operation became increasingly difficult, forcing them to integrate and withdraw from the industry. According to statistics from the China Shipbuilding Industry Economic Research Center, the number of active shipyards in China dropped from 428 in 2009 to 118 in 2022, a decrease of 72%. According to Clarksons data, the market share of the top three and top five shipyards in China has increased from 19% and 37% in 2009 to 61% and 70% in 2022. In the future, with the continuous development of China's shipbuilding industry to the high-end, the large central enterprises led by China Shipbuilding have the strong support of government policies and financial institutions, and the customer qualification is also better, the competitive advantage will be more prominent, and the head concentration trend will be more obvious.

Chinese shipyard profitability: high ship prices combined with falling steel prices, shipyard profitability is expected to improve significantly

New ship prices remain high and steel prices continue to fall, and shipyard profitability is expected to be greatly improved. Continued tight shipbuilding capacity and inelastic supply will keep ship prices high, while steel prices continue to fall, and steel and plate prices are now down about 35% from the cycle peak (May 2021), The price of Clarksons new ships has risen by about 30% from the low point of the cycle (November 2020), and the price of new ships has continued to rise and the price of steel has fallen to form a scissors difference trend. At the peak of the last cycle, China's gross profit margin and net profit margin reached 27.84% and 19.76% respectively, while the industry bottom was 8.49% and -0.84%, respectively. With the delivery of high-priced ship orders in 2023, we believe that the profit side of shipyards is relatively flexible.