The German Shipbuilding and Ocean Industries Association (VSM) has released a stark assessment of the challenges ahead for European shipyards in the COVID-19 era. The coronavirus pandemic not only creates short-term distortions, but is also raising "considerable uncertainties for medium-term development," the association warned. VSM predicts a complete halt to ordering activity in the cruise sector and a significant reduction in ordering for government vessels, the two mainstays of EU complex shipbuilding.
The risk factors extend beyond the first-order impact of public health shutdowns, which have reduced demand and created operational challenges for all shipowners. Long-term risks include the impact of public and private sector debt, which have rapidly risen as governments and businesses attempt to plug the revenue hole left by reduced economic activity. The risks also include the growing odds of economic conflict between China and the United States, which last year agreed to reduce trade barriers but are now engaged in a diplomatic dispute over COVID-19.
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"Investment decisions in durable goods such as ships are often put on hold in this environment. For the shipbuilding industry, very low demand can therefore be expected worldwide for a longer period of time. Against the background of the global shipbuilding industry, which has been weak since 2016 - in the past four years, newbuild orders fell short of total production by more than 40 percent - this drop in demand will significantly expand the already underutilized global shipbuilding capacity," warned VSM. "Cancellation of orders that have already been placed could make the situation even more difficult. Increased dumping practices and blazing [government] subsidy races are already evident today."
Before COVID-19, the European shipbuilding order book covered four years of future activity, significantly longer than in other shipbuilding countries like China, Korea or Japan. However, the future of the European order book is "acutely at risk," especially as the complex shipbuilding projects that EU yards conduct require much longer contract discussion, lead time and development phases. There is an average of more than 3.5 years between the construction contract and delivery, according to The German Shipbuilding and Ocean Industries Association (VSM) - meaning that the order book for 2025 deliveries will soon begin to run thin if more contracts aren't signed today.
Mainstay segments affected
The most successful market segment for EU shipyards is in the construction of cruise ships, which are almost exclusively built in Europe. This, however, is now a liability, as the cruise sector has been hit harder by the coronavirus shutdown than any other. Since virtually all cruise ships are now moored, anchored or engaged in non-commercial voyages, "it is therefore to be expected that new orders in this segment will be completely absent for a few years," The German (VSM) warned.
The second big sector for EU shipbuilders - warships and government vessels - may also take a hit. National governments have been taking on large quantities of debt in order to respond to the COVID-19 pandemic, and the need to service that debt may limit procurement budgets in future years. "In particular, export demand is likely to be affected," said VSM.
The association predicts that orders will fall "across the board" and many EU shipbuilders will run out of work within the next two to three years if the current state of affairs continues. To head off the loss of industrial capacity and shipbuilding jobs, The German Shipbuilding and Ocean Industries Association (VSM) is advocating a European "fleet program" of public vessel orders (coast guard, police, firefighting, research and ferry vessels) to keep shipyards busy. The program could also include support for environmentally-friendly fleet renewal for the European commercial shipping sector. "The aim is to compensate for part of the expected drop in demand so that uncontrolled damage to land in this industry can be prevented," VSM wrote.
