Time to think counter-cyclical ordering

In the years before the financial crisis and the recession that followed it, leading cruise shipping groups contracted new tonnage at a rate that had never been seen before - and it may indeed take a while before anything like that will happen in the future.

Right now, the orderbooks of shipbuilders like STX Europe and Fincantieri are thinning at a worrying rate, while Meyer Werft in Germany can enjoy a slightly longer spell of good workload thanks to contracts from Aida, Disney and Celebrity.

The current challenging economic climate will not last forever and there are strong signs coming from various parts of the world that indeed the worst should be over and leading economies should either have entered or enter to growth.

However, the cruise yards and a complex infrastructure of suppliers and contractors that complement the yards are facing tough times. While major business failures have been avoided so far, the conditions are becoming tougher almost by the day in the current drought of orders. There is little help to be expected from the cargo shipping sector - an excessive spree of orders has led to severe overcapacity in many sectors and owners are trying to cancel existing orders rather than to seek to place new ones.

It is vitally important that the infrastructure of yards, suppliers and contractors overcome the current lean times. Without that it will be very hard indeed to build a major cruise liner and it must take quite a bit of time and effort to re-establish such an infrastructure in case an existing network collapsed.

Therefore, some companies might do well for themselves and the industry as a whole by considering counter-cyclical ordering. Yes, freight volumes are low for ferry companies and ticket prices plus on board spending below the levels seen before 2007 in both ferry and cruise trades.

However, the cost of labour, equipment and raw materials must be well below those seen in the peak of the recent strong cycle. Interest rates are lower too and if companies can raise the required funding, they might save quite a bit of cash by ordering now rather than once a strong cycle is gathering momentum again with all its subsequent implications. Furthermore, delivery times of ships themselves plus vital components, such as main engines, which were very long only a couple of years ago, must be much shorter today.

A problem with shipping in general is the fact that it is cyclical to the extreme. The recent long, strong cycle led to a situation in which there were more than 11,000 ships of all types put together on order. some of the yards that were supposed to build them did not exist at the time and the downturn may well mean that many of them will not come into existence either.

So much the better: the world is not suffering from a shortage of ship building capacity. Combined with easy credit in those hectic pre-2007 days, excess shipbuilding capacity was in fact a major reason why the sector as a whole ended up in the mess in which it is today.

Passenger shipping, however, is very different. In the cruise industry, Carnival Corp & PLC alone controls about half of all beds on the market. Such degree of consolidation is unknown in other areas of shipping: Maersk Line only has 15% of the global container shipping capacity, by comparison.

In ferries, a couple of strong players usually share a market between them as these companies operate on regional rather than Europpe-wide let alone global level. Many ferries are old and ripe for recycling, so hopefully some owners will think outside of the box when it comes to ordering new tonnage and take up the counter-cyclical way.