PRICE DETERMINATION IN THE SHIPBUILDING MARKETLiz SHUKER, BRS Group

November 2018

203/12/2018

Price determination in the shipbuilding market

I. Prices determined by yards’ building costs –(steel prices, manpower etc)

II. Prices determined by supply and demand –(shipping market, yard capacity, alternatives to NB)

III. Are prices sufficient to have a sustainable newbuilding industry?

IV. What are the different strategies adopted by shipbuilders to counter prices that may be below building costs?

I. Prices determined by yards’ building costs

403/12/2018

Building costs

Category: %

Equipment 40%

Steel 30%

Labour 15%

Overheads 10%

Profit ? 5%

Representative cost breakdown to build an Ultramax bulker -China 2018

503/12/2018

1. Steel price

2. USD/Exchange rate

3. Labour costs

4. Regulatory requirements

Building costs

Fluctuations and challenges:

1. Steel price

603/12/2018

0

100

200

300

400

500

600

700

800

900

1,000

Chinese Steel Price (Shipbuilding Plate) in USD

Shipbuilding plate 20mm RMB

$/ton

$330 / ton

$600 / ton

703/12/2018

2. Exchange rates

Exchange rate variation with the USD

0.50

0.55

0.60

0.65

0.70

0.75

0.80

0.85

0.90

0.80

0.90

1.00

1.10

1.20

1.30

Jan2014

Apr Jul Oct Jan2015

Apr Jul Oct Jan2016

Apr Jul Oct Jan2017

Apr Jul Oct Jan2018

Apr Jul Oct

100 Yen 1000 Won 10 Yuan

6.93 Yuan

1126 Won

113 Yen109

10036.63

803/12/2018

3. Labour costs

Comparison shipyard labour costs 2000 and 2015

4. Regulations

903/12/2018

Accumulation of Regulations has added to Newbuilding Costs:

2004 PMA (IACS RULES Permanent Means of Access)

2006 CSR (IACS COMMON STRUCTURE RULES)

2006 PSPC (IACS PERFORMANCE STANDARDS FOR PROTECTIVE COATING)

2010 IMO Tier I (Nox) Main Engine & 2012 IMO Tier II (Nox) Main Engine

2012 BWTS (Ballast Water Treatment System)

2013 IMO EEDI (ENERGY EFFICIENCY DESIGN INDEX)

2015 HCSR (IACS REVISED COMMON STRUCTURE RULES)

2016 Tier III Main Engine (SCR) for ships with keel laid after 2016, trading US/Europe

4. Regulations

1003/12/2018

Comparison lightweight tons VLCC 1990 vs 2018

II. Prices determined by shipping supply and demand

1203/12/2018

Shipowner Demand – influencing factors:

• Global trade demand• Time charter rates and forecasts• Market sentiment• Fleet renewal • Regulatory requirements • Demolition prices• NB & S&P prices

Shipowner Demand

1303/12/2018

Shipowner Demand – influencing factors:

• Global trade demand• Time charter rates and forecasts• Market sentiment• Fleet renewal • Regulatory requirements • Demolition prices• NB & S&P prices

Shipowner Demand

NB S&P Charter

1403/12/2018

Shipyard Supply

Shipyard evolution since 2000

0

50

100

150

200

250

300

350

400

450

2000 2002 2004 2006 2008 2010 2012 2014 2016

Number of Shipbuilding Facilities - China, Japan, South Korea

CHINA

JAPAN

SOUTH KOREA

TOTAL

201

222

415

128

1503/12/2018

Newbuilding prices since 1992

Newbuilding prices

0

20

40

60

80

100

120

140

160

180BULK Supramax

BULK Panamax

BULK Capesize

TANKER Aframax

TANKER Suezmax

TANKER VLCC

1603/12/2018

VLCC newbuilding prices since 1992

Newbuilding prices

0

20

40

60

80

100

120

140

160

180BULK Supramax

BULK Panamax

BULK Capesize

TANKER Aframax

TANKER Suezmax

TANKER VLCC

$90m

$160m

$60m

$100m

III. Are newbuilding prices sufficientto have a sustainable industry?

1803/12/2018

A sustainable industry?

Widespread losses in the shipbuilding industry

FY 2015 FY 2016 FY 2017 FY 2018e

SAMSUNG HI (Wn 962bn) Wn 475bn (Wn 150bn) Wn 139

NAMURA SHIPB ¥14.6bn ¥7.3bn (¥11.3bn) (¥20.5bn)

FINCANTIERI (€175m) €14m €53m €30m

1903/12/2018

• Since 2007 the number of shipyards worldwide has halved

• China and Japan GT under construction -36% and -46% respectively

• S Korea orderbook -48% since 2007

A sustainable industry?

0

50

100

150

200

250

300

350

400

450

2000 2002 2004 2006 2008 2010 2012 2014 2016

Number of Shipbuilding Facilities - China, Japan, South Korea

CHINA

JAPAN

SOUTH KOREA

TOTAL

201

222

415

128

2003/12/2018

1. 21st Century Sb2. Dae Sun3. Daehan Haenam4. Daewoo5. Dongbang6. Hanjin Busan7. Hanjin Youngdo8. Hyundai Mipo9. Hyundai Samho10. Hyundai Ulsan11. Ilheung12. Jinse Hi13. Kwangsung14. Mokpo S&e15. Nokbong16. Samho Sb17. Samsung18. Sekwang Hi Mokpo19. Sekwang Hi Ulsan20. Shinan21. Sls Sb22. Spp Sacheon23. Spp Tongyeong24. STX Busan25. STX Jinhae26. Sungdong27. YS Heavy

A sustainable industry?

South Korea 2008: 27 yards

1. Hyundai Mipo2. Hyundai Ulsan3. Daewoo4. Hyundai Samho5. Samsung6. Daehan Haenam7. Dae Sun8. STX O&SB Jinhae9. Samkang M&t

In 10 years the number of yards in South Koreahas fallen by 65%

South Korea 2018: 9 yards

IV.Different strategies to counter pricesthat may be below building costs?

2203/12/2018

State owned vs private Government/naval ship orders Tax breaks Debt waivers Soft financing Shipping funds Programmes for domestic owners Demolition bonuses Group cross-subsidisation

Shipyard strategies

Strategies to counter low prices/long cycles

How to qualify this support?

2303/12/2018

Building costs

Category: %

Equipment 40%

Steel 30%

Labour 15%

Overheads 10%

Profit ? 5%

Representative cost breakdown to build an Ultramax bulker -China 2018

2403/12/2018

Building costs

Category: %

Equipment 40%

Steel 30%

Labour 15%

Overheads 10%

Profit ? 5%

Representative cost breakdown to build an Ultramax bulker -China 2018

THANK YOU