Shipbuilding capacity may grow by 90% in two years

Shipbuilding capacity at yards around the world is expected to grow by between 50 per cent and 90 per cent by 2010, says a new report from HSBC Bank.

But the dramatic increase combined with moderate order growth could create downside risks further ahead, the bank warns. Over-capacity may lead to weaker newbuild prices and lower margins.

HSBC says China's capacity is increasing and new entrants are appearing in India, Vietnam and the Philippines. China is expected to overtake South Korea as the largest shipbuilding nation in the near future.

The report underlines the increasing importance of the oil industry to shipyards. One of HSBC's favoured stocks is South Korea's Samsung Heavy Industries, which it describes as a "deep water oil drilling and production play" with 70 per cent of revenues associated with the oil sector.

The shares of major shipbuilders have retreated from their peaks in the second half of last year as global economic uncertainties, reduced activity during the past two years, tight credit markets and potential oversupply have combined to increase the risk of a further slowdown in order growth in the near term.

The bank believes specialised shipyards such as those with strengths in cruise ships, oilrigs, liquefied natural gas vessels and oil production will survive, while others will dwindle away as low-cost Chinese builders gain market share.

The most vulnerable shipbuilders are those in Japan, which have a comparatively high cost base – 1.5 times higher than South Korea's and seven times higher than China's in terms of average wages. The bank warns that the recent acquisition of a 39 per cent stake in Norway's Aker Yards – the second largest cruise ship builder after Italy's Fincantieri – by South Korea's STX Shipbuilding could indicate that western Europe may be starting to lose its hold on that market.