Fresh newbuilding contracts especially from China and Korea will have the biggest impact on the supply of tonnage, according to Matthew Flynn, Managing Director, Worldyards.

Speaking about supply responses to changing demand at the Greater China Shipping Finance Strategy and Investment Forum held recently in Hong Kong, Flynn said that in the long term, there has been a revival in orders, particularly from Chinese owners and cargo interests.

Flynn said a mutual agreement for deferred delivery and construction problems at the yard would be a medium-term solution and would result in flatter orderbook and accelerated delivery of vessels that are in demand.

With regard to the bulker market, despite an increase in global iron ore shipments, slow steaming may come to the bulker market. As far as dry bulk carriers, despite an activity in the carriage of iron ore and coal, there could be slow steaming coming to the bulker market. However, with regard to containers, idle fleets and reduced speed have helped to limit impact.

Orderbook scenarios

With regard to LNG too, there would be additional vessels available for spot/short-term business by the end of the second quarter of 2010. On tankers however, vessels in lay-up are in very limited number and mainly confined to old vessels that will likely never trade again.

"Fresh newbuilding contracts have the biggest impact on the supply of tonnage. There has been a revival inordering particularly by Chinese owners and cargo interests. Orderbook deductions – referring to orders totally removed rather than rescheduled – from 2009 are being offset at least on the dry side by a surge in orders at Chinese yards by Chinese owners as well as by a flurry of activity in Korea at the turn of the year," said Flynn.

Referring to orderbook deductions, he said three scenarios are being practised. The first type are definite ones where shipyards will not continue to construct. "These are clear deductions to the orderbook," he said. On the other hand there are a few orders which although cancelled, continue to remain. "While the owner or the yard cancels the order, the shipyard continues to build for its own account or to sell to a different owner. "There are no deductions to the orderbook in this situation," he added.

The best example is the Polarcus order with Drydocks World Dubai. Although the company initially placed an order for six vessels, financial constriants forced it to settle for four ships. Drydocks World Dubai however continues to build the remaining two vessels.

Impact of conversions

The second scenario is when both parties mutually agree to terminate forward contracts resulting in deduction to the orderbook. Finally, there are cases of failed contracts and fictitious orders. These are cases where the original orderbook is in itself overstated," said Flynn.

According to him Worldyards is also tracking contractual conversions in which shipyards and owners agree to change the ship type before the vessels is delivered.

"The impact on supply depends on the specific type of contractual conversions, but we have seen trends such as change in ship size within the same segment, where for example, it is increased from 48,000 dead weight tonnage (dwt) to 52,000 dwt bulk carrier. The impact here is a marginal increase to the drybulk orderbook," he said.

On other occasions containership owners are also negotiating with shipyards to change contracts from containerships to bulkers or tankers, while in several cases, newbuilding tankers have been converted into Floating Production Storage and Offloading (FPSO) units, he added.

Flynn added that while demolition is running at a high level, it is still below historical levels on both historical and relative terms. "Physical conversion of single hull bulk tankers to bulk carriers or offshore vessels can have a substantial impact on the market," he said.

From 2008 to present, Worldyards has recorded eight single hulls being converted to Very Large Crude Carriers (VLCC) double hulls, 40 SH VLCC into Very Large Ore Carrier (VLOC) conversions and seven SH VLCCs to FPSO conversions.

Slow steaming in bulkers

In terms of rescheduling, he said while owners and yards mutually agree for later delivery – which is often market driven – there are a few which are a result of construction problems at the yard, mainly construction competency-driven.

Commenting specifically on bulkers, he said that while global iron ore shipments in 2010 are expected to reach one billion tonnes, there are suggestions that slow steaming may come to the bulker market.

Quoting Lorentzen & Stemoco, he said no dry bulk carriers have been laid up since March/April 2009. "As the letter of credit situation normalised and the dry bulk trade resumed in the spring of 2009, all laid up vessels were re-employed in the market. Since then, the market has functioned normally with freight rates covering financial and operating costs for most owners."

With strong activity in the carriage of iron ore and coal, many ports have been overwhelmed by cargo handling, leading to congestion in many ports. "Many Chinese, Australian and Brazilian ports were impacted."

With regard to containers, he said the idle fleet in hot lay-up (deactivated for a short period of time), according to Alphaliner and as of January 1, 2010, stood at 581 ships, totalling 1.51 million TEUs, which represents 11.6 per cent of the cellular fleet.

Meanwhile, Alphaliner's 47 units of 3,000 to 13,000 TEU containerships were navigating at reduced speeds (as of January 1, 2010), absorbing 230,000 TEUs in freight space, accounting for about 2.3 per cent of the global containership fleet. "Such ships otherwise would have been idle," he said.

With regard to LNG, he said there are examples of some LNG ships that were completed but kept at the shipyard. "MOL's 177,000-cbm sister ships, Abdelkader and Ben Badis, were both delivered in 2009 but were kept at the shipyard in a de-facto lay-up," he said.

Vessels in lay-up

Quoting data from Poten, he said at the beginning of this year, a total of 15 ships were in semi/hot lay-up, of which 10 are in the East and five in the West. "The estimates are that four vessels in the West, two in the Middle East and seven in the Far East were open as of the first week of March," he added.

Further quoting Poten, Flynn said according to estimates in the second quarter, there would be about 23 to 27 "non-project" vessels potentially available for spot/short-term business.

"During the course of 2009, Poten identified eight to nine ships that were used for floating storage LNG plays, but at the beginning of this year, there was no floating LNG storage," he said.

Tanker vessels, he argued, are in lay-up in very limited number and are confined mainly to old vessels that will likely never trade again. "Such units include older tonnage used for fuel oil storage plus those vessels waiting for conversion to FPSO projects," said Flynn.