Analysis of Ships Supply and Demand Principles in the World Sea Trade

Transcription

1 Analysis of Ships Supply and Demand Principles in the World Sea Trade Bahram Shomali Pour M.SC. Student of Marine Transport Engineer, Khoramshahr Marine Science & Technology University Ebrahim Noshadi Assistant Professor of faculty Economic & Management, Khoramshahr Marine Science & Technology University Maryam Taghinezhad Fard Bachelor Student of commercial Management, Field of Port and Shipping, Khoramshahr Marine Science & Technology University Abstract- The shipbuilding and ship scrapping industries play a central part in the shipping market model. This paper starts with a regional review of the location of shipbuilding capacity. This is followed by a discussion of shipping market productions and prices cycles. A section on the economic principles is followed by a discussion of the technology of the business. Now in this paper, The Economics of Shipbuilding and Scrapping has established itself as the most valuable introduction to the organization and workings of the global shipping industry available today. Also the paper combines a sophisticated historical and the oretical analyze is of this large and complex market with detailed practical information on all aspects of the Shipbuilding and Scrapping. Keywords: shipbuilding, scrapping, ship market Introduction The job of the shipbuilding industry is to supply new ships, while ship breakers are the last resort buyers of old ships when it is no longer possible to operate them profitably in the shipping market. In terms of their economic structure, the two industries are very different Shipbuilding is a heavy engineering business, selling a large and sophisticated product built mainly in facilities located in the industrialized countries of Japan, Europe, South Korea, China and Taiwan. It requires substantial capital investment and a high Corresponding author; Tel: address: bahram.shomalipour@yahoo.com 161

2 level of technical expertise to design and produce a merchant ship. The ship scrapping industry, in contrast, is located mainly in the developing countries of the Indian subcontinent and is one of the world s most labor-intensive industries in some countries ship scrapping takes place on the beach, with labor equipped with only the most primitive of hand tools and cutting equipment. We then consider shipbuilding market economics, looking in particular at the shipbuilding market cycle, the price mechanism and the influences on the supply of and demand for shipbuilding output. The section on shipbuilding ends with a discussion of competitiveness and the related issues of capacity measurement, the production process and international comparisons of productivity. The second part of the paper discusses the process by which ships are scrapped, the market for scrap products and the international structure of the ship scrapping industry. Finally, in this paper we introduce a new unit of measurement, the compensated gross ton (cgt). The cgt of a ship is derived from its gross tonnage (gt), but weighted to take account of the work content of that particular ship type [1]. Regional Structure of World Shipbuilding About thirty countries have a significant merchant shipbuilding industry their production fell from 27.5 mgt in 1977 to 13 mgt in 1980 and then increased to m gt in This volatility was accompanied by a re-alignment of regional shipbuilding capacity. Europe s market share fell from 41 per cent to17 per cent, while the Far East grew from 46 per cent to 75 per cent. Japan and South Korea now dominate the industry, between them producing two-thirds of the world s ships. The other production is spread over many countries, mainly in Eastern and Western Europe. The shipbuilding output of most European countries declined during the 1980s, though only Sweden completely stopped building ships.south Korea and China both grew rapidly despite the general market problems in the shipbuilding industry.a century ago, shipbuilding was dominated by Great Britain. Gradually Continental Europe and Scandinavia squeezed Britain s share down to 40 per cent. Then in the 1950sJapan overtook Europe, achieving a market share of 50 per cent in In the 1980s the South Korean industry grew rapidly, challenging Japan s dominant position and finally establishing the Far East as the center of world ship building. In the 1990s China was increasing in importance. Following this sequence of events we might ask what it is about shipbuilding that enables a single country to obtain the commanding position achieved by Britain, Japan, and SouthKorea and why the balance has changed so much over the years. To answer this question it is instructive to take a brief look at the recent history of the ship building industry, and in particular the relationship between the shipping and shipbuilding industries [1]. Shipbuilding Market Cycles The changes in the regional structure of the shipbuilding market produced long periods of intense competition as each new entrant, Continental Europe, Scandinavia, Japan and 162

3 then South Korea, fought for market share. This intense competition sets the scene for a harsh commercial climate, which is intensified by the cyclical nature of shipbuilding demand. Over the last century it is possible to identify eleven separate cycles [2]. In addition, several European governments had been convinced by the war of the importance of having a domestic maritime capability and devoted public funds to building up their industries. When combined with volatile trade, these supply side conditions set the scene for two decades of almost continuous overcapacity, interspersed by periods of moderate market improvement. Contemporary press statements illustrate the mood of the period. In a century of shipbuilding it is difficult to find many normal years. The combination of shipping market cycles and a constantly changing competitive structure ensures that this business, even more than the shipping business, is in a constant state of change [3]. The Economic Principles The Shipbuilding Market Supply/Demand Model As far as the demand function is concerned, the role of freight rates in generating ship orders is easy to understand high earnings encourage ship owners to order more ships and thereby increase their profits. If high freight rates persist for a considerable time this has the secondary effect of generating internal funds to help finance new ships. Historically there has been a close relationship between peaks in the freight market and peaks in ordering new ships. However, because of the time-lag between ordering a ship and taking delivery and the long service life of ships once it has been delivered, current freight rates will only be a partial influence on new building demand. The key question facing the ship owner is what level offer right rates will prevail during the years following delivery of the vessel, and this introduces market expectations as the second major influence on new building demand. The third important influence on shipbuilding demand is the availability of credit. If shipping companies fund their ship purchases from internally generatedrevenue, this limits the amount of ships ordered to those ship owners with the necessary financial resources to purchase a ship. The availability of credit removes this constraint and broadens the market to include many entrepreneurial ship owners without large sums of capital [4]. Turning to the supply function for new buildings, we immediately encounter the difficult issue of shipyard capacity basically, the level of supply depends upon how many shipyards are operational and how many ships it is financially viable for each yard to produce at the prevailing price level. In practice, the level of output depends not only on shipyard facilities but also on the input of labor and labor productivity. Shipyard facilities place an upper limit on output, but it is the efficiency with which they are used that determine the number of ships built. Another major factor determining the shape of the short term supply curve is the inflexibility of ship building capacity [5]. 163

4 The Shipbuilding Production Process For a better understanding of the supply/demand model, we must now turn to the production process. Currently there is over 250 merchant shipyards world-wide employing about 200,000 workers. The number of docks/berths and the layout and equipment of the shipyard place an upper limit on the number of vessels which can be built per annum. There is great diversity. Some yards are fully operational, while others are uncompetitive and under-utilizing their facilities [3]. Shipbuilding Facilities and the Production Process The basic structure of the ship is, in some ways, quite simple. The hull is a box built from thin steel plate, reinforced by internal bulkheads and sections to give strength. Within the hull are various items of equipment required to propel and control the ship, handle cargo and monitor performance. The complexity in ship building lies in minimizing the materials and labor required to construct a ship to the structure al standards ( scantlings ) laid down by the Classification Societies. The way navalarchitects resolve this problem depends on then a ture of the ship.[6] The bulk carrier hull uses steel plate to construct the sides, double bottom, shedding plates, bulkheads and shaped components such as the transverse web. Sections are welded to the flat plate, for example as side or bottom shell longitudinal, to give rigidity. Although this structure looks simple, it is quite complex. The main deck is broken up by hatch openings and the hull derives its strength from the double-bottom, the shedding plates, the hat chcombings and the frames which run along the hull. Into the hull are fitted the many components, main engine, auxiliaries, pipe work, control systems, wiring, pumps [4]. Nine Stages in the Shipbuilding Production Process Stage [6] Stage 1: Design and Estimating The design, estimate, building strategy and production plans are produced by shipyard staff, initially in outline and then gradually developed in greater detail involving the production of detailed working drawings and parts lists. Computer graphic equipment is now widely used in ship design to speed up this process and create better and more accurate information. Materials are ordered. Developing comprehensive and accurate information at an early stage in the design programmeis one of the most crucial areas for improving productivity and product quality in modern shipbuilding. Materials account for about per cent of the cost and labor and overheads for the remainder and a large merchant ship may involve several thousand separate purchase orders. A cost estimate must be prepared, often before the full design has been finalized and materials, particularly long lead items such as the main engine must be ordered. Stage 2: The Steel Stockyard The steel is one of the first items to be ordered and when it arrives it is stored in the steel stockyard. The two principal steel components used in ship manufacture are plates and 164

5 rolled sections, which are used primarily to stiffen the plates. A modern stockyard is laid out in an orderly manner and materials are retrieved using an overhead gantry crane. Stage 3: Steel Shot Blast Plant Steel plates and sections are retrieved from the steel stockyard and processed through the steel shot blast plant. This involves rolling plates and straightening sections to ensure that they are true, followed by shot blasting to remove rust and priming to protect the plate from further rusting and provide a foundation for paint. Stage 4: Plate and Stiffener Preparation The primed steel plates are cut to the precise required size using profile burning machines. Any plates that do not need cutting are transferred to the flame planer to have their rough edges removed, and create the proper edge profile for welding.if required; they are bent to shape using a press or rolls. Framing members are prepared from steel sections, cut to size and then bent to shape using a frame bending machine. By this process the many thousands of steel components for constructing the ship s hull are prepared, cut to size and numbered in accordance with the drawings. In practice, this is a flow process with a steady stream of components moving through the steel preparation bays. Stage 5: Assembly The next stage is to assemble the steel components into the building Blocks from which the ship will be constructed in the dock. Shaped steel is formed in to minor assemblies, typically weighing less than half a ton. The larger plates that make up most of the hull are transferred to the panel assembly line where framing members are welded in place to form panel assemblies. Finally, the minor assemblies and the suband panel assemblies are welded together into major three-dimensional (block) assemblies using various types of welding equipment. Stage 6: Pre-Outfitting The hull must be fitted with tens of thousands of outfit items such as pipes, electric alcables, switchboards, furnishings and machinery. During the various stages of assembling steelwork, advance outfitting is carried out. This involves the installation of as much pipe work and equipment as is possible at the earliest practical stage in production. To achieve high levels of advanced outfitting requires large amounts of information, accuracy and organization. Plans must be made, materials orderedand delivered to the work zone when they are required, so that assembly can proceed smoothly. When the materials arrive they must be precisely as specified and fit into the assembly without adjustment or re-work. This sounds easy, but calls for great care in planning and accuracy control. 165

6 Stage 7: Coating Traditionally painting was carried out at a late stage in production and often became a production bottleneck. In recent year s coatings has become increase in glyprominent in the production operation. There are two factors driving this. First, effective corrosion protection is now required by customers, as a way of reducing maintenance costs. Second, modern coatings are technically demanding and must be applied under controlled conditions, ideally in a properly designed paint cell. These requirements have led to the careful integration of paintwork into the production operation. Wherever possible outfitted steel units will be blasted and painted in dedicated paint cells before final assembly. Stage 8: Assembly on Berth Finally, prefabricated sections of the ship, together with those items of out fitting already installed, are lifted into the assembly dock where they are carefully aligned, then welded into position. Outfit installations such as pipe runs are also linked up. Stage 9: Outfit at Outfit Quay When the Hull is Complete. the dock is flooded and the vessel is floated to an outfit quay where the outfitting of the ship is completed, systems are commissioned to ensure that on-board systems are operating correctly, and basin (or dock) trials of the main engines. The major steps forward in shipbuilding techniques have been in these areas for example, the introduction of pallets for material handling and the extensivepre-outfitting and painting of assemblies before installation in the ship. The application of these techniques yields dramatic results. For example, a ship builder using these techniques may take only half the man hours required by more traditional methods to build the same ship. In short, the key to modern shipbuilding is organization. Shipbuilding Costs and Competitiveness Broadly speaking the price competitiveness of a shipyard depends on the six key material supply, facilities, skilled labor, wages, labor productivity, exchangerates and, in some cases, subsidy all play a part in determining how many ships are produced, how much they cost and the revenue received by the shipbuilder[7]. Material Costs Material cost and availability is significant. Very large shipbuilding countries such as Japan and South Korea can support a full range of material suppliers, including engine builders, equipment manufacturers, subcontractors and manufacturers of specialist items such as stern frames. Long production runs give these suppliers a competitive advantage and the ability to deliver a wide range of quality components from stock. Shipyards in areas with little shipbuilding activity have a more difficult time. Even if they are able to obtain supplies abroad, the complexity of the assembly operation can make this a difficult strategy to implement [7]. 166

7 Shipbuilding Facilities and Productivity There are enormous differences in the productivity of shipyards around the world.facilities play a part in explaining these differences in the sense that they set an upper limit on the size and volume of ships that can be built during a year.however output is far more dependent upon the productivity of the shipyard. Unlike a process industry where achieving maximum production merely involves switching on the machinery and feeding in the required volume of raw materials, building a merchant ship requires highly sophisticated managerial skills in terms of planning, organization and control. Ultimately the maximum throughput will depend not just upon the size of the facilities, but upon the efficiency with which they are used. Some shipyards take ten times as many man hours as others to build the same ship[8]. Labour Costs Arid Competitiveness Labor accounts for per cent of the cost of the ship, so wages have a major impact on competitiveness[7]. The labor cost determines the total wage bill for producing the ship and depends upon the basic wage, to which must be added over time payments and any bonuses paid to the workforce. In order to compare hourly wage costs it is necessary to convert them to a common currency; for present purposes, the US dollar has been used. Applying the labor cost per man year to the cart productivity per man year gives an estimate of the labor cost per cart. Currency Movements and Competitiveness Although currency movements are far removed from the shipyard, they are the single most important factor in determining the cost competitiveness of a shipbuilder. Since the world economy moved on to a floating exchange rate system after the breakdown of the Bretton Woods system in 1971, shipbuilders have faced a major problem with exchange rates. Unit labor costs vary proportionately with the exchange rate, and given the volatility of exchange rates during the 1980s and1990s this is clearly a very major factor in determining shipbuilding cost competitiveness [7]. The Ship breaking Industry Compared with shipbuilding, ship breaking is an rough business. Most of the world s ship scrapping industry use manual labor to break ships in whatever facilities are available, often a suitable beach. Although it is possible to increase productivity by using mechanized ship breaking methods, these are capital intensive and require special investment, which is not easily justified given the small margin in the ship breaking business. The process of non-mechanized ship breaking falls into three stages. At the preparatory stage, the owner of the vessel undertakes various operations including stopping up all intake apertures; pumping out all bilge water; blocking off in takes and valves; and removing all non-metal objects together with potentially explosive materials. If the vessel 167

8 is a tanker it must be cleared of potentially explosive gas. This work is often subcontracted. The next stage is to beach the ship and remove large metal structures such as masts, pipes, superstructure, deck equipment, main engine, ancillary equipment of machinery room, decks, platforms, transverse bulkheads, propeller shafts, propeller shaft bearings, upper hull sections, and bow and stern end sections. The remainder of the ship is then hauled or lifted on to dry land by means of slipways, ramps or dry docks and cut into large sections. In some of the less sophisticated ship breaking operations the vessel is simply winched on to the beach. Although this process can be undertaken satisfactorily on a beach or alongside a quay, the availability of a dry dock is a considerable advantage, in terms of both efficiency and safety [9]. Finally, the panels and sections obtained from the ship are cut into smaller pieces as required, using manually operated acetylene cutters. The scrap is then assembled for transport to its ultimate destination. The Market for Scrap Products Steel scrap obtained from the ship breaking process is of comparatively high quality, especially from tankers that have large flat panels. In developing countries, the scrap is simply heated and rerolled into concrete reinforcing rods for sale to the construction industry. Rerolled steel is also ideal for sewage projects, metal roads and agricultural needs. Smaller pieces are melted down. Much of the ship breaking industry is located in the Far East and Indian subcontinent where there is a sizeable market for reprocessed steel scrap products of this type. In the advanced countries of Europe, scrap is generally completely melted down to make fresh steel[9].although the scrap steel provides most of the value of the ship, the most lucrative return comes from the 2 per cent of non-ferrous items. Diesel engines, generators, deck cranes, compasses, clocks and furniture can also be resold. Again, the market for such equipment is more readily available in developing countries than in the developed countries where technical standards are more demanding and the costs of refurbishing are higher. Who Scraps Ships? For all these reasons most of the ship breaking industry is located in developing countries where ship breakers sell their products to the construction industry. This is a relatively mobile industry. Table 13.5 shows that in the mid-1980s almost three-quarters of the ship breaking industry were located in Taiwan, China and SouthKorea. Ten years later Taiwan and South Korea had left the industry. China s market share had fallen to 9 per cent and India, Bangladesh and Pakistan had taken over as market leaders. The explanation is that this very basic industry gravitates towards countries with low labor costs. Analyzation In this paper we have discussed the international shipbuilding and scrapping industries. Although shipbuilding is closely aligned to shipping, it operates in a totally different 168

9 competitive environment that is highly volatile and ship builders are constantly under pressure to expand or contract their output. During the twentieth century there have been eleven major market cycles of this type. The market operates through international competition, which forces change through the price mechanism. It is common for shipbuilding market prices to vary by as much as 60 per cent in a period of two or three years. Prices rise when there is a shortage of capacity to meet the new ordering demand of shipbuilders, and they fall when there is overcapacity. Because of the continuous adjustment process in the level of shipbuilding output, the measurement of capacity has always been a contentious issue in the ship building industry. There is no accurate way of measuring capacity, since the level of out put depends upon physical facilities (which ultimately limit the maximum number of ships that can be built), the level of employment, the productivity of those employees, and the type of ship being built. Thus, it is possible for a modern shipyard with a highly productive workforce to produce twice as many ships as a shipyard of similar physical dimensions and the same number of employees but lower productivity. Conclusions In conclusion, the shipbuilding production process is simple in principle but complex in practice. Shipbuilding is a fascinating industry, but not an easy one to study. In nearly every area we find difficulties in measuring output, productivity, or competitiveness, while historically the industry has swung from period s of euphoria to gloom. Only one thing is certain: as long as there is seaborne trade and salt water, there will be shipbuilders. References 1. Fayle, E.G. A Short History of the World s Shipping Industry, London Press, Volk, B. the Shipbuilding Cycle a Phenomenon Explained, Bremen: Institute of Shipping Economics and Logistics Press, Hampton, M. Shipping cycles, Sea trade Conference, London, Svensson, T. Management strategies in shipbuilding in historical and comparative perspective, the Fourth International Shipbuilding and Ocean Engineering Conference, Helsinki, Rochdale Report Committee of Enquiry into Shipping, Cmnd 4337, London: HMSO, Chilton, M. What Goes on in Shipbuilding?, Cambridge Press, Riddle, I. Shipbuilding Finance, Cardiff, University of Wales Press, Stopford, R.M. and Barton, J.R. Economic problems of shipbuilding and the state, International Journal of Maritime Policy and Management, Vol. 13(1), pp , Patrick, M., and Alderton, K. Sea Transport: Operation and Economics, Thomas Reed Press,