Newbuilding Requirements 2017-2035 | SEA Market Forecast WG

2017 Market Forecast Report

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2017 Market Forecast Report

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Contents

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7

Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9

Global Economic Situation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11

Global Energy Consumption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Global Seaborne Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Newbuilding Requirements: Cargo Carriers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17

a. Containerships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17

b. General Cargo ships forecast . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21

c. Oil & Chemical Tankers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24

d. LNG & LPG Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

e. Bulk Carriers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27

Newbuilding Requirements: Offshore Oil & Gas . . . . . . . . . . . . . . . . . . . . . . . . . 29

a. Offshore E&P . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31

b. Construction & Subsea . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32

c. Offshore Wind . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

d. Offshore Supply & Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

Newbuilding Requirements: Passenger Ferries . . . . . . . . . . . . . . . . . . . . . . . . . . .37

Newbuilding Requirements: Cruise Ships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39

Newbuilding Requirements: Ro-Ro . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

Newbuilding Requirements: Other Non-Cargo Carrying Vessels (ONCCV) . . . . .47

a. Fishing Vessels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47

b. Research Vessels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

c. Tugs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

d. Dredgers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .51

e. The Arctic Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .53

f. Other Specialised Vessels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56

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Introduction

SEA Market Forecast exists since 1969. The main task of this group is to conduct market forecasts and deliver regular studies on technical issues such as market forecast, newbuilding requirements, CGT coefficient and shipbuilding capacities aiming at providing best possible guidance for long-term planning. The group represents European shipyards’ and maritime equipment industry at internatio-nal level and takes part at international forecasting groups.

Forecasting is a difficult business, but when it needs to be done, it is good to assemble the best. That is what ISFEM is for. The International Shipbuilding Forecast Expert Meeting (ISFEM) is the forum for discussing findings and harmonising the methodologies to create this report together with our colla-borators: SAJ, KOSHIPA and CANSI1. Our partnership in this annual endeavour increases our mutual understanding of our industry and its prospect for growth.

The developing global macroeconomic outlook on economic growth, production, energy consump-tion (and developing changes to the energy production mix) provides the basis for the forecasts found inside this report. These values, in turn, inform our expectations for maritime trade volumes in dynamic global shipping routes and patterns. These volumes are further broken down into segments such as major bulk trade, oil and gas cargo, general cargo and minor bulk.

It is important to note that expectations for technological advancement is having increasingly signifi-cant impact on the forecasts. The speed of change, the convergence of sciences, advanced robotics on one hand, and on the other machine perception, intelligence and learning are delivering capabili-ties that are seamless, synchronous, and personalised.

This forecast is reporting on newbuilding requirements, not on demand growth. Newbuilding requi-rements reflect the expected growth of the fleet and are forecasted for individual ship type and size. These estimates take into consideration the average age of the fleet-segment and the rate of vessel scrapping.

The figure below illustrates the methodology:

GLOBAL TRADE

▸ trade patterns

▸ type of trade

▸ sea borne/land

▸ etc.

NEWBUILDNG REQUIREMENT

TO 2035

MACRO ECONOMIC

▸ GDP

▸ demography

▸ production

▸ energy mix

▸ etc.

FLEET REQUIREMENT TO 2035

▸ Existing fleet size & age

▸ deleted ships & replacement

▸ regulations

▸ etc.

Source: SAJ, ISFEM 2016

Taken together, the forecast shows that newbuilding requirements are on the rise, albeit that the growth rate is relatively low. Drivers for growth include increasing demand for transport and sup-ply-side factors: that newer, smarter, and more efficient equipment, technologies, and training are playing an even more significant role in fleet replacement. Fleet digitalisation is offering new hori-zons of possibilities for the fleet to become more effective, transparent, responsive, and timely in their operations.

1) SAJ = Shipbuilders’ Association of Japan, KOSHIPA = Korean Shipbuilders’ Association, CANSI= Chinese Association of National Shipbuilding Industry.

Nonetheless, with sustained overcapacity of the global shipbuilding capacity and transport capacity, these demand prospects for growth are not enough to restore balance to the ongoing health of the overall maritime industry. Much has already been done to reduce this capacity, but it still falls short and risks are still high. We applaud those who have already taken steps - you are heroic caretakers of the industry and the future of the maritime business.

Jenny N. Braat - Chairwoman

Sarai Blanc

Dario Bazargan

Ralph Dazert

Sandra Rand

Elina Vähäheikkilä

Paulino Fernandez

Jesús Algarra Lois

Runar Haddal

Tor Hjorth-Falsted

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Executive Summary

The shipping industry is undergoing structural changes affecting almost all segments within the industry and impacting the foreseen newbuilding requirements towards the year 2035. Apart from ongoing technological advancements and increasing regulatory pressure on the industry, the geo-political situation, slowing overall seaborne trade growth and general global economic uncertainties also affects the forecasts.

SEA Europe’s 2014 Market Forecast Report focused on uncertainty in oil prices, the US financial situation, China’s economic transitioning and slowdown, general growth forecasts and the Eurozone recovery. Updating this snapshot for 2016 would continue along these themes combined with more added uncertainties affecting the forecasts downwards especially in the short term. Most major shipping segments are challenged by overcapacity issues and low freight rates leading to signifi-cant lowered secondhand values and limited shipowners incentives to contracting of new vessels. Consequently, the global shipbuilding industry is heading towards the lowest annual order intake for 30 years.

Looking further, however, provides confidence in the industry. Despite the above mentioned structu-ral changes, being a very volatile industry, shipping has historically followed long cycles. Hence, the perspectives for sea borne trade growth, the ocean economy and maritime business potential in ge-neral are good and indisputable. Apart from increasing newbuilding requirements albeit with lower growth rates than historically, SEA Europe foresees a promising potential within conversions and retrofitting of the at any time existing fleet in a quest to comply with the even tighter regulatory requirements and ensure increasing operational efficiency.

Looking at the individual segments, cargo carriers experience renewed severe pressure. In the me-dium to long term, it looks as though the dry bulk and tanker market could be in for a spell of overall slow growth due to a chronically over-supply. The containership segment will plateau in the medium term and grow moderate in the long term towards 2035. As the global seaborne trade patterns are likely to change and regionalise, oil prices expected to be depressed and the average capacity of containerships anticipated to increase further resulting in larger vessels and operators form alliances to increase operational efficiencies, the demand for feeder vessels for servicing smaller ports and shorter shipping routes is likely to increase. A similar increase is expected within the RO-RO segment.

The long term outlook for offshore is positive. However, after all time high ordering activity in several sub-segments combined with severe cuts in offshore spending, oversupply will dominate in most sub-segments and will take time before a more balanced market is achieved.

Despite a fairly mature passenger ferry market and slowing growth in passenger volumes in key mar-kets, overall moderate demand growth is expected in the medium to long term. The cruise vessel segment has experienced tremendous growth the past years and, judging from the orderbooks, the level of growth will remain in the short to medium term. However, in the long term the newbuilding requirements will most likely moderate and decrease linked to trends in international tourism, eco-nomic growth, and population growth.

Newbuilding requirements for non-cargo carriers such as fishing vessels, research vessels, tugs, dredgers and other specialised vessels are mixed. Due to an ageing fleet of fishing vessels, a high level of scrapping is expected. This, in turn, will lead to an expected rise in newbuilding deliveries but will still be lower than the number of vessels scrapped resulting in a further drop of the fleet size. Despite low levels of exploration activities leading to low vessel utilisation, low day rates and an increasing number of laid up vessels, recovery of exploration activities and fleet renewal is expected to restart investments in seismic research vessels. However, it remains to be seen whether the con-tracting levels of the past will be reached again. A similar development is expected in newbuilding requirements for oceanographic research vessels. While mature Western economies suffer from budget constraints, they still need to replace their ageing fleet. This is often achieved by replacing existing vessels with fewer but larger and more versatile vessels. Meanwhile, emerging economies are increasing spending on their oceanographic research fleets in their quest for energy sources and other raw materials. Taken together, these developments lead to a generally higher newbuilding requirement towards 2035.

Compared to previous forecasts, the slowing of world seaborne trade growth, a lower level of scrap-ping and a generally restrained spending are expected to result in a reduced yet still increasing new building requirement for both tugs and dredgers. As the arctic areas of the world are opening, the existing fleet of ships suited for the Arctic is exposed as ageing and insufficient. This development has spurred demand for icebreakers and ice-strengthened tonnage capable of Artic operations in the medium to long term. The requirement for ships in the other special vessels category is expected to grow slightly below the projected annual growth rate of world seaborne trade resulting in a relatively unchanged fleet size with the potential for a gradual rise in deliveries towards 2035.

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Newbuilding Requirements - Actual + Forecast (in mill. CGT)

Total Real deliveries

Projected Sea Europe

Average deliveries

Source: SEA Europe

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Global Economic Situation

Our 2014 situation report focused on uncertainty in oil prices, the US financial situation, growth forecasts and the Eurozone recovery. Updating this snapshot for 2016 would continue along these themes. Oil prices have seemed to reach near-term stability as North American output seems to trump any ongoing disruptions in the Middle East and rig-dismantling in the North Sea. The US financial situation has sustained its robustness so far into the second half of 2016, but with elections looming, trade deals in the balance, and a general political uneasiness in the US rolls on, markets may begin to grow weary. Growth has slowed in much of the developing countries, and Brazil’s hosting of the Olympic Games seems to pose as the cover story. Russia and Venezuela are under pressure of ailing economies, and the UK, one of the supporting pillars of the European economy, has voted to leave the EU.

Global growth drivers should not be discounted over the long term. China’s production is moving inland but their appetite for investing cannot be met domestically or abroad. This may go through seemingly volatile periods, but momentum is certainly in their favour. India’s demographics are stag-geringly young and the forecasts expect them to increase their purchasing power in the longer term. African expectations are likewise driving future growth, as they seem to continue to clean up their institutions and thereby laying the groundwork for future generations.

However, the beat rolls on. The forecasts in this report are looking much further over the horizon. We understand shipping to be very volatile and has historically followed long cycles. Looking further provides the confidence that the wrinkles get ironed out, trade happens and economies grow.

-8,00%

-6,00%

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1980-1989

1990-19992000

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20052006

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20152016

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World Economic Growth 1980-2030 (pct. p.a.) in PPP (Base Case)

Total OECD Developing Countries Total Transition Economy World

Source: SEA Europe

Shipbuilding

Forecasting seaborne trade volumes - historically the major variable tied to shipbuilding - were understood to be a factor of economic growth. However, these two indicators have decoupled as of late, and the result is that it has become more complex to produce accurate forecasts. We expect the growth-to-trade multiplier to trend towards a 1:1 ratio. As entire age cohorts are entering retirement, digitalisation and cheaper production equipment and technologies are moving pro-duction capabilities closer to the consumers, the impacts on volumes have yet to be realised.

The OECD launched a report examining new potentialities in the ocean economy. It recognises that technologies developed for on-land industrial applications have had a large impact on shipping and shipbuilding. However, this is poised to reverse given the emerging and diversity of industries that are connected to the ocean’s economy. It leaves us with the imperative to be good stewards of our environment and calls for more integrated policy, and invites us to the table.

Newbuilding prices reflect the competitive atmosphere among the yards that are struggling to keep above water. Low freight rates show a decrease in orders and increases in cancellations. With on-going productivity improvements increasing yard efficiency from technology, digitalisation, and project management, newbuilding prices are sighted to remain low. Ongoing accusations of state aid to support non-performing yards are prevalent and significant in their scope.

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Global Energy Consumption

The world population is increasing and more than one billion people are without access to electricity today. In 2040, the number is expected to be reduced to around 500 million.

The world economy is projected to almost double over the next 20 years and rise in prosperity drives a strong increase in energy demand even if this growth is substantially offset by rapid gains in energy efficiency.

In IEA’s main scenario, a 30% rise in global energy demand to 2040 means an increase of consump-tion for all modern fuels, but there will also be a multitude of diverse trends and significant switching between fuels. Renewable energy sees by far the largest growth. Natural gas will also have a strong growth, indeed the strongest growth among the fossil fuels. Gas consumption increases almost everywhere. Oil demand growth slows over the projection period and the use of coal will be hard hit due to environmental concerns and climate goals.

A total of $44 trillion in investments in global energy supply is needed towards 2040 of which 60% is estimated to be related to fossil fuels (IEA). Compared to the period 2000-2015, when 70% of supply investments went to fossil fuels, this represents a significant reallocation of capital.

Oil demand continues to increase, but the main stimulus for upstream oil and gas investments is the decline in production from existing fields. In the case of oil, this decline corresponds to losing the current output of Iraq - or the daily US shale oil production in 2016 - from the global balance every second year. That is approximately 4.5 million barrels per day and represents around 5% of the cur-rent global oil production.

A near term risk to oil markets could arise from a shortfall of new projects due to cuts in investments in 2015-2017. With cuts in investments for a third year in a row, it becomes increasingly unlikely that demand and supply can be matched in the early 2020s without the start of a new boom/bust cycle for the industry.

Significant improvement in operating efficiency and cost reductions for renewables is expected, but fossil fuels, in particular gas and oil, will continue to be the main sources of energy for several de-cades. Still, increases in renewables, together with nuclear and hydro energy, provide around half of the increase in global energy out to 2035 (BP). The growth in renewables will shift towards Asia, China in particular.

China is expected to be the largest growth market for energy, but it is likely to be overtaken by India towards 2035. Almost all the growth in world energy demand comes from fast-growing emerging economies, with China and India accounting for over half of the increase. Energy demand within the OECD barely grows. China remains the world’s largest market for coal, accounting for nearly half of the consumption in 2035.

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1990 1995 2000 2005 2010 2015 2020 2025 2030 2035

Asia PacificAfrica

Middle East

CISEurope

S & C America

North America

World Energy Consumption

Source: BP Statistical Review

RenewablesHydroNuclearCoalGasLiquids

World Energy Consumption

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Source: BP Statistical Review

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Global Seaborne Trade

As the backbone of international trade, seaborne transportation plays a major role in the world’s industries and society, enabling the transport of large volumes of raw and processed material, as well as food, water and technological products.

While experiencing a slightly slower growth rate compared to the longer-term historical average, global waterborne trade is forecasted to rise to an excess of 15,000 mln tons in 2035. With several factors coming into play in connection to seaborne trade patterns’ (re)definition, it has become clear that forecasting solely based on GDP evolution may no longer be sufficient. While WTO forecasts world merchandise trade in 2017 to grow between 1.8% and 3.1%, several uncertainties affect the outlook. These include, amongst others, the financial volatility stemming from changes in monetary policy in developed countries as well as the uncertainty about future trading arrangements following the “Brexit” vote in the United Kingdom and the trade policy announcements made by US President Donald Trump.

Continued population growth in Africa, Asia and South America and rising urbanisation are on the other hand set to increase energy consumption and hence demand for waterborne services during the coming decade. Global seaborne trade patterns could be also potentially affected by current and planned initiatives, such as the “One Belt, One Road Initiative”, the Partnership for Quality In-frastructure and the expanded Panama and Suez Canals. Growing cross border e-commerce, digi-talisation as well as the so-called fourth industrial revolution will also have the potential to further reshape maritime trade patterns and drive global seaborne growth.

Global oil seaborne trade is estimated to grow at 1.8% p.a. until 2035 (IEA), driven to large extent by increasing demand coming from emerging economies. In addition to price levels, supply and refinery margins, factors such as infrastructure developments as well as the recent lifting of sanctions on the Islamic Republic of Iran are also expected to drive further growth in crude oil trades. Fossil fuels will remain the dominant energy source powering the world economy up to 2035, with both gas and renewables though being set to grow rapidly in the coming years (also supported by environmental policies). The overall total seaborne dry bulk volume is forecasted to grow to approximately 6,000 million tons in 2035, driven by resilient Chinese imports of coal and iron ore, and strong grain and mi-nor bulk trades globally. Containerised trade is also expected to continue growing to reach approxi-mately 3,100 mln tons in 2035, with developing countries other than China entering the shipping scene expected to drive further trade growth.

Source: SEA Europe

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1970 1975 1980 1985 1990 1995 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2020 2025 2030 2035

Total trade in mln TONSTotal trade in mln TONS

Source: SEA Europe

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Newbuilding Requirements: Cargo Carriers

a. Containerships

Containerisation has played a crucial role in the development of global trade. It greatly reduced the cost of international trade and increased its speed, especially of consumer goods and commodities. Standardised containers made it possible to ship increasing volumes of goods around the globe in a cost-effective way. The constant growing of containerisation’s significance is a reflection of the changes that have occurred over time in the international system set up of manufacturing and pro-duction. Between 1982-2005, containerised trade grew 3.5 times as fast as the world GDP and 40% faster than international trade overall. Approximately 90% of non-bulk cargo worldwide is moved by containers stacked on transport ships. The Chinese share of the total container volume handled in the world has increased from 16% in 2000 to 31% in 2015.

Slow economic growth in 2015 resulted in limited expansion of container trade. Volumes increased by 2.4% to 175 mln TEU in 2015. For a long time, containerised trade flows could be predicted by looking at the performance of world GDP with the multiplier effect of the container volume growth ranging between three to four times the growth of GDP. In the recent years, 2010-2015, container- ised trade has grown around 1,5-2,5 times as fast as world GDP. The development is that in the year 2016 global container demand is struggling to achieve a GDP-to-trade multiplier of one.

Nowadays, the biggest container ships in the world can carry up to 19,200 TEUs. Containerised shipments have increased due to globalisation and world trade growth, but also compared to other shipping segments due to the fact that a container’s shipping price is not linked to the distance, like general cargo ships, but to parameters like availability, supply and demand. In addition, compared to RO-RO ships, containerships are much more flexible and growingly cost effective. The structu-ral changes that container shipping are undergoing will provide large economies of scale and the demand and supply ratio will continue to put pressure on container freight rates.

Containership Completions Actual and Forecast

The figure below shows the containership completions in million CGT’s for years 2010-2015 and forecast of 5-year-average of completions until year 2035.

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Mil.CGT

Container CompletionsActual and Forecast

Source: SEA Europe

In 2015, 212 containerships were delivered (8,25 mln CGT). As in the previous years, over 90% of containerships are built in Asia (China and South Korea). There is now overcapacity in the market so it is expected that deliveries of containerships will decrease in the coming 5 years. There is no room for many new orders very soon, since the current orderbook will cover a large part of the demand.

In the past years, the fleet grew unevenly. There was a shift to larger ship sizes when the focus was cutting unit costs per transported TEU by having larger ships. The ultra large containership segment (ULCS) especially contributed to the growth and currently accounts for 18% of the total fleet in TEU. There was annual growth of 45% between 2011 and 2016 of the ULCS fleet (12,000 TEUs and larger). Vessels over 10,000 TEUs accounted for 55% of the total capacity delivered in 2015. They now make up approximately a quarter of the current world fleet, up from less than 5% in 2011. Vessels of this size currently make up around three quarters of the total orderbook, so the share is about to grow.

Supersized containerships are leading to overcapacity. It is estimated that the demand for very large containerships is coming to an end because it has resulted in low freight rates and also ports struggle to turn them around efficiently, causing the total system cost to rise. This is why it is estimated that ULCS orders will decrease significantly. There will also be more demand for feeders to serve the big ships delivered. In the old Panamax segment, there is also overcapacity as these ships are not any more the most efficient way to transport goods through the Panama Canal and finding new uses has been difficult, as they are inefficient for most other container trades.

The figure below shows the CGT per vessel, that has been increasing in recent years.

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CGT / Vessel

Source: SEA Europe

In 2015, the containership fleet amounted to 246 mln DWT (5,214 vessels, 19.7 mln TEU), which means 6.5% growth compared to previous year in DWT. The container fleet in percentage of world’s total fleet is around 14% in DWT. The containership fleet will grow following the trade growth.

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Trade mil .tonnesMil . dwt

Containership Fleet EvolutionActual and Forecast

Source: SEA Europe

Container fleet requirement forecasts for 2020 / 2025 / 2030 / 2035 are 278,53 / 294,04 / 341,50 / 392,91 mln DWT.

Containership Deletions Actual and Forecast

Containership demolitions reached a record level in 2013, when 197 vessels ~ 435,000 TEU were removed. After 2013, demolition decreased and 2015 116 vessels were demolished. Year 2016 was again a record busy demolition year. Especially deletion of old Panamaxes which are becoming obso-lete due to the new Panama Canal expansion has been high. Higher demolitions will help to stabilise the industry. Today, the fleet is quite young and demolitions are expected to increase further again after 2025. The size of ships being scrapped is also expected to increase and the age of demolition is expected to decrease.

012345678

2011 2012 2013 2014 2015 2020 2025 2030 2035

Mil. DWT

Containership DeletionsActual and Forecast

Source: SEA Europe

Containership fleet age structure

In 2016, approximately 24% of total containers are over 15 years old. In 2015, the average age for containerships was 11.5 years. The orderbook (at the end of 2015) covered 9% of the fleet.

>15y24%

10-15y18%5-9y

31%

<5y18%

Orderbook9%

Container fleet age structure

Source: SEA Europe

Slow Steaming

Slow steaming started in 2007 - 2008, along with the financial crisis, when the market started to face an oversupply of tonnage, declining freight rates and increasing bunker prices. Through slow stea-ming vessels save bunker fuel, which is the largest component of operating costs structure. So, the practice of deliberately slowing down the speed of a ship was based mainly on economic reasons.

Nowadays, despite the continued low oil prices, slow steaming is still a common practice due to the fact that reduced fuel consumption leads to less air emissions and enable more energy efficient ope-ration. In addition, slow steaming keeps over 1 million TEU employed, the equivalent of 5-8% of the global container fleet capacity. If vessels speed up, it will probably lead to overcapacity in the market and put downward pressure on freight and charter rates. Slow steaming might even be a normal practice for the future.

Container Shipping Business

The current cheap slot cost will affect in a positive way the container shipping profitability and actual slots costs are expected to decline at faster rate than average freight rates. Bunker prices have fallen since early September 2014 reducing the largest cost element for ship operators. The main beneficia-ries of a lower oil price are containership companies, which benefit directly as bunker is not a passed through cost in container shipping. Another effect of the low oil price is the return of the feeder vessels onto the market offering lower bunkering prices per unit. In recent years, feeders have been passed by for being more expensive and slower than large vessels.

The container shipping business is also changing and operators are forming new alliances to increase operational efficiency. The alliances formed in the market limit the amount of port calls due to the large vessels for the main routes, which results in an increased number of feeders especially for small ports and shorter shipping routes. Also Hanjin Shipping went bankrupt, a reminder of the severity of the situation of the industry. We can also notice a predilection for eco-friendly designs.

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b. General Cargo ships forecast

Background and fleet profile

For a century, the general cargo ship was the workhorse of global seaborne trade. This all started to change with the advent of the containership in the late 1960s. By the mid-80s, classic general cargo vessels were being sent off to the scrapping beaches in droves, as containerships pushed these ships out of more and more trades. As the classic general cargo ship left the scene, the composition of the general cargo fleet tilted more and more towards short sea cargo ships below 10,000 DWT carrying capacity on the one hand and multipurpose and heavy lift tonnage on the other hand. As of January 1st, 2016, over 80% of the active general cargo fleet in terms of numbers of vessels consisted of general cargo ships smaller than 10,000 DWT. Despite these changes to the composition of the gene-ral cargo fleet, the decline in size and market share of this fleet continued. Of course, there were cer-tain periods of revival (as seen in the graph below), but overall the general cargo fleet has declined quite sharply in size, from 116 million DWT in 1980, to 75 million DWT as of the beginning of 2016. Because the total merchant fleet expanded sharply in the same timeframe, the general cargo fleet’s share of the world merchant fleet has declined much more severely, from 17% in 1980 to 4.2% at the beginning of 20162 .

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General Cargo fleet development, 1980-2016, in size and share of world fleetMillion DWT %

Note: Bars indicate fleet size, while the line indicates market share.Source: UNCTAD review of maritime transport, issues 2012, 2015 & 2016). This graph is meant as an indication and is based on Clarksons data. The numbers may not match those used in the SEA Europe forecast, which is based on IHS Fairplay data.

While general cargo vessels have been replaced by containerships in many trades, there are some re-gions where volumes and port infrastructure do not (yet) allow replacement by containerships. More importantly, there are several trades for which container vessels are not suitable. Examples are short sea shipping and heavy lift shipping. These two shipping segments had a good run during the econo-mic boom prior to the Lehmann crisis of 2008. Short sea shipping, in Europe in particular, benefited from strong economic growth in various EU economies and plentiful financing, especially in Germany and the Netherlands, where the KG3 and CV4 capital structures attracted many new investors. Heavy lift shipping rode the wave of demand for project cargoes to China, as that country rapidly became the world’s factory. Heavy lift and multipurpose tonnage is very suited for the transport of outsized or breakbulk cargo: things that do not fit well in a container.

2) UNCTAD, Review of Maritime Transport 2016, pg. 313) KG=Germany Limited Partnership4) CV=Dutch Limited Partnership

The economic boom of the mid-00’s led to a sharp recovery of the size of the general cargo fleet, from 92 million DWT in 2005, to 109 million DWT in 2009 and 20115. Unfortunately, the recovery was shortlived as the general cargo fleet saw a very sharp decline in the years from 2011 onwards: in the space of four years (2011-2015) the fleet declined from 109 million DWT to 74 million DWT: a decrease of 32% and the worst decrease on record since 1980.

As of January 1st, 2016, the general cargo fleet as per the registers of IHS Fairplay, consisted of 14,811 ships. These are all vessels carrying an IMO number and they are classed by IHS either as “In service/commission”, “Laid up”, “In casualty or repair” or “Converting/rebuilding”. Of this total, 13,905 ves-sels are classed as “General Cargo Ships”. Heavy lift and multipurpose ships account for another 461 ships. The remainder of the category is made up by niche tonnage such as deck cargo ships, livestock carriers, semisubmersible heavy lift ships and the lone yacht carrier.

A large part of the fleet was (and is) very old: some 7,075 vessels or 48% of the fleet is at least 25 years old. At the same time, 3,763 vessels or 25% of the fleet is at most ten years old. The high pro-portion of old vessels indicates significant fleet renewal potential in the years ahead. Unfortunately, trends in recent years have shown that the amount of vessels scrapped every year quite often exce-eds annual newbuild deliveries. As newbuilds tend to be larger than the vessels they replace, the decline in terms of tonnage is less pronounced than the decline in numbers of vessels.

Recent market developments and market drivers

With the European short sea shipping industry currently in the doldrums, ordering of newbuilds for this segment has slowed down significantly in recent years. Low freight rates, lack of finances on the shipowners’ side and unwillingness of banks to finance newbuilds have left only a few Euro-pean owners able to order newbuilds. When these owners do order newbuilds, the new ships tend to be much more efficient than the ships they are replacing, in order to reduce fuel consumption, harmful emissions and to comply with the EEDI6 design criteria of the IMO7. Hulls are being optimised and installed engine power is being reduced, compared to older vessels. The large Dutch short sea shipowner, Royal Wagenborg, has indicated that its latest 22,000 DWT newbuildings of the R-BORG class burn two thirds less fuel than the 8,400 DWT ships from the late 90s they are replacing. Despite being almost three times larger, the R-BORG series has 15% lower installed engine power than its late 90s fleetmates8 .

Short sea vessels with Open Top notation, able to sail without hatchcovers, are also on the rise. These vessels are particular suited to ferry windmill parts to offshore windfarm installation projects. The very latest generation of these open top vessels has been adapted further to include a Dynamic Positioning system, increasing suitability for the offshore windfarm market. In recent years, many heavy lift vessels for project cargoes have been built as well, but this segment is currently also suffe-ring from overcapacity and low rates, resulting in an early withdrawal of vessels with lower lifting ca-pacities. Last but not least, the issue of sulphur emissions is firmly on the cards for short sea vessels, as many trade in present or future Sulphur Emission Control Areas, coupled with the global sulphur cap for shipping of 0.5% per 20209. While some ships have been retrofitted with sulphur scrubbers, these installations are proving too large or too expensive for most short sea ships. Meanwhile, yards in Europe and China are starting to deliver the first short sea ships fuelled by LNG-burning dual fuel engines. Further on the horizon, issues like remote monitoring, unmanned ships and battery- powered ships are coming up.

5) UNCTAD review of maritime transport 2010, pg.30 & UNCTAD review of maritime transport 2012, pg.316) Energy Efficiency Design Index7) International Maritime Organisation, a United Nations agency8) Presentation by Albert Engelsman, Royal Wagenborg, 10/9/’159) IMO.org, 15/11/’16

23

As indicated before, there is a significant overcapacity and a severe lack of financing for newbuilds in the European short sea sector. Dutch short sea expert, Johan Wagelaar, only sees a balancing of demand and supply in the European short sea market by 2020, providing demand growth remains at 2% per year and newbuild contracting remains low10. Contracting of general cargo newbuilds world- wide is in fact currently very low, resulting in a sharp drop in expected newbuild deliveries, from over 1.9 million CGT for 2016, via 1.06 million CGT in 2017 to a mere 476,000 CGT in 2018. Deliveries for 2016 will probably end lower than expected due to delays on newbuilds, resulting in slightly higher final numbers for 2017. Upon closer examination, over 300,000 CGT of the current general cargo orderbook was contracted before 2013, raising doubts whether this tonnage will be delivered at all.11 On the upside, some new contracting for 2018 deliveries is still to be expected, as general cargo tonnage generally has fairly short lead times. Nevertheless, the outlook for the next few years for yards specialising in general cargo tonnage is grim. An improvement of newbuild contracting towards the end of the current decade (2018-2020) would seem likely though, given the significant scrapping potential of the existing fleet, exacerbated by upcoming new environmental regulations as detailed before. In addition, the orderbook-to-fleet ratio for the general cargo fleet at the beginning of 2016 was low at approximately 4.6% in CGT terms.

SEA Europe forecast

SEA Europe predicts a relatively modest demand requirement for on average 177 general cargo ves-sel deliveries or 1,039 million CGT per year for the period 2016-2020. For the period 2021-2025, the demand recovery for general cargo ships is expected to peak at an average of 253 vessel deliveries per year or 1.73 million CGT. The peak in demand wanes in the second half of the 2020s as an average of 184 deliveries per year will be required, amounting to an average 1.73 million CGT per year. In the longer run, however, we expect the world’s general cargo fleet to resume the declining trend it has exhibited over the years. Our forecast for the period 2031-2035 is, therefore, decidedly bearish, at an average 74 newbuild deliveries per year or 616,000 CGT per year. Demolition numbers are expected to remain firm throughout the entire forecasting period, oscillating between 323 and 340 ships per year or 1.3 to 1.4 million CGT per year. There are simply that many older ships in the general cargo fleet.

0

100

200

300

400

500

600

700

0

500 .000

1 .000 .000

1 .500 .000

2 .000 .000

2 .500 .000

3 .000 .000

3 .000 .000

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016-20average

2025-30average

General Cargo Vessels Completions, Actual and ForecastCGT Vessels

Source: SEA Europe, November 2016 / IHS Fairplay, 2016

10) Johan Wagelaar, Tristan Beumer; The European Short Sea market in perspective, Volume III, 2015, pg.2611) Data source: IHS Fairplay, updated to end August 2016

Uncertainties and possible future demand drivers

Of course, there are many developments and circumstances which are hard to predict in a demand requirement forecast. Perhaps intra-Asian trade will grow so fast that there will be a sharp increase in Asian demand for short sea vessels. Alternatively, a lot of this new intra-Asian traffic could be containerised immediately. Another interesting potential development could be that of unmanned ships, which might generate so many savings that wholesale replacement of existing manned ships by newly built unmanned short sea ships turns out to have a solid business case.

In the heavy lift and project cargo sector, a continuous push for larger and more capable ships (mainly in terms of lifting capacity) could generate a premature fleet replacement of the existing ships. While the Chinese economy could be reaching maturity, the One Belt One Road (OBOR) initiative or “Maritime Silk Road” of the Chinese government might generate renewed intense demand for heavy lifters. Also, a continued growth of several energy- and resource-rich African countries could spur heavy lift demand. At the time of writing however, the fate of many of these sub-Saharan “boom” economies is hanging in the balance.

Finally, the SEA Europe forecast is a demand requirement forecast, which by its very design can-not take into account ordering of new ships because of low yard prices or easy access to funding for example. Annual fluctuations in ordering are also extremely difficult to forecast. Therefore, SEA Europe issues average numbers. The forecast can serve to give an idea of the required amount of tonnage in the future and to stimulate serious discussion on the future demand for ships.

c. Oil & Chemical Tankers

Industry Overview

In the period 2003-2007 (“Great Moderation”), oil consumption grew by 1.9% annually, while the period 2008-2012 (the crisis and post-crisis period), oil consumption grew by 0.3% annually. IEA Forecasts until 2035 estimate a 0.8% annual growth in oil consumption, and IEA forecasts until 2035 estimate growth of seaborne trade in oil of 1.8% p.a..

On the other hand, in the past decade, the tanker fleet grew more than oil seaborne trade, genera-ting fleet overcapacity. The projection to 2035 shows that due to this overcapacity, the tanker fleet will grow less than oil seaborne trade.

-3

-2

-1

0

1

2

3

4

5

0

500

1 .000

1 .500

2 .000

2 .500

3 .000

3 .500

4 .000

4 .500

5 .000

1985

1990

1995

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2015

2020

2025

2030

Ann

ual i

ncre

ase

%

mill

ion

tons

(Oil

equi

vale

nt)

World Oil Consumption million tons (Oil equivalent)

Total non-OECD Europe & FSU

Other developing countries

Total OECD Annual increase % - Right Axis

Total other Asia

Source: SEA Europe

25

Tanker Fleet Requirement and Newbuilding Forecast

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

2008

2009

2010

2011

2012

2013

2014

2015

2020

2025

2030

2035

Annu

al G

row

th

Oil Seaborne Trade Growth and Tanker Fleet Growth

Oil Seaborne Trade Growth (mill . Tons)

Tanker Fleet Growth (dwt)

Fuente: Datastream, Thomson Financial Source: SEA Europe

We expect the oil tankers fleet requirements expand at a rate of 1.3% per year in terms of DWT. In contrast to the previous decade, tanker fleet grew at a rate close to 5% per year in terms of DWT. In the period 2015-2035, oil tankers newbuilding requirement, according to our forecasts, has a mean of 250 units per year, 27 DWT p.a., and 7.8 CGT p.a..

In the medium term, it is estimated that Chemical / Product Tankers’ demand for transportation tons will average 3.4% between 2019 and 2023, lower than previous historical levels and levels reached between 2016-2018. This sluggish demand for Chemical / Product Tankers shipping would be due to factors that support a growth in demand, such as the expansion of petrochemical capacity in the US and the Middle East, and the increase in chemical transport to Asia, to be offset by factors such as lower demand for transport in primary commodity-exporting countries for low energy prices. Overall, by 2018-2021, the demand for Chemical / Product Tankers ships between 10,000 and 60,000 DWT would be around 75 units per year.

d. LNG & LPG Market

Between 2001 and 2014, the strong growth in LNG transport demand and high gas prices led to an increase in the contracting of LNG and LPG vessels. However, as of 2015, the fall in the price of na-tural gas and oil reduced freight prices, with the result that contracts fell sharply to the lowest levels of the last 10 years. In 2015 only 28 units of LNG were contracted and we have only 6 units in 2016, compared to 70 LNG contractors in 2014 and 41 in 2013. The 2035 forecasts estimate growth of seaborne trade in LNG of 1.8% p.a..

0

1.000

2.000

3.000

4.000

5.000

6.000

7.000

0

50

100

150

200

250

300

350

400

450

1985

19

86

1990

19

95

2000

20

01

2002

20

03

2004

20

05

2006

20

07

2008

20

09

2010

20

11

2012

20

13

2014

20

15

2020

20

25

2030

20

35

Aver

age

dist

ance

mill

ion

tons

(Oil

equi

vale

nt)

Seaborne Trade in LNG million tons (Oil equivalent)

LPG

LNG

Average distance, n . miles LNG

Average distance, n . miles LPG

Source: SEA Europe

LNG & LPG Fleet Requirements and Newbuilding Forecast

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

2008

2009

2010

2011

2012

2013

2014

2015

2020

2025

2030

2035

Annu

al G

row

th

LNG Seaborne Trade Growth and LNG Tanker Fleet Growth

LNG Tanker Fleet Growth (dwt)

LNG Seaborne Trade Growth (mill . Tons)

Source: SEA Europe

In the last 5 years, the LNG carriers fleet grew more than gas seaborne trade, generating fleet overca-pacity. The projection to 2035 shows that due to this overcapacity, the LNG tanker fleet will grow less than LNG seaborne trade. We expect the LNG carrier fleet requirement expands at a rate of 0.9% per year in terms of DWT. In contrast to the previous decade, LNG carrier fleet grew at a rate close to 10% per year in terms of DWT. In the period 2015-2035, LNG carrier new building requirement, according to our forecasts, has a mean of 15 units per year, 1.2 DWT p.a., and 0.7 CGT p.a..

27

e. Bulk Carriers

The bulk carrier market condition came under renewed severe pressure in 2015 reflecting the input of a considerable slowdown in seaborne dry bulk trade and existing oversupply pressures.

In recent years, China has been key in driving world seaborne trade growth. However, against the backdrop of the country transitioning towards a more mature, diversified economy, expansion in Chinese imports has slowed, with dry bulk imports dropping. Global dry bulk trade grew only 0.6% in 2015, the slowest pace since 2009.

Demand

China s imports in 2015 have been reduced compared to previous years contributing to a notable slowdown in growth in China s iron ore imports from 15% in 2014 to 3% in 2015. The recent growth in Chinese iron ore imports, 6% in 2016, is not likely to be sustainable, and imports are projected to soften into medium-term.

Meanwhile, China s seaborne coal imports has fallen 30% and with little growth in heavy industry elsewhere in the world and coal quality restriction reflecting an increasing environmental focus, the result is likely to be minimal growth in seaborne dry bulk trade.

China is suffering a phenomenon known as the “trade development cycle” which recognises that emerging economies use large quantities of raw materials to build infrastructure, and then settle down to value-added growth which requires less resource intensive imports.

Although there is a possibility that rapid growth will resume after the present economic difficulties have been resolved, it seems more likely that the economy is moving into a new phase with slower growth, with the existing steel capacity, sufficient to support its economy.

Shipments into other major importing regions, such as Japan and Europe, also look likely to remain subdued, while prospects for growth in imports appear mixed. So, it looks as though the dry bulk market could be in for a spell of slow growth.

Average earnings in the year 2015 across all sectors down significantly year-to-year. Despite a tem-porary uptick in July 2015, Capesize spot earnings fell 47% year to year to average $ 8,440/day in the first eight months of 2015, and the Capsize market is 68% below the ten year historical average. Overall, the dry bulk market is 64% below the long term historical trend.

Supply

On the supply side, the positive news is that bulk carrier fleet growth is slowing, with growth of 2.8% in DWT terms in 2015, following 4.4% growth in 2014 and which was the slowest pace of growth since 1999. The Handymax fleet is expected to grow at the fastest speed (7.3%). Meanwhile, Capesize fleet growth to slow significantly to 0.8% (from 4.9% in 2014), largely as a result of record demolition in the year. (Whether fairly slow supply growth will be enough to support the Capesize market during a time of relatively weak demand is a matter for speculations). However, the biggest worry is perhaps the bulk carrier orderbook, which has declined 28%.

Newbuilding contracting activity was very subdue in 2015 and even worse in 2016 when it fell to the lowest level since 2001 with just only 48 units of a total 13.4 million DWT reported ordered compa-red to an average of 74.2 million DWT per year in the previous ten years, a 76% less in DWT. Bulker orderbook declined by 28% in terms of tonnage. Deliveries continued at a relatively steady pace, with 49.3 million DWT entering the fleet in 2015.

Bulker demolition surged helping to limit overall fleet growth to the slowest pace in fifteen years, accounted for 78% of tonnage reported scrapped in 2015 with a record of 93 Capesize with 15.4 million DWT demolished and a total of 30.6 million DWT bulkcarriers demolished, almost double the

2014 level. It is noteworthy that almost all Capesize ships built in the 90s were scrapped. Scrap prices falling because of a surplus of steel production.

Bulk Carrier Market outlook

The sudden slowdown in seaborne dry bulk trade to only grown across 0.66% growth in 2015 has put the markets under enormous pressure, and even the 2-3% growth of supply achieved by a heavy pace of demolition has been more than the market can cope with. With around 133 mln DWT of bulk carriers on the orderbook, the dry bulk market needs to keep scrapping. Even if there is a bounce back, the market is still left with around 20% fundamental surplus tied up in slow steaming. So the ultimate escape to “good times” appears to remain some way off. The dry bulk sector is chronically over-supplied and will remain so over the next few years.

2016 was the worst year in DWT ordered since 2001. The main reason for the dry bulk downturn is the slowdown of the Chinese economy.

Bulk carriers are expected to account for the majority of the tonnage sold for demolition in 2016 with 33.3 million DWT projected to be scrapped.

The new expanded and widened Panama Channel could mean that the ever popular Panamax size segment would be faced with the threat of extinction. Panamax vessels have been the size that has felt the biggest brunt of this effort, being a size group that is no longer offering the best economics of scale because they are too big and gearless to be able to be shifted easily to smaller developing trade routes. The NeoPanamax vessels will be the ones that will quickly replace these vessels as the best suited to fully utilise trade routes which pass through the Panama Channel.

In the short and medium term, excess of fleet due to lower transport demand along with low levels of freight, will remain. The drought for newbuilding contracts and, therefore, completions will be kept.

However, we think that with the drastic reduction of fleet due to the current considerable increase in scrapping, together with the possible cyclical factor of increased consumer demand and transport, we might anticipate the turning point which will be from 2020 an increase in newbuilding and conse-quently completions.

0

50

100

150

200

250

300

350

400

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2020 2025 2030 2035

Bulk Carriers Completions, Actual and Forecast

Capesize

Panamax

Handymax

Handysize

Rest

Number

0

5 .000 .000

10 .000 .000

15 .000 .000

20 .000 .000

25 .000 .000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2020 2025 2030 2035

Bulk Carriers Completions, Actual and Forecast CGT

Source: SEA Europe

29

Newbuilding Requirements: Offshore Oil & Gas

Market drivers

The key driver for offshore newbuilding demand is the prevailing oil price and the perception of future oil price development vs. actual and expected cost development. With a higher oil price, we get a higher number of profitable offshore fields, more exploration activity and thus higher spending and a higher demand for rigs and ships.

However, there are significant differences in recognised oil analysts’ prognosis on the future oil price development. As it is a challenge to predict the future oil price, it is also a challenge to predict the future level of offshore vessel demand or timing of the next peak.

New significant discoveries in one region will usually affect the sentiment to oil companies. New discoveries and high hit rates in areas previously regarded as not promising will be a key driver for increased interest and further exploration activity.

In emerging regions, the infrastructure is often limited, distances may be longer and the rig density is low. Thus, a higher number of support vessels per rig will be needed. Operation in arctic areas will drive this number even further.

Mature regions with predicted lower future production are often interpreted as declining offshore markets. However, lower production is also an important driver for higher exploration activity when there is a sufficient focus on replacing reserves. In addition, there will be higher focus on increa-sing the production rate per field or well (well intervention). Development of marginal fields and tie-backs will also require subsea vessels. A mature installed base of subsea wells and pipelines will require vessels for inspection, maintenance and repair. Then, at some point, there will be a need for decommissioning and specialist vessels accordingly. Activity in mature areas is often key for driving innovation with the North Sea as a good example.

Countries aiming at getting less dependent on oil or gas import is also an important activity driver. For national oil companies (NOC), there will often be less attention on short term profitability and more attention on long term growth of reserves and production. This will depend on government policy. Still, as NOCs usually share production licences with international companies, the challenge will be to make licences and projects as attractive as possible.

The mix of shallow water, deep water, ultra-deep water activity and effects of increased activity in remote areas is also key. Distances from shore are increasing leading to higher demand for more efficient vessels. With this, there are new requirements and a need for more rigs and ships capable of operating in these areas in the most efficient and safe way.

More cost-efficient vessel designs and systems are also important drivers for newbuild demand as vessels will then have a competitive advantage, obtain higher utilisation and thus be preferred in the market.

The market cycle

Offshore shipping markets are normally very volatile. Oil price development has always been one reason for this, but other reasons are sometimes low market visibility, speculative orders, lack of discipline, the fight for market shares and overreaction from too many of the market players. There is often a trigger point: when fleet utilisation exceeds a certain level the day rates are skyrocketing. If the market believes this will continue, there will be a boom in new orders for the relevant vessel type. However, what is often the case is an order book containing too many vessels at the time when day rates start to drop again. The consequence may be a low number of offshore orders for several years.

Demolitions increase

Fleet shrinks

Lay-ups decreasing

Fright rates recover

Demand for newbuildings

increase

Yards reopened

or new yards

created

Excess of shipbuilding

capacity

Ship price drop

Cancellations

Lay-ups increase

Demand for newbuilding

drop

Fright rates drop

Over ordering by speculators/

bargain hunters

Oversupply

Shipping market cycle

The effect of shale oil

One main advantage of shale oil versus offshore is a far shorter lead time from development to production start, reducing the time until a project turns cash positive. A disadvantage of shale oil wells is the higher decline rates compared to offshore, where the typical shale oil well declines 80% in production within the first three years. However, this becomes less of a concern when taking into account the lead times and costs.

Oil market may rebalance already this year, affecting the oil price, but shale will most likely be able to deliver sufficient new volumes. This will put a temporary limit to the oil price recovery in 2017.

However, with higher activity in the short and medium term, marginal costs for shale oil are expected to increase. At the same time, the break-even oil price for offshore projects will be further reduced. This will bring new offshore projects back to a competitive position in 2018 and onwards.

Supply from offshore will be needed for decades. Shale will not be able to close the gap.

Offshore spending

For E&P spending, there was a trend shift in 2013, moving from double to single digit growth. The key reason was the stable oil price vs. very strong growth in costs. On the top of growth in costs, we got a severe oil price slide resulting in aggressive spending cuts. As oil prices sank from around $100/bbl in 2014 to below $30/bbl in Q1 2016, the industry’s first option was to cut capital expenditures. It was a matter of survival.

E&P spending declined approximately 25% in 2015, the largest spending cut in history. The 2016 decline will be of corresponding magnitude. Most market observers also see further reduction in 2017. Thus, it will be the first time in history that we see reductions in E&P spending for three consecutive years.

Oil and gas companies are facing challenging years ahead. Oilfield service providers and related industries also face challenging times due to the knock-on effect of reduced E&P spending.

31

However, the aggressive spending cuts, or investments decline in future production, could seriously disturb the global supply system, paving the way for future oil price and investment hikes later on. The level of discoveries is now very low. Oil demand will increase, not just because of GDP growth, but perhaps more due to of the low oil price itself.

An oil price around $50 per barrel is not regarded as sustainable. It is not only companies who are struggling, but also countries. This is also one reason why to believe in a higher future oil price. If oil stays around $50 a barrel, most countries in the Middle East will run out of cash in five years or less (IMF). That includes OPEC leader Saudi Arabia.

A significant share of the growth in offshore spending we have seen in the past has not been the increased activity, but the cost inflation. Now offshore is becoming more cost efficient. Statoil has made its flagship oil project in Norway’s North Sea, Johan Sverdrup, profitable at less than $25 a barrel after slashing costs and lifting production forecasts. In other words, the break-even oil price is down from $40 a barrel in 2014 to below $25 a barrel in 2016.

In the Barents Sea, the break-even price for the offshore field Johan Castberg is now below $35 a barrel, down from $80, with estimated investments on the project in the Arctic frontier play now more than halved at between NOK45 billion and NOK50 billion, compared with an original estimate of around NOK100 billion.

According to Statoil, 80-90% of the cost improvements they have achieved are related to efficiency, doing things differently, not market effects nor deferring activities. As an example, Statoil say they can drill almost 70% more meters per day compared to 2013.

In general oil companies and offshore operators have pushed down costs significantly in the past two years because of simpler concepts, cheaper equipment and more efficient drilling. This will also affect the number of profitable projects going forward.

Most observers see higher oil prices in 2017-2018 and an increase in offshore E&P spending from 2018 and onwards, perhaps with a significant increase in 2019.

The offshore fleet

The global offshore fleet consists of around 10,000 vessels across 30 vessel sub types with anchor handling tugs, platform supply vessels and crewboats representing more than half of this. These sup-ply and service vessels are supporting over 1,000 drilling rigs and floating production units in explo-ration and production activity. In addition, there are over 1,000 offshore construction, crane, subsea support, pipelaying, inspection, maintenance, repair vessels in many shapes and sizes. Comments in this report will only cover the major categories.

The offshore shipping market outlook

a. Offshore E&P

•Drilling

The rig downturn is both supply and demand driven where we see a severe overcapacity for both shallow- and deepwater units. The day rates have plunged and the 2nd hand prices are extremely low. Rigs are coming off contracts and it is very difficult to secure new work.

Scrapping and cold-stacking will increase further as the owners’ choice is costly class surveys or scrapping. Cold-stacking will often be synonymous with scrapping, indeed for veteran rigs. Some rig owners may loose more than 50% of their fleet. Thus, this will change fleet size ranking among rig companies.

On the other side, low rig rates will also help the oil companies to increase activity at some point. When contracts signed at peak levels disappear, the oil companies are left with a totally different cost picture. That could lead to volume effects. However, first the oil companies will need to believe in a higher future oil price. This is the key driver for drilling activity.

Recovery will come eventually and mid-water rigs will most likely recover first. However, the number of new rigs to be ordered the next five years will be very limited.

•Floating Production

With budgets being trimmed and with an intense pressure on costs, investment decisions are being deferred. Units are coming off contract and there are more idle FPSOs.

However, the demand for floating production units is expected to increase and drilling is not a “bottle neck” anymore. Costs have dived. There are over 200 projects at different planning stages (IMA), but with wait-and-see tactics on projects. Expected future oil price is what really counts.

The timing for when the projects will materialise is uncertain and there is a possible trend towards conversions rather than newbuilds. Thus, there is a challenge to evaluate number of newbuilds, but improvement is expected from 2018 onwards where Brazil’s ability to order new units will be key.

This market is also an important driver for subsea and other offshore support vessels.

Number of vessels by delivery year

Fleet growth – DWT mill

0

10

20

30

40

50

2000 2005 2010 2015 2020 2025 2030 2035 0

10

20

30

40

50

60

70

2000 2005 2010 2015 2020 2025 2030 2035

Fleet growth – CGT mill

0

10

20

30

40

50

60

70

2000 2005 2010 2015 2020 2025 2030 2035

Fleet growth – GT mill

0

10

20

30

40

50

60

70

2000 2005 2010 2015 2020 2025 2030 2035

Source: SEA Europe

b. Construction & Subsea

•Construction Support Vessels

We have a major build cycle behind us and most of these vessels were ordered on speculation. Now we see that the backlog for the contractors continues to deteriorate as many projects are cancelled or postponed after the oil price slide. This has led to significant oversupply, downturn in charter rates and financial results. This has of course had a severe impact on the ordering of new ships.

33

There is uncertainty around new awards of new projects, but strong demand growth towards 2020 and beyond is expected where field development will be the key driver. New large projects are not likely to commence before 2018, but another driver is also growth in installed base and inspection, maintenance and repair markets (IMR). In the current market environment, quite much IMR activity has been postponed and will need to come later.

New innovative solutions, combined with low ship prices, could stimulate demand for new vessels even in a market situation with oversupply. As tasks are increasing in scope and complexity, many first-generation vessels will leave the market.

In the past, we have seen new and more cost-efficient technologies being developed in times with low oil price, new solutions which offered profit even in a difficult market. One example is well inter-vention ships (Riserless Light Well Intervention), reducing the cost of operations in mature subsea fields.

However, in the short term, as the financial situation for offshore ship owners in general is very chal-lenging, the number of newbuilds will be very low.

Adjacent markets, like offshore wind installation and support, will be of increasing importance.

c . Offshore Wind

The main advantage with offshore wind vs. onshore, is that the wind resource is much greater, thus generating more energy from fewer turbines. Offshore wind is suitable for large-scale development near the major demand; large cities.

There are four life cycle phases of an offshore wind farm: pre-installation, installation, operation and decommission. In addition to purpose built installation vessels, there are many other vessel types needed in these phases, but most of these can be found within other commercial segments (e.g. crewboats and cable layers).

Development of offshore projects further from shore with increased turbine capacities is a trend. Greater distance from shore normally leads to deeper waters, where new foundation solutions are required. This will also have an impact on vessel size, requirements and capacities.

Costs have reduced significantly in recent years, predominantly due to the larger sizes of turbines installed with lower operational expenditures once wind farms become operational.

Strong growth in offshore wind markets is expected both in short and longterm. The average an-nual growth rate for new installations in the next decade is expected to be above 15%. In Europe, a tripling of capacity between 2020 and 2030 is expected.

As quite many vessels are too small to handle operations in deeper waters, the offshore wind industry is most likely going to meet a shortage of installation vessels. However, we are not talking about many vessels per year in the short and medium term.

The market for offshore wind support or service operation vessels is also growing. Around 2-4 ves-sels have been ordered per year since 2013 (> 80 m), but this will most likely increase going forward towards 2020 and beyond.

Due to low oil prices and the severe downturn in offshore markets, the utilisation and day rates for subsea support vessels are very low and many vessels are laid-up. As offshore wind support is an adjacent market to these, ordering of new vessels is likely to be negatively affected in the short and medium term.

Number of vessels by delivery year

Fleet growth – DWT mill

Fleet growth – CGT mill

Fleet growth – GT mill

0

10

20

30

40

50

60

70

80

90

100

2000 2005 2010 2015 2020 2025 2030 2035 0

2

4

6

8

10

12

14

16

2000 2005 2010 2015 2020 2025 2030 2035

0

2

4

6

8

10

12

14

16

2000 2005 2010 2015 2020 2025 2030 2035 0

2

4

6

8

10

12

14

16

2000 2005 2010 2015 2020 2025 2030 2035

Source: SEA Europe

d. Offshore Supply & Service

Demand for platform supply vessels (PSV) and anchor handling tug supply vessels (AHTS) mainly de-rives from drilling activity, field development work, and production facility support.

•Platform supply vessels

We have seen a dramatic fleet increase for large PSVs and the market did have earlier an amazing ability to absorb new tonnage. However, those days were over in 2014.

A significant fall in contracting was expected, but then the oil price slide in 2014 put further pressure on the market. Dayrates are now very low and a significant number of vessels are laid up.

There is still also a significant orderbook where the big majority orders were placed at yards in China in 2012-2014. However, quite many of these PSVs will never be completed or make it to the market. Perhaps more than one third of the orderbook will be in this category. Many vessels are in fact built, completed in 2014-2015, but not delivered to owners who are struggling financially, some bankrupt. Thus, the vessel status is “On Order” in most public vessel registers, while the real status should rather be “Scrapped” or “Cancelled”. Many completed vessels are already in poor condition due to no inspection or maintenance, no ventilation, mold and rust. The condition will get worse in the course of the next few years and most ships will of course be very hard to sell.

Charterers can now hire high-quality tonnage at a very low price. Thus, the outlook is best for new and efficient vessels. Older tonnage will often be ignored and vessels will be scrapped or removed from the market.

Consolidation may improve future ordering discipline and allow some more scrapping but it will not be enough to address the current supply overhang. A lot of scrapping is needed.

35

The PSV market will continue to be poor in the next few years. Future demand for PSVs will continue to grow, but it will take time to reach a market balance.

•Anchor handling tug supply vessels

Moored rigs are the key driver for anchor handling tug supply vessels; not only the number of rigs (semis and jack-ups), but the number of rig moves. FPSOs will also play a more important role as market driver in the future. Some light construction work is also a part of the picture.

The oversupply is not as severe as for PSVs, but AHTS are more exposed to exploration activity than PSVs and exploration activity is typically the most affected area when oil companies cut costs. With less exploration drilling and lower number of rigs, the AHTS market has been affected accordingly. Currently, utilisation and day rates are low with many vessels laid up.

The newbuilding activity for AHTS > 8.000 bhp was very low in 2008-2013. It picked up in 2014, but not to the very high levels we have seen in the PSV market. However, most owners are exposed in both markets and they are suffering losses accordingly.

Also in the AHTS market we see many vessels on order, but for the same reasons as for PSVs it re-mains uncertain whether all will make it to the market. Very few vessels will be ordered in the short term.

Number of vessels by delivery year

Fleet growth – DWT mill

Fleet growth – CGT mill

Fleet growth – GT mill

0 50

100 150 200 250 300 350 400 450 500 550

2000 2005 2010 2015 2020 2025 2030 2035 0

5

10

15

20

25

30

35

40

2000 2005 2010 2015 2020 2025 2030 2035

0

5

10

15

20

25

30

35

40

2000 2005 2010 2015 2020 2025 2030 2035 0

5

10

15

20

25

30

35

40

2000 2005 2010 2015 2020 2025 2030 2035

Source: SEA Europe

Summary

Due to the oil price slide, there is a dramatic slowdown in all offshore markets. After an all time high ordering activity, the downturn is both supply and demand driven. It can easily be called the worst offshore market of the past three decades. Day rates are down to break-even levels or even lower. Fleet utilisation is probably down to around 50%.

The oil price is still under pressure and the cost development for oil companies has required cuts in investments and postponement of projects. However, as we have seen before, cuts in investments and spending may lead to a new upturn later as lower growth in production leads to a higher oil price. The question is of course when.

As it is close to impossible to predict a future oil price development, it is also very difficult to predict the future level of vessel demand, but we know for sure it will take time before we see a more ba-lanced market. Right now, instead of talking about light at the end of the tunnel, it is more about the tunnel getting lengthened.

Still, with a growing global population, increasing industrialisation and urbanisation, growth in ener-gy demand where oil and gas will dominate for decades, the long-term outlook for offshore is most likely promising.

The market balance is often sensitive with trigger effects. As we have seen in the past when utilisa-tion level is increasing above a certain level the charter rates are sky rocketing with an order boom as a result. Thus, the peaks may get higher and downturns deeper than what is possible to predict in a newbuilding prognosis. However, we will most likely not see the extreme peaks we have had the last decade.

Costs and efficiency requirements are important drivers for innovation and technology develop-ment. Thus, these are times with opportunities too. When this crisis is over, we will see a “new” industry with a totally different cost picture.

0

100

200

300

400

500

600

700

2000 2005 2010 2015 2020 2025 2030 2035

Number of vessels by delivery year

0

10

20

30

40

50

60

70

80

90

100

2000 2005 2010 2015 2020 2025 2030 2035

0

10

20

30

40

50

60

70

80

90

100

2000 2005 2010 2015 2020 2025 2030 2035 0

10

20

30

40

50

60

70

80

90

100

2000 2005 2010 2015 2020 2025 2030 2035

Fleet growth – CGT mill

Fleet growth – GT mill Fleet growth – DWT mill

Source: SEA Europe

37

Newbuilding Requirements: Passenger Ferries

Passenger Ferry Market

The Passenger Ferry sector includes Passenger/Car ferries and pure Passenger vessels with no Ro-Ro facilities. Passenger/Car ferries account for the majority of vessels in this sector, and are defined as vessels which have a passenger capacity in excess of 50 people and where vehicles can be driven on and off a car deck or passenger vessels without RO-RO facilities connecting two places on a regular basis. The vessel must also have a high ratio of passenger capacity to cargo lane length. These ships are designed to link transport networks, particulary in sparsely populated areas, as efficiently as possible. For countries such a Norway, Canada and the countries on the Adriatic Sea, Passenger/Car ferries provide a vital transport link between otherwise isolated communities. Passenger/Car ferries are also utilised to link different countries’ transport networks, e.g. across the English Channel. In this instance, the Passenger/Car Ferry sector in particular, is in direct competition with airlines which often provide faster connections for travellers.

The passenger ferry market is fairly mature, and growth in passenger volumes in key markets has been sluggish. However, a lack of newbuilding investment in recent years has limited passenger ferry deliveries, and with the fleet remaining fairly steady for a number of years, gradual demand improvements have tightened the market.

Demand

Expansion in passenger volumes in Europe, a key sector for the passenger ferry market, has been very limited in recent years and volumes have failed to fully recover to the 2008 peak. In 2015, passenger volumes reportedly hampered due to the economic difficulties in Russia, which placed pressure on the ferry market in the Baltic. Elsewhere, passenger volumes in Asia, an important emerging region for the sector, have been increasing at a moderate pace in recent years. The expansion of coverage by low cost airlines, particularly in the European and Japanese domestic markets, has limited growth in passenger ferry volumes to some extent.

0

10

20

30

40

50

60

70

2010 2011 2012 2013 2014 2015

Num

ber o

f Ves

sels

Completions by Type

Passenger/General Cargo

Passenger/Ro-Ro Cargo

Passenger Ship

Source: SEA Europe

0

100 .000

200 .000

300 .000

400 .000

500 .000

600 .000

2010 2011 2012 2013 2014 2015

Gro

ss T

onna

ge

Completions Passenger Vessels

Source: SEA Europe

Medium Term

In the medium term, demand growth in the Passenger Ferry sector is projected to average 1.8% p.a. Passenger volumes are expected to expand, partly driven by increasing Asian volumes, although questions over the strength and sustainbility of growth in Asia remain. There is also the potential for an increased demand on US-Cuba routes. Meanwhile, the potential introduction of a gap on SOx emissions globally and NOx in ECAs is expected to support fleet renewal going forward. Between 2018 and 2021, passenger ferry contracting is expected to be average 66 p.a.. The use of LNG as a fuel in the Ferry sector appears likely to continue to increase gradually as infrastructure is developed. Also design with batteries to store energy are becoming more popular.

Long Term

Ordering of fuel-efficient and “greener” designs in order to comply with environmental regulations is expected to increase in the long term. Overall, more moderate demand growth of 1.8% p.a. is expected for the Passenger Ferry sector.

0

100 .000

600 .000

600 .000

600 .000

500 .000

600 .000

0

10

20

30

40

50

60

70

80

90

100

110

120

2010 2011 2012 2013 2014 2015 2016-2020average

2021-2025average

2026-2030average

2031-2035average

Gro

ss T

onna

geVess

els

Passenger Vessels Completions, Actual, Forecast

GT Vessels

Source: SEA Europe

39

Newbuilding Requirements: Cruise Ships

Industry Overview

The cruise industry is the fastest growing segment of the travel industry - achieving more than 2,100% growth since 1970 when an estimated 500,000 people took a cruise.

Growth strategies to date have been driven by larger capacity new builds and ship diversification, more local ports, more destinations and new on board/on-shore activities that match demands of consumers.

For instance, the financial crisis of 2008-2009 has not impacted the demand for cruises. Three major trends have particularly shaped the cruise market since its emergence:

• Amenities. The cruise ship has an important part of the cruise experience since it also represents a destination in itself. An increasing amount of amenities are being offered both on the ships and as shore experiences.

• Massification. The principle of economics of scale and the development of a wider customer base has incited the development of larger cruise ships.

• Concentration. The industry has a high level of ownership and market concentration. Carnival and Royal Caribbean are the two main cruise lines of the market. The Caribbean and the Mediterranean account for about 70% of the global annual deployment of cruise capacity.

Source: CLIA

Deliveries

In 2015, six ships were delivered with a total of 617,500 GT and 15,700 lower berths. In 2016, this figure rises to 9 vessels with a total of 1,101,500 GT and 27,000 lower berths.

2009 2010 2011 2012 2013 2014 2015 2016e

Clia Global Ocean Cruise Passengers (millions)

0

200 .000

400 .000

600 .000

800 .000

1 .000 .000

1 .200 .000

1 .400 .000

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Gro

ss T

onna

geCruise ship deliveries since 2000

Others

Mitsubishi

Fincantieri

Meyer Turku

STX Finland

STX France

Meyer Werft

Source: SEA Europe

Orderbook

The current orderbook for cruise newbuildings features 66 confirmed vessels on order (not including options etc.), with a total capacity of 175,243 lower berths and a total order of 7,065,459 GT. The cruise shipbuilders have orders until 2025.

Based on a set of reasonable assumptions on average vessel life, and a rising average size for new- buildings, then the number of extra vessels required (in addition to the current orderbook) to meet the projected cruise demand, is approximate 10-12 vessels in the following years.

Cruise ship demand will continue, as in the past, to be partly supply-driven, with the introduction of new ships, new itineraries, and new themes promoting customer interest and sales. Long term trends will continue to be subject to short-term factors, but will be linked to underlying trends in international tourism, economic growth and population development.

41

0

4 .000 .000

8 .000 .000

12 .000 .000

16 .000 .000

20 .000 .000

24 .000 .000

28 .000 .000

32 .000 .000

36 .000 .000

40 .000 .000

44 .000 .000

0

50

100

150

200

250

300

350

400

450

500

550

600Gr

oss T

onna

ge

Vess

els

Cruise Fleet, Actual and Forecast

No . of Vessels GT

20052006

20072008

20092010

20112012

20132014 2015

2016-2020

2026-2030

2021-2025

2031-2035

Source: SEA Europe Note: The bars represent CGT, while the line represents number of vessels.

0300 .000600 .000900 .000

1 .200 .0001 .500 .0001 .800 .0002 .100 .0002 .400 .0002 .700 .0003 .000 .0003 .300 .0003 .600 .0003 .900 .0004 .200 .0004 .500 .0004 .800 .0005 .100 .0005 .400 .0005 .700 .0006 .000 .0006 .300 .0006 .600 .0006 .900 .0007 .200 .0007 .500 .0007 .800 .000

20052006

20072008

20092010

20112012

20132014

2015

2016-2020

2021-2025

2026-2030

2031-20350

5

10

15

20

25

30

35

40

45

50

55

60

65

70

75

Gro

ss T

onna

ge

Vess

els

Cruise Completions, Actual and Forecast

No . of Vessels GT

Source: SEA Europe Note: The bars represent CGT, while the line represents number of vessels.

43

Newbuilding Requirements: RO-RO

CAR CARRIERS

The PCTC (Pure Car & Truck Carriers) market conditions have remained under significant pressure the past five years characterised by limited growth in seaborne car trade resulting in overcapacity and weak charter rates. Despite increased imports into developed regions such as North America and Europe supported by strong growth in vehicles sales, weaker economic growth in developing economies has impacted the imports significantly and hence the overall seaborne car trade volumes.

By the end of December 2015, the PCTC segment totaled 839 vessels with combined capacity of 38,5 mln GT or 22,44 mln CGT. Since 2003, 512 vessels have been delivered with a total capacity of approximately 15,4 mln CGT. An annual average of 40 vessels. Looking at the fleet age structure approximately 52% of the fleet is <10 years and approximately 21% 20+ years. Looking at capacity (CGT), the same group of vessels, however, only represents approximately 60% and 12%.

Going forward, the PCTC market conditions will likely experience slight improvements albeit it is still challenged and under pressure as seaborne car trade growth is expected to remain relatively subdued in the short-term due to remaining weaknesses in emerging economies. Despite growing projections for global seaborne car trade largely supported by increasing shipments into emerging markets, the economic environment and outlook in Europe and continued pressures on emerging economies could potentially inhibit growth and influence the decisions to demolish the existing ageing fleet and could impact the future demand requirements. The occurrence and potential wider popularity of the sharing economy is also foreseen to have an impact of future vehicle sales and seaborne car trade. The tendency to relocate assembly plants closer to target markets is also likely to impact future long haul demand growth and result in fluctuating seaborne car trade volumes. Despite continued efforts to reduce land borne vehicle traffic that could potentially support increasing short-haul seaborne car trade demand, the PCTC market is to some extent disadvantaged of the rather expensive trailer units (high capital and maintenance costs and port dues) and is competing with other modes of transport and more flexible vessel designs that are becoming more popular in recent years, i.e. the risk of either a modal shift or the loss of cargo to other operators and vessel types remains.

Despite some of the reservations emphasised above, SEA Europe foresees that the car carriers fleet requirement will remain steady or experience slight increases in the years ahead with an annual fleet growth of 1% on average. The level of newbuild requirements is expected to stabilize at an annual average of 30 vessels or 1,2 mln CGT. with a focus on larger PTCT. Given the large number of vessels with an age of 20+ years and assuming an average scrapping age of 25-30 years, 160-170 vessels are clear demolition candidates in the short term. As an annual average of 40-45 vessels are expected to be scrapped towards 2035, the newbuilding requirements are foreseen to primarily be driven by replacements needs.

0

5

10

15

20

25

30

35

40

45

50

55

60

65

70

0

500 .000

1 .000 .000

1 .500 .000

2 .000 .000

2 .500 .000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016-20 2020-25 2025-30 2030-35

Car Carriers Completions, Actual and ForecastCGT Vessels

Source: SEA Europe Note: The bars represent CGT, while the line represents number of vessels.

RO-RO VESSELS

The RO-RO market is exiting a long period of contraction (2009-2014) characterised by a decreasing fleet size, an ageing fleet with few new buildings, weak charter rates and general difficult market conditions resulting in a decrease in number of owners/operators (most RO-RO vessels are owned and operated by the same company) and consolidation. A trend that is expected to continue. The top 20 owners own and operate approximately 45% of the fleet measured in numbers amounting to approximately 60% in terms of total capacity.

Despite the current situation in today’s major segments, it seems like the market conditions have started improving and the RO-RO market has mostly balanced capacity to market demand. However, there are regional variations, while changing trade patterns and larger vessels will impact the market going forward. Today’s RO-RO market is concentrated in Europe, North Africa and the Black Sea. Non-European markets still do not have a sufficient influence on the RO-RO sector to spur serious demand. However, this is expected to change in the medium to long term.

By the end of December 2015, the RO-RO segment totalled 624 vessels (above 100 GT) with com-bined capacity of 9,6 mln GT or 7,86 mln CGT. Since 2003, 207 vessels have been delivered with a total capacity of approximately 3.7 mln CGT; an annual average of 16 vessels. Looking at the fleet age structure, more than 60% of the fleet is 15+ years and 45% 20+ years. Looking at capacity (CGT), the same group of vessels, however, only represents approximately 38%. Hence, fleet renewal of espe-cially smaller vessels is becoming a problem.

Going forward, a number of important factors are likely to impact the RO-RO market of 2016 and onwards. The emission control legislation has been and will continue to be a game changer. In the short term, a period of fleet optimisation, optimisation of services, increasing investments in emis-sion abatement technologies and migration of tonnage which is either too small or too old for in-vestments is foreseen. Economies of EU countries and the countries at its periphery have been going through a long period of negative or minimal growth and weak demand. The situation started to change in 2014 with the improving economic conditions in most European countries. However, risks to UK and European economic growth stemming from ‘Brexit’ could have a limiting impact on future demand growth.

Despite continued efforts to reduce land borne vehicle traffic and the potential for a sustained pe-riod of low oil prices that could potentially support increasing RO-RO demand, the RO-RO market is to some extent disadvantaged of the rather expensive trailer units (high capital and maintenance costs and port dues) and is competing with other modes of transport, i.e. the risk of either a mo-dal shift or loss of cargo to container operators, as it is a cheap(er) alternative, remains. Despite

45

improving market conditions and continued consolidation, financial constraints among remaining owners/operators could eventually hamper contracting. The increasing needs of short-sea transport will influence the need for replacing the existing ageing fleet and could impact the future demand requirements. As in other segments a clear and similar trend towards larger ships is seen. However, current reception facilities and infrastructures in relevant ports put some limitations on the possibi-lities to expand the capacity of newbuild vessels. Geopolitical problems, wars, seasonal fluctuations and restrictions including sanctions have had a detrimental effect on the Baltic and Black Sea market and could affect the potential in the MENA region as the Mediterranean market is sensitive to geo-political shocks (civil war in Syria, conflicts in Libya, etc.). A number of new markets and new oppor-tunities are expected. Continued growth of the south-east Asian RO-RO market, more demand in the MENA region and Arabian gulf, increase of activity in the Caribbean.

Despite some of the reservations emphasised above, SEA Europe foresees that the RO-RO fleet re-quirement will be at modest levels in the years ahead with an annual fleet growth of 1-2% on average. In combination with a rising demand, the modest growth is likely to result in a better fleet utilisation.

The level of newbuild requirements is expected to stabilise at an annual average of 20 vessels or 0.55 mln CGT with a focus on larger RO-RO’s. Given the large number of vessels with an age of 20+ years, 270-300 vessels are clear demolition candidates in the short term. As an annual average of 40-45 vessels are expected to be scrapped towards 2035, the newbuilding requirements are foreseen to be primarily driven by replacements needs.

0

5

10

15

20

25

30

0

100 .000

200 .000

300 .000

400 .000

500 .000

600 .000

700 .000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2015-20 2020-25 2025-30 2030-35

RO-RO vessels Completions, Actual and ForecastCG Vessels

Source: SEA Europe Note: The bars represent CGT, while the line represents number of vessels.

47

Newbuilding Requirements: Other Non-Cargo Carrying Vessels (ONCCV)

a. Fishing Vessels

Demand for fishing vessels is driven by the global population. This is because of the main use of fish as food. Given the expected population growth, it follows its future growth to meet this need. However, there are additional factors to consider.

The future market for fishing vessels is one of the hardest markets to predict of all vessel types. This is largely due the fact that fleet size is mostly dictated by government policies rather than market requirements. Several studies have shown that fish stocks have been seriously overfished in many areas of the world. Several countries have established targets to tackle national overcapacity of fishing fleets. A rise in fish quota restrictions is, therefore, to be expected. That is why the global fishery production in marine waters remains uniform between 78-83 million tonnes. Coupled to these restrictions is a likely decrease in the world fishing fleet size. At the same time, a rise in the number of vessels active in fish farming is to be expected. There will still be a newbuild requirement for fishing vessels, as a certain degree of fleet renewal will be necessary to replace part of the current ageing fleet. Global fish production has grown steadily in the last five decades, with food fish supply increasing at an average annual rate of 3.2 %, outpacing world population growth at 1.6 %

The total world fishing fleet as per IHS Fairplay currently numbers over 22,000 vessels (above 100 GT) with a total tonnage of 9.8 million GT (The total number of fishing vessels in the world was estima-ted by FAO to be about 4.72 million in 2012, 90% of them less than 12 m LOA). Basis of our forecast is the assumption that the current fleet will shrink by 25% to 8.3 million GT by 2035. A high level of scrapping is expected in the coming years due to the age of the fleet. Currently, more than 50% of the ships are over 30 years old. Newbuild deliveries are expected to rise from around 215 vessels in the period 2017-2020 to around 386 vessels per year in the period 2031-2035. While the latter may seem like a significant amount of vessels, it is still lower than the amount of vessels deleted from the fleet in that same period, resulting in a further drop of the fleet size.

0

20

40

60

80

100

120

140

50 55 60 65 70 75 80 85 90 95 00 05 120

3

6

9

12

15

18

21

World fish utilisation and supply

Fish utilisation

(mill

ion

tonn

es)

Population (billions)and food supply (kg/capita)

FoodNon-food usesPopulationFood supply

Source: Food Agricultural Organisation (FAO)

0

20

40

60

80

100

120

140

160

50 55 60 65 70 75 80 85 90 95 00 05 12

World capture fisheries and aquaculture productionM

illon

es d

e to

nela

das

Aquaculture productionCapture production

Source: Food Agricultural Organisation (FAO)

0

50

100

150

200

250

300

350

400

0

200 .000

400 .000

600 .000

800 .000

1 .000 .000

1 .200 .000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2020 2025 2030 2035

Fishing Vessel Completions, Actual and ForecastCGT Vessels

Source: SEA Europe Note: The bars represent CGT, while the line represents number of vessels.

b. Research Vessels

The market for research vessels is basically divided into two categories: the oceanographic research vessels (ORV) owned by government entities used for oceanographic research disciplines (phy-sical, biological, chemical, marine geology and geophysics, ocean engineering and atmospheric science) and the geophysical seismic research vessels (SRV) owned by private companies and used in the offshore oil and gas industry. Order levels for government oceanographic research vessels (ORV) are driven by government planning and government budgets, while order levels for the seismic research vessels (SRV) related to the offshore industry are linked to the growth in exploration activi-ties for oil and gas.

49

Seismic Research Vessels (SRV)

The level of exploration activities is related to expectations about the future price of oil and gas. Before the onset of the economic crisis, contracting of particularly seismic research vessels (SRV) peaked at 17 vessels per year in 2008. Afterwards, it never returned to the same level, despite the quick recovery of the oil price after the severe dip of 2009. The reasons for this low level of con-tracting might lie in the backlog of vessels ordered before the crisis and the rise in size and complexi-ty of newbuilds. Orders for SRV hovered around five units per year between 2009 and 2014, when orders went down even further. The oil price went down considerably from mid-2014 onwards and is presently quite low. This has had an immediate effect on the investment plans for oil and gas explo-ration. Owners of seismic research vessels are recording losses and vessels are being laid up or, the older less competitive vessel, scrapped.

For oil and gas exploration, struggle with low vessel utilisation, as demand keeps declining for explo-ration work in new frontier fields, day rates are already at severely depressed levels. As some indi-cation is that current seismic demand is potentially as low as around 30 SRV, while the current active fleet is up around 66 SRV. This low demand is expected to remain fairly low in 2016 and 2017. It can take a couple of years to develop new plans for new fields, especially when they are sophisticated and complex subsea projects in deep waters.

However, in the longer term, oil companies must keep up their exploration activities or else their known oil and gas reserves will decrease too much. In addition, almost half of the existing fleet of close to 700 survey ships was built before 1984. Recovery of exploration activities and fleet renewal will help to restart investment in SRV vessels, but it remains to be seen whether the contracting le-vels of 2007-2008 will be reached again.

Oceanographic Research Vessels (ORV)

As mentioned before, orders for government owned research vessels are related to government budgets. It will come as no surprise that these budgets have been under serious pressure in Europe and the USA in recent years. On the other hand, the newly emerging economic powers of China, India and some South American countries are spending a lot of money on expansion of their oceano- graphic research fleets as they venture out further in the quest for energy sources and other raw materials.

The existing fleet of research vessels (government and private (energy industry)) will need replacing: almost half of the existing fleet of close to 1,000 research vessels is 30 years of age or older. Over a quarter of the existing fleet dates from the 1960s and 1970s. Due to the aforementioned budget constraints in mature Western economies, it is highly likely that existing research vessels in those countries will be replaced by fewer but larger and more capable research vessels. China and India will in all likelihood keep expanding their research fleets for at least a decade, while Russia will need to replace about half of its existing fleet in the next decade: 46 of the 87 Russian flagged research vessels were built in 1984 or before.

Due to fleet replacement, scrapping is expected to rise in the mid-term, from 20,000 GT per year to nearly 60,000 GT per year by 2035. Part of this increase in scrapped tonnage will be due to an increase in absolute numbers of vessels being scrapped, but part of it is also due to the growth in size of research vessels being retired. Research vessels built in the early 1990s measure 2,700 GT on average, while vessels built before 1985 measure about 1,100 GT on average. Deliveries of new- builds are expected to average 20 vessels per year for the period 2016-2025 with an average tonnage of around 3,400 GT per vessels. For the period 2026-2035, deliveries are expected to increase to 26 vessels a year with an average size of 4,500 GT per vessel, reflecting the gradual growth in size of vessels witnessed in the past decades as well.

Source: SEA Europe Note: The bars represent CGT, while the line represents number of vessels.

c. Tugs

Drivers behind tug orders

Growth in the world fleet of tugs is driven by growth in world seaborne trade, which in turn is related to world GDP growth. While seaborne trade appears to have settled on a lower growth path since 2011, it is still growing nevertheless.

Growth in world trade means more vessel movements. Most of the larger vessels require tug assistance. In order to accommodate all these extra vessel movements, a lot of ports are being expanded or newly constructed, mainly in Asia, Africa and South America.

Not only the rise in vessel movements is driving newbuild orders for tugs. Another driving force is fleet renewal. Large port tug operators in Europe, Asia, the Middle East and the US are ordering or operating energy efficient and environmentally friendly tugs with new propulsion forms, such as hybrid propulsion (battery/diesel) or dual fuel engines fuelled by LNG or diesel. This fleet renewal by major tug operators is not directly leading to an increase in scrapping of old tugs. Tugs simply have extremely long lives, although we cannot rule out that in the future, tug lives will be cut short by environmental regulations, as has also happened with some large ship types, like oil tankers and passenger ferries.

Fleet profile

“Tugs” are defined here as sea-going vessels listed in the registers of IHS Fairplay in the categories Tug, Pusher Tug, Articulated Pusher Tug and Salvage Tug. The world fleet of tugs in these categories numbered about 17,300 vessels at the end of 2015. This represented an increase of around 600 ves-sels compared to the end of 201412. 38% of the current tug fleet was delivered in the last ten years, whereas 28% of the fleet is aged 35 years and older. Main builder countries for tugs in the past ten years have been Indonesia, Malaysia and China (not necessarily in that order), taking a 60% market share in terms of numbers of tugs delivered annually.

12) IHS Fairplay World Register of Ships, 1/1/’16

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The average size of the vessels delivered since 2006 is 305 GT. Deliveries from 2006 onwards have been averaging around 650 vessels, but they have been on a downward trend since the peak in 2012, when 970 tugs were delivered. 2015 saw the delivery of a mere 419 tugs. Scrapping of old tugs is very hard to trace, but our best estimate is that around 90 tugs per year have been deleted from the fleet in recent years.

Forecast

Deliveries of tugs are expected to remain subdued for the next few years, due to the aforementio-ned slowing of world seaborne trade growth. Compared to the 2015 forecast, we have, therefore, reduced by 10% the tonnage expected to be delivered in the period 2016-2020 in our new forecast.

We now expect to see 570 tug deliveries per year in the aforementioned period. As the world tug fleet continues to grow by around 3% per year, while scrapping gradually increases, we expect tug deliveries to gradually rise to around 956 units per year in the period 2030-2035. This again is a decrease of around 10% compared to the previously expected peak of 1,050 units per year around 2025. A slowdown in expected seaborne trade growth and lower than expected scrapping have led to this deferral and lowering of peak production.

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Tug Completions, Actual and ForecastCGT Vessels

average average average average

Source: SEA Europe / IHS Fairplay, 2016Note: The bars represent CGT, while the line represents number of vessels.

d. Dredgers

The driving forces behind orders for dredgers are somewhat similar to those driving port tug orders: growth in world seaborne trade, growth in energy demand, the need for fleet replacement and need for both land expansion and defences against rising sea water levels as the number of crowded coastal megacities across the globe continues to increase. Finally, a marked shift in the origin of demand is taking place as national dredging companies such as the massive Chinese company CCCC Dredging increasingly demand a piece of the pie.

Growth in world seaborne trade (and of the vessels used to transport the goods) necessitates increa-ses in port capacity and also expansion and creation of shipping canals. Examples of the latter activity are the recent work on both the Panama and Suez Canals and the possible construction of the Nica-ragua Canal and Kanal Istanbul. The continuously rising energy demand also entails more dredging work. On the one hand, ports need to be extended to accommodate oil, coal and LNG terminals. On the other hand, dredgers are also involved in prepatory work for the installation of offshore wind farms. A further source of dredging activity is the maintenance of flood defences. This used to be an activity mostly restricted to the Netherlands and surrounding countries, but as water levels rise

worldwide, interest in this activity is increasing. Large scale land reclamation as witnessed in recent years in for example Dubai is currently on a lower level, but could take off again in the future, as many of the world’s largest cities are located near the sea. These cities will need both extra land space and protection against the sea. Jakarta is a good example of a city which is very active in this field. Last but not least, maintenance dredging of waterways is a continuous activity, providing employment to mainly smaller and mid-sized dredgers.

Dredgers as discussed in this report are defined as sea-going self-propelled dredgers with an IMO number. Fleet information is obtained from the registers of IHS Fairplay as per January 1st, 2016.

The ordering of dredging vessels has been somewhat subdued in recent years, but is bound to rise in the next years. Vessels ordered in recent years have generally been of the slightly smaller variety (below 10,000m3 hold capacity), as major dredging companies are renewing their maintenance dredging fleet. With half of the existing fleet of some 1,600 vessels aged 30 years or older, this trend is bound to continue for the foreseeable future. While the focus of the well-known large indepen-dent dredging companies is on replacement of elderly units, national dredging companies are buying more and more vessels to compete internationally for projects. Overall, spending on newbuilds is restrained though, as the dredging market is experiencing headwinds due to lower seaborne trade growth and fewer oil and gas related projects as the oil price is currently low.

New dredgers are expected to feature many advances in terms of reducing their environmental footprint. Already, the first LNG-fuelled maintenance dredgers are under construction, and more will likely follow. LNG is not the only option though. The use of hybrid propulsion (combining diesel and batteries for example) might also be a suitable option for dredgers, as the power usage of these ves-sels fluctuates a lot during operations. Issues like mitigation of underwater noise and disruption of sea life due to the stirring up of mud during dredging operations are also increasingly being focused upon.

Fleet replacement has in fact started. Newbuilding deliveries, at some 30 vessels per year, will be just enough to cover scrapping, which is also estimated at 30 vessels per year for the period 2016-2020. We expect scrapping to peak in the 2020-2025 period at some 64 vessels per year, as dredging companies’ fortunes take a turn for the better on a recovery in energy and commodity prices and increasing investment, fuelling port expansion projects.

As the new vessels tend to be larger and more efficient than the ones they replace, we expect that fleet replacement will occur on a less than one-by-one basis, leading to a slight drop in the overall fleet size in numbers of vessels in this period. The same goes for the period 2025-2030, when the high level of scrapping will still outpace newbuild deliveries.

After 2030, we expect that the majority of fleet replacement is finished, resulting in a return of scrapping levels to more familiar levels of 30 units per year. Newbuild deliveries should still be stable at a relatively high level of 51 vessels per year, partly because as in all areas of shipbuilding, there is always a time lag between identifying the need for the vessel and finally taking delivery. In addition, world seaborne trade will continue to grow. Even if that trade growth takes place at lower levels than witnessed prior to 2011, it will still fuel the need for more dredging to accommodate ships in ports, canals and rivers. National dredging companies from emerging economies will still require more dredgers, necessary for both large projects at home and in order to compete for large projects abroad. The rise of local competitors and “local for local” shipbuilding policies have also led to an increase in the amount of yards building dredgers for the lower end of the market. It cannot be ruled out that some of these yards will gradually move towards higher-specification newbuilds.

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Dredgers Completions, Actual and ForecastCGT Vessels

Source: SEA Europe / IHS Fairplay, 2016Note: The bars represent CGT, while the line represents number of vessels.

e. The Arctic Market

The Arctic is usually considered to be the area inside the Arctic Circle. The main characteristics of the Arctic market are the ice covering of the sea and the harsh and cold environment. This makes the nature also particularly vulnerable. The driver promoting the market growth and opening new opportunities is the melting polar ice that opens new business opportunities and routes for ship-ping. However, the traffic is still at low level. It is estimated that Arctic shipping could potentially account even for as much as 10% of all cargo transported between Europe and the Pacific in the long run. This means that icebreakers and ice-strengthened tonnage capable of Arctic operations are needed to guide ships through the Northern Sea Route and the North West Passage and for offshore operations: exploration and extraction of natural resources, oil and gas in particular. There is also a need for icebreakers at the northern areas of the world, like the Baltic Sea, where icebreaking is needed during winters. Also increasing research activity at polar areas creates demand for icebreaking research vessels.

The picture on page 54 describes the fleet of traditional icebreakers (IHS Database definition) and the estimated growth of it. Traditional icebreaker fleet is quite small. There are also other types of mul-tipurpose ships that act as icebreakers. The number of traditional icebreakers and this kind of ships combined is around 150. In recent years, there has been a slight growth in the fleet. In 2015, there were 87 traditional icebreaker vessels. The fleet is expected to stay at these levels, or grow modestly.

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Source: SEA Europe (according to IHS Database definition)

Planned lifetime of new icebreakers is 50 years, for older vessels it is somewhat less. The average age of the icebreaker is currently 36 years. The average age of scrapping is around 34 years, but there has been very few scrappings in the last 20 years, so the average age does not tell the whole story. A lot of scrappings have been postponed in the past years so there are major refit needs. The below picture shows the delivery decades of the icebreakers currently in operation. It can be seen that large parts of the fleet are constructed in the 1970’s and the fleet is getting old.

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Due to the ageing fleet, there is demand for newbuildings. Many older Russian icebreakers will be at the end of their lifecycle in the next few years, so the country estimates it needs to build up to thirty more before 2030. In Finland, a large part of the fleet is planned to be replaced by 2030 and Sweden has quite the same situation. There are also some plans of cooperation. US and Canadian go-vernments are considering their Arctic responsibilities. The USA has announced a statement of Polar icebreaker recapitalisation project for constructing a fleet of up to three heavy and three medium ships to meet mission demands in the high latitudes. It is said that it might take around ten years before the first ship sails.

Along with an ageing, limited and increasingly thin supply, the demand for icebreaking vessels is expected to increase in the decade to come. It is assumed that most of the icebreakers over 50 years need to be scrapped or refitted. However, some scrappings have to be postponed – there are not

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enough resources to renew a very large part of the fleet in the same period. Some scrappings will probably be postponed by refits. The picture below describes the completions of icebreakers after year 2000 and the estimation of completions to 2035 in number of ships completed in 5 year periods.

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There are also some uncertainties of what kind of demand there will be. Northern sea routes create new demand. Climate warming may increase the need of icebreaking in some areas, but it may also decrease the demand in other areas and some vessels may not be replaced. On the other hand, climate warming makes the weather less predictable so there may be more need for icebreaker support in this way too.

It has been estimated that the traditional icebreaker demand will decrease, if customers start to ask for multipurpose icebreaking ships that are capable to other kinds of operations also during sum-mertime. In this case, the forecast of needed completions should be interpreted to be meaning this kind of multipurpose vessels. Also research vessels and for example special ice strengthened pas-senger ships may have increasing demand, if Arctic tourism and research increase at the pace it now seems. Icebreaking offshore support vessels and icebreaking construction vessels are expected to see increasing demand if the arctic operations continue. The oil and gas reserves in the Arctic areas are located under ice-covered, deep water and very harsh conditions and arctic offshore energy opera-tions will require top-of-the-range vessels.

When the activity in the area is increasing, the demand for new products, especially for environmen-tal protection technology, safety technology and ICT is increasing. The main threats for operations in the area are oil spills, which are harder to recover in the ice-covered areas, and also e.g. black carbon emissions that could increase the melting of the polar ice. The IMO’s new Polar Code is setting up some requirements so that the operations in the area would be safe and environmentally friendly.

The Arctic market development faces a lot of uncertainties. The current political situation between Russia, Europe and the United States has a heavy toll on the Russian economy. There is also a lack of (port) infrastructure in the Arctic that needs to be addressed in order to facilitate expansion of Arctic shipping and operations. The real problem at the moment is the low oil price. At low oil price levels, most investments in Arctic oil and gas exploration were postponed. However, recent development is that oil companies have managed to cut cost so that the breakeven oil prices have come significantly down making many projects profitable again.

Icebreakers have seen significant technology developments in recent years. Increasing vessel sizes set new standards also for icebreakers: oblique icebreaker breaking wide channel sideways is one solution. New icebreakers are also more stable when sailing in open waters. Also, the first LNG powe-red icebreaker has been built by Arctech Helsinki Shipyard. Finland and Russia have been strongholds

of icebreaker expertise. Finnish yards have built both ships for domestic use and most of the current Russian icebreaking fleet. Icebreaker design has also been mainly Finnish (Aker Arctic, etc). Finnish, Russian and Norwegian yards have been increasing production of icebreakers and icebreaking supply vessels. Russia is also investing heavily in its own yards and is starting to build specialised Arctic ships, like nuclear-powered icebreakers and icebreaking LNG carriers. Competition from Asia is intensifying too, when the Asian shipyards are moving to build more specialised ships. For instance, China is now building its first polar icebreaker.

f. Other Specialised Vessels

The remaining group of specialised vessels is a very mixed group of about 2,900 vessels, consisting of a wide variety of vessel types. It is a challenging group to keep track of, as certain subgroups of ves-sels move in and out of this category over time in the registers. This has to do with the employment of these vessels, which is often related to other large vessel groups such as offshore vessels, dredgers or naval vessels for example.

Numbering close to 700 vessels, the largest subgroup of Other Special Vessels is that of the patrol vessels. Although patrol vessels are more related to navy ships than to regular commercial vessels, many are built these days by commercial shipbuilders and along commercial standards. Also, some of the smaller patrol vessels are offered as a multi-role design which can be customised as a crew boat or supply tender. Production of patrol vessels is rising. Developing nations are building up their navies, while navies in the Western world are increasingly looking at the deployment of patrol vessels as a more cost effective way of performing some duties which used to be performed by frigates and corvettes, enabling the latter ship types to deploy more exclusively on the more dangerous tasks.

Utility vessels and work/repair vessels also form a relatively large group, amounting to some 538 vessels. These are mostly small multirole vessels, commonly known as “workboats” and often used as auxiliary vessels in port construction, dredging and offshore construction projects. These vessels are usually equipped with a crane and an open deck and often have a catamaran hull form in order to provide a relatively stable working platform on such a small vessel.

Also heavily involved in offshore energy projects are the crane vessels, of which there are over 240 vessels.

Ships owned by governments or ports, such as pollution control vessels, buoy tenders, pilot vessels, search & rescue vessels, training ships and salvage ships make up most of the remainder of this ca-tegory.

Most of the other special ship types are built in very small numbers, with production in the low single digits each year. The most notable exceptions are the larger categories of workboats and pa-trol vessels. The average production of patrol vessels has almost doubled, from 17 units per year in the period 1996-2005 to 33 units per year in the period 2006-2015. The production of utility vessels and work/repair vessels has also sharply increased, from less than 10 units per year before 2006, to an average of around 21 units per year in the last ten years. Although the production numbers are relatively small, the vessels themselves are often high-value specialised vessels.

The economic crisis of 2009 and the collapse of the oil price since 2014 have both had a relatively limited impact on this segment. The use of many of these vessels is related to port operations and port development, both activities which continue to grow steadily in line with the growth of world seaborne trade. Workboats are also increasingly being employed in the construction of offshore windfarms, an industry which is growing fast in Europe, but which has yet to really take off outside Europe.

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Growth areas for offshore wind outside Europe are China, Japan and the United States. The increase in size of the windmills themselves also calls for more capable crane vessels, so that subsegment may also see some new orders. Finally, the versatility of workboats means that they are also increasingly employed in the growing fish farming industry.

We expect the requirement for ships in the Other Special Vessels category to grow at slightly below the projected annual growth rate of world seaborne trade. As this growth has settled on a lower level after 2011, and is expected to remain relatively low until 2020 (Source: OECD/ITF), we expect delive-ries of newbuilds to remain relatively unchanged at around 105 vessels per year during the period 2016-2020. Scrapping will continue at a relatively low level of around 27 vessels per year until 2025, as the very specialised nature of vessels in this fleet tends to lead to lengthy careers. Afterwards, scrapping will gradually rise until it peaks at around 42 units per year in the period 2030-2035. As a result, we expect a gradual rise in deliveries of other special vessels after 2020 until it reaches 189 vessels per year during the period 2030-2035.

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Source: SEA Europe / IHS Fairplay, 2016

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