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					                         WORLD SHIPBUILDING TRENDS

Good morning ladies and gentlemen, and I am honoured to be asked to kick off the first
session of today. I have been asked to speak on shipbuilding trends and the current state
of the shipbuilding market and I speak in the capacity of someone who is not involved in
the actual insurance industry but who is in the eye of the storm in terms of the
shipbuilding market as a whole.

The shipbuilding market is fundamental to the overall health of the shipping industry as it
dictates the supply of tonnage to the market. Indeed, blame for most shipping recessions
can usually be laid firmly at the door of the shipbuilding market with a combination of
shipyards offering tantalizingly cheap newbuilding berths, together with the herd instinct
of shipowners rushing off to shipyards just when shipping goes through one of it's all too
rare profitable periods, usually seeing shipping markets lasting only as long as it takes to
build the inevitable glut of ships this combination of circumstances produces.

So where does the shipbuilding market currently stand? Surely the twelve months of
record breaking rates we have seen means that shipowners have managed to fill up the
shipyards setting the stage for the inevitable slump.

In trying to answer this question, I would firstly like to address the issue of shipyard
capacity and shipyard profitability. Whilst shipowners may be making record profits this
year, 2004 is not going to be a particularly impressive year for shipyards. Ships which are
being delivered were all generally booked at much lower prices than what is achievable
today and costs in terms of steel and labour have risen considerably.

I attended a ship naming ceremony in Korea earlier this year where the Owner was
delighted to be taking delivery of a capesize bulkcarrier which was now worth US$ 70
million and which he had fixed on charter for US$ 53,000 for day for three years,
effectively writing the ship down in three years to the current market value of a twenty
year old vessel. This owner had purchased the ship from a Greek owner at US$ 46 mill a
few months earlier, who in turn had purchased it for US$ 39 mill six months earlier from
the owner who had originally placed the newbuilding contract at around US$ 34 mill. So
whilst three shipowners who had at one time or another during the construction period
owned the contract were all smiling, the poor shipyard was still stuck with a cheap
newbuilding contract on which they barely broke even. Almost all ships scheduled for
delivery this year are break-even or relatively marginal profit-wise for the shipyards,
simply on account of the fact that 2002, when most of today's contracts were placed saw
a significant dip in prices yards were able to achieve.

For example the average price of a VLCC newbuilding in 1999 was US$ 69 mill, rising
to US$ 76.50 in 2000, before dropping down to US$ 70.0 mill in 2001, and a depressing
US$ 63.5 mill in 2002. The late year surge in 2003 saw prices sprint up to US$ 77 mill,
still some way off the US$ 83.0 mill achievable just before the Asian crisis of 1997, and
by July this year, a newbuilding contract, if you can get a yard to quote, would be in the

region of US$ 92.0 mill. The current earnings on the freight market however, mean that a
prompt delivery resale coming out of the yard would probably now be able to achieve
US$ 105 million. A great return on investment for the owner who managed to get a berth
in the low end of US$ 60 mill in 2002, but again, not much joy for the shipyards.

So are the shipyards now gearing up capacity and raising prices to make up for lost time
and share in the profitability which seems to be washing over the shipping industry?

As I mentioned, prices are clearly on the increase. The summer months have seen a
relatively quiet period in the shipbuilding industry as shipyards hold back marketing
berths until the autumn, not just because of expectations they will be able to secure better
prices from owners, but also because of the extreme difficulties they are having in pricing
on account of rising steel prices and the increasing problem of securing early deliveries
on key items such as main engines. The insatiable demand for steel in Asia, and the
growth of the Chinese steel industry in particular, have been one of the driving forces,
indeed the key reason, behind the five fold increase in bulkcarrier rates seen since 2002
when average earnings for capesize bulkers were just over US$ 11,500 for the whole year
compared to the average for 2004 so far standing at US$ 68,000 per day. Increased iron
ore prices, shipping costs and energy costs plus the dynamics of a market which demands
more steel than is currently available has seen steel prices rocket and this has led to many
shipyards having to absorb increased material costs on fixed price contracts and hence
not only are shipyards still delivering ships at loss making prices in some cases, they are
going to have to increase prices in the coming months to recover the increased costs they
are facing.

Getting prices to increase, however, is going to be a struggle for the shipyards. We have
already seen price rises of in excess of 25-30 per cent in some sectors since the beginning
of the year and prices are at, or near, recent historical highs. As a result, buyers are more
conservative about making investments as they perceive there is a bigger asset downside
than upside. At the same time, buyers are struggling to justify prices which have risen so
fast and with newbuilding prices at the highest levels seen for a decade, it takes a very
high degree of confidence from a buyer to commit to these prices. It is difficult to find
anyone who paid over US$ 90 million for a VLCC when prices last hit that level who has
made any money on their ship so far.

The key to getting prices to remain at current levels and get further increases is in the
hands of the shipyards. At present, shipbuilders are marketing berths intelligently, by
trickle feeding capacity into the market and keeping supply tight. For example over the
past twelve months, Hyundai Heavy Industries, the world's largest shipbuilder, have been
marketing on a quarter by quarter basis and when the respective quarter is full, they stop
marketing and wait. This has ensured that there has not been too much capacity on the
market to threaten prices. The key to whether this can be maintained will come in the
next few months when 2008 berths begin to be marketed. With global shipbuilding
capacity now so vast, if unrestrained marketing of 2008 berths takes place, prices will be
under pressure through over-supply of berths. Selling limited space and keeping
orderbooks long will allow the yards to maintain upward pressure on prices.

The shipbuilding market relies on four key sectors of the shipping industry- the
bulkcarrier and tanker markets and two relatively new but increasingly pivotal
components, the LNG and container industries. All four sectors are currently booming, an
unprecedented situation which is allowing the major shipbuilders to pick and choose who
they take orders from and what they build. There are obviously other more specialised
sectors such as the cruise industry, the offshore market and specialised areas such as car
carriers, multi-purpose ships etc., but it is these four sectors which I would like to
concentrate on in analyzing the industry as a whole.

The LNG sector is currently the glamour sector of the shipbuilding industry and not
surprisingly so. For owners, shipmanagers, shipbrokers, shipbuilders and I am sure, the
marine insurance sector, assets which cost anything up to US$ 200 million and earn in
excess of US$ 70,000 per day on up to thirty year charters have an irresistible magnetism.
As of August this year, there are seventy eight LNG carriers on order for delivery
between now and 2008. This may not seem a massive number of ships compared to the
medium range product tanker market where there are 122 vessels due for delivery in 2005
alone, but it represents a whopping 46 per cent of the fleet by number of ships and 56 per
cent by actual carrying capacity. The orderbook is split over ten shipbuilders primarily in
Korea which holds fifty six of the newbuildings on order at Hyundai, Daewoo and
Samsung whilst Japan is currently building sixteen LNG vessels and the remaining six
see one of the last areas of shipbuilding where Europe has a presence. The Korean yards
in particular have focused on the LNG sector in recent years, starting off with building
for domestic customers and establishing a reputation as the world's leading LNG builder
in a relatively short space of time. Shipyards love LNG. The profit margins are good, the
ships seem to be built in decent sized series and the customers, usually backed by long
term contracts, are amongst the most substantial clients shipyards are going to get. This is
also a rapidly growing market that is no longer the 'closed shop' it used to be with a few
selected players. With LNG becoming increasingly important as a fuel source, this sector
of the market is set to grow in importance and shipyards who are not yet in this sector are
all clamouring to join in. This will put a ceiling on prices as new entrants will be willing
to price newbuildings at a sufficiently attractive level to gain entry to the market, whilst
there have already been some concerns about over-building, although it is difficult to see
why given the growth of this sector. The concerns are more from the established owners
who have been keen to keep LNG shipping one of the best kept secrets in the industry
and are not happy that this sector has been discovered by some of the true entrepreneurs
of our industry.

The containership market has truly been one of the star performers of shipping in the past
few years and this year has been truly spectacular. The industry has gone through a
similar period as experienced by the tanker industry in the late 60's when the basic
parameters of size have moved massively. In the 60's it was the development of the
VLCC, in today's container market it is the development of the 7-9,000teu vessel which
has seen the unprecedented level of investment we have seen in liner shipping recently.
Never has the liner shipping industry been making so much money and the liner
companies are re-investing it at an unprecedented rate. Over the past eighteen months,

investment in container ship newbuildings has run at US$ 41 billion. That compares with
total spending of US$ 51 billion over the previous seven years, a jump of 350 per cent.
Again, shipyards like the container industry. Not only are ships ordered by either end
users such as the liner shipping companies or by owners who have long term charters to
liner companies, but the need to operate a 'string' of ships to maintain a liner service
means they are usually ordered in batches of at least five vessels, again providing yards
with the economies of scale which they desire. Newbuilding lists of containerships are
littered with German KG investment buyers, and the German market has been the driving
force behind much of the container vessel ordering which is spread over a broad base of
shipyards with Korea dominating the larger sizes and China and some of the European
yards having enjoyed success in securing the smaller sizes. In terms of the fleet, the post
panamax orderbook of vessels over 4,000teu stands at 239 vessels, a staggering 78.4 per
cent of the world fleet in terms of vessel numbers and a whopping 97.9 per cent of the
fleet in terms of teu intake. Not since the VLCC building boom of the early 70's has any
sector of shipping had such a high percentage of the fleet on order. We all know what
happened to the tanker market when those huge tankers were delivered, so the liner
industry must pray that China continues to be the world's factory or this could seriously
fall out of bed in 2006 when eighty-eight post-panamax ships join the world fleet to add
to the sixty which come out in 2005.

The two mainstays of the shipbuilding market, bulkcarriers and tankers have not had such
headline stealing orderbooks as the container and LNG markets, but nonetheless, have
enjoyed a buoyant year with the boom in freight rates prompting considerable demand
and it is capesize bulkcarriers which have seen the most dramatic increases in shipyard
prices, with the price for a 170,000dwt bulkcarrier rising over 47 per cent in twelve
months to US$ 57.5 mill. Shipyards have turned down many bulkcarrier enquiries as they
have preferred to concentrate on the lucrative container, LNG and tanker sectors. For
example, Hyundai Heavy Industries currently has not a single bulkcarrier on order and
their management are quite happy with this situation. Bulkcarrier orders are now
primarily concentrated in Japan and China, with Japanese yards fuelling a substantial
domestic demand whilst China, with it's lower costs and emerging shipbuilding industry
has become the builder of choice for all sizes of bulkcarriers. Investment in bulkcarrier
newbuildings this year has reached US$ 6.5 billion, down by 6.5pct compared to 2003,
but this is principally because of the yards reluctance to take bulkcarrier orders. It is not
surprising that owners are now considering bulkcarrier ordering again. With expectations
of sustained growth in China fuelling record rates, newbuildings now look cheap
compared to secondhand vessels- on average a five year old bulkcarrier is currently worth
93 pct of the cost of a newbuilding, a reflection of the premium for a prompt delivery
vessel which can start earning straight away and a figure which has certainly re-written
the rules on depreciation.

After five years of heavy investment, we would have expected the tanker market to be in
recession with all the newbuildings delivered. Again, strong energy demand from China
and a desire to keep inventories high in a period of unprecedented Middle East instability
has seen a booming freight market and Owners have re-invested their profits in
newbuildings. Whilst certain sectors such as the medium sized product carrier market

have a hefty 35 per cent of the fleet currently on order, the glamorous VLCC market
currently has only 20 per cent of the fleet on order and with thirty three vessels scheduled
for delivery in 2005, this is a situation which should see the market retain the fine balance
it has seen for the past year. In terms of newbuilding demand, the tanker market does not
need any further ordering, except perhaps in the smaller sizes. The ships due to be phased
out under the IMO regulations for the removal of single hull tankers have generally all
been replaced with the current order book and hence to sustain the tanker market, we will
need to see further growth in demand and for that we again look to China. It is unlikely,
however, that tanker ordering will stop as publicly listed tanker companies will be
seeking to re-invest profits rather than sit with cash on their balance sheets, so expect to
see further orders once the winter season starts, but will this see a market crash later?

In terms of shipbuilding capacity, South Korea has now firmly established itself as the
world's leading shipbuilding nation, ending years of Japanese dominance. Up to August
this year, South Korean yards had secured 10.5 million compensated gross tons of orders
comprising 325 ships, a slight increase over the same period last year when they secured
17.6 million tons during the whole of 2003, which represented a 250 pct increase over the
orders secured by South Korean yards in 2002. Japan's orderbook so far this year has
dropped by 33 per cent to 5.6 million cgt and it looks unlikely that they will manage to
achieve the 14.5 million cgt they booked in 2003, but Japanese shipyards should exceed
the 8.4 million cgt they secured in 2002, the last year they led the world league table.
Whilst China is considered the next big threat to overtaking Japan, the rising economic
power-house still lags far behind the two leading shipbuilding nations, indeed Chinese
shipbuilding orders have so far dropped by 5 per cent compared to the same period last
year with only 3.3 million cgt contracted, but with world shipbuilding orders this year
running at a total of 25.2 million cgt, China now holds well in excess of ten per cent of
the world shipbuilding market.

Europe, largely due to the fact that it retains a strong presence in the cruise ship industry
and other highly specialised sectors has seen orders rise by almost fifty per cent this year
to 4.6 million cgt.

As I commented at the start of this paper, shipbuilding is the key to the health of the
market. In the late 1980's, there was a concern that there would not be enough global
shipbuilding capacity to meet projected demand. Analysts hate being reminded of that as
it is one of the all time wrong calls in shipping. Japan increased productivity, Korea
massively expanded facilities including brand new yards at Samho and repair yards such
as Hyundai Mipo switched to shipbuilding with remarkable success- the former ship
repairer now has an orderbook of 153 ships just eight years after switching strategy to
focus on shipbuilding.

Potentially, the biggest threat to the shipbuilding industry outside of a sudden global
economic meltdown is excess shipbuilding capacity. Japanese yards continue to expand,
not just in terms of productivity but also in terms of new dockyards such as the VLCC
berth built by the Imabari group. Korea's three major shipbuilding groups, Daewoo,
Hyundai and Samsung have all expanded capacity through increased efficiency and series

production whilst yards such as Hyundai Mipo, STX and Shina have all expanded
capacity in medium sized vessels such as product carriers and panamax bulkers, again
through utilising the economies of series production. China, however, is going to see the
most rapid expansion and poses the biggest threat in terms of potential over-supply.
Expansion is taking the form of numerous new facilities, with a plan to have ten VLCC
capable yards in the next few years, up from the current three. Of equal significance is
going to be the increase in productivity at the existing yards. Waigaoqiao shipyard in
Shanghai delivered their first vessel seventeen months ago and initial production was five
deliveries per year. By the end of next year, the yard should be approaching their target of
being able to achieve twenty deliveries per year, a four fold increase in productivity
which if magnified throughout the Chinese shipbuilding industry will provide a huge
additional supply of berth space which will put pressure on prices for bulkcarriers and
medium sized containerships in particular.

Whether these production increases will come about in China remains to be seen and the
past twelve months has shown shipbuilding in China to still be fraught with problems.
Whilst from a technical and quality point of view, China has made enormous strides in
recent years and the ability to build a more bespoke ship there rather than the standard
types the Japanese yards wish to, has built up a loyal following amongst owners.

The major, established yards within the state owned yard groupings such as China
Shipbuilding Trading Corporation have proved to be reliable counterparts, but there have
been issues with some of the more independent shipyards which have sprung up, often as
part of a provincial expansion programme and these yards do not have the financial clout
of the larger state owned groupings. This has led to many situations of contracts being
frustrated because of the inability of the shipyard to produce the required stage payment
refund guarantees and many potential buyers of newbuildings in China have been put off
by agreeing contracts and prices but then being asked to pay 'extra' to secure the required
refund guarantee. In addition, the smaller independent yards are finding it increasingly
difficult to secure main engine deliveries because of the shortage of capacity at the two
large marine diesel manufacturers in China as they will always give preference to orders
from their shareholders, China Shipbuilding trading Corporation and their affiliates.
Whilst it is inevitable that China will continue it's march towards being the major
shipbuilding nation, there are some bumps in the road ahead and potential buyers of ships
in China should exercise caution as the tantalizingly cheap berth may not be all it appears
to be.

In conclusion, the shipbuilding industry may not be generating the profits of other areas
of shipping this year, but the bumper level of contracts placed during the course of this
year will all show a marked improvement in profitability for the shipbuilders if they are
able to contain material costs. With lengthy orderbooks and a careful marketing strategy,
shipyards can dictate prices over the next few months, but with a huge amount of unsold
2008 capacity yet to come to the market, the upside in prices is limited and would only
take a combination of the shipping industry as a whole having a slight wobble at the same
time as yards are trying to fill their 2008 capacity for prices to come under pressure

The shipbuilding industry will certainly not stand still, and whilst the status quo amongst
the three major shipbuilding nations looks set to remain for the next few years, it is
always worth remembering that in the mid to late 70's, Sweden was the second largest
shipbuilder in the world, by the early 80's, they were out of shipbuilding, so fortunes do
change. The value of the industry has increased massively in the past couple of years
with the increased number of LNG carriers and larger containerships, not to mention the
appreciation in value of the bulkcarrier and tankers currently on order. As I said earlier,
anyone who ordered a ship in 2002 is sitting on a huge profit- whether that will be the
case for those owners now contemplating heading to the shipyards is the great unknown.

Thank you.

Tim Huxley
Singapore 14/9/2004


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