The Worst Cycle We See
While you may not usually look at shipbuilding, it is a very interesting and globally relevant industry – and it is poised for a severe downturn within the next year.
- Severe: The shipbuilding downturn will be disruptive, making it important to avoid suppliers, creditors and customers, in our view. Freight capacity should be well supplied for years, leaving indicators like Baltic Dry less useful for macro analysis.
- Just Past Peak: Since ships last for about 30 years, capacity added after WWII was replaced in the 1970s and that capacity was just replaced, with peak deliveries in 2011-2012.
- Next Two Years Painful: The drop-off will be unusually sharp this cycle because the financial crisis clipped off orders in 2008. 2014 capacity utilization at ship yards will be a fraction of current levels (something like 20% of current utilization). Many shipyards will not survive.
- Avoid/Short: We suggest staying away from or shorting Samsung Heavy, Hyundai Heavy, and other shipbuilding exposed names, and even avoiding high quality suppliers like Wartsila.
- Tough Industry: The shipbuilding industry has a difficult industry structure – fragmented competition, high barriers to capacity exit, consolidated suppliers, and consolidated customers by shipyards. Except for cycle peaks, margins tend to be low.
UPCOMING EVENT: On August 16th at 11:00AM we will be hosting a call on the launch of our Trucking OEM Black Book that will discuss Navistar, PACCAR, Cummins and other key names in the space.
