The shipbuilding industry is set to undergo a major transformation due to various factors such as an aging fleet, the green transition, and geopolitical tensions.
Analysts predict a strong demand for new ships in the next decade, with a total addressable market estimated at 599 million deadweight tons (dwt) and a projected value of $563 billion by 2030. This demand is expected to increase further, reaching 954 million dwt and $781 billion from 2031 to 2035, before potentially entering a prolonged downturn. Shipping executives' insights from a recent UBS Evidence Lab survey support the positive outlook for the market.
Despite the promising future, the shipbuilding sector faces challenges, particularly in terms of capacity constraints. While new orders may be limited due to these constraints, the industry is expected to experience a downturn around 2027-28 as new capacities come online. However, shipyards are expected to have significant pricing power, benefiting from the current cycle's extended nature. This is important as it could lead to above-normal returns and a re-rating of the sector.
The shipbuilding landscape is expected to see a surge in prices, with a compound annual growth rate (CAGR) of over 10% in new ship prices until 2026. This increase is attributed to factors such as a record backlog of orders, high freight rates driven by geopolitical events, and stricter regulatory frameworks. As competition intensifies, shipbuilders are motivated to secure orders early, leading to higher prices. Analysts predict that operating profit margins (OPM) could reach their previous peak by 2028, driven by rising ship prices and cost deflation influenced by China.
The potential for margins to exceed the previous peak of 2010 is of great interest. With a backlog of orders exceeding three years until 2026, along with disciplined pricing strategies and declining costs, particularly in steel, Korean shipyards may find themselves in a favorable position. However, the risk of increased yard capacity could impact future margins and ship prices. Balancing order momentum and managing capacity constraints will be crucial for the industry's trajectory.
Order momentum is a key driver of share prices in the shipbuilding sector, especially in the first half of the year when order intake is typically higher. Even if order levels stabilize, the underlying demand is expected to maintain a full backlog, which is important for share price performance. The interplay between rising new ship prices and unexpected earnings surprises will also influence market sentiment and investor confidence.
As the industry navigates these dynamics, the focus will be on how shipbuilders can effectively leverage their order books and pricing power to enhance profitability. The anticipated increase in new ship prices, coupled with strong demand, positions the sector for a potentially profitable period. However, the threat of capacity additions and market fluctuations requires a cautious approach as stakeholders evaluate the long-term viability of their investments in this cyclical industry. In summary, the Korean shipbuilding sector is on the verge of a significant upswing, driven by strong demand, strategic pricing, and the ability to manage capacity constraints. The future of shipbuilding and its impact on global trade dynamics will depend on how these factors interact.