S. C. Misra
4.6 Determination of Price
Maritime structures and vehicles operate at the international environment following inter- national economic norms. Therefore, the price of such a product is determined based on the internationally competitive environment. The demand for sea-borne trade determines
the requirement of ships at any time. If the availability of ships is more than the require- ment, the price of a new ship is likely to decline. If the ship availability is not adequate, the demand for new shipbuilding is likely to be high, with ship pricing showing a higher trend. Thus, ship pricing follows the supply and demand relationship as per standard economic norms. The ship availability is not solely dependent on transport requirement but also on ship scrapping/demolition trend and technology demands for demolition (e.g. regulatory double-hull tankers eased out single-hull tankers). Since shipbuilding is a long process, the supply of new ships has a time lag with the demand. Figure 4.9 shows the sea-borne trade growth in the world in the last few decades (UNCTAD Report 2013). It can be observed that sea-borne trade had a dip in 2008–2009 due to the worldwide depression, but now it is showing and is likely to show growth in the near future.
The shipbuilding market has shown impressive growth following the demand for ships in the early part of this century, particularly for bulk carriers and tankers. Figure 4.10 developed from the data of the Shipbuilders’ Association of Japan (2013) shows the jump in ship order book position from then on, peaking around 2009–2010. This peak was perhaps a bit unnatural and was not likely to last. Shipbuilding is known to be a cyclic industry moving between crests and troughs of ship demand and, as was expected, the demand for shipbuilding has reduced. Clarkson’s market research group has collected and statistically analysed a large amount of shipping and shipbuilding data. Figure 4.11 (Stopford 2009) shows shipbuilding demand and deliveries. This figure also shows the excess delivery done in 2009–2010. Further, Clarkson’s extrapolation of data indicates that shipbuilding is likely to grow again in the near future. Clarkson’s data are collected for three main categories of commercial ships: tankers, bulk carriers and container ships. The prices for such ships have also been analysed and a ship price index has been established with 1988 price as 100. The variation of this index is shown in Figure 4.12 developed from the data published by Clarkson’s research. It can be observed that the index has fluctuated more or
1975 50
Years
World seaborne
trade World merchandise
trade
100 150 200 250 300 350
1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
Trade index (base year 1990 as 100)
FIGURE 4.9
World trade development (including sea-borne trade) since 1975.
400
350
300
250
200
150
100
50
1979 1985 1991 1997
Years 2003 2011 2017
Million GT
World new orders (mill. GT)
World order book at year end (mill. GT)
FIGURE 4.10
Shipbuilding order book position since 1975.
200
Annual requirement for new ships based on 3% pa trade growth and
replacing ships after 25 years Yard capacity somewhere in this
range?
180 160 140 120 100 80 60 40 20
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055
0
Million deadweight demand/deliverie
Shipbuilding output is expanding faster than the underlying demand The current
order book assuming delivery on
time Deliveries Jan 2009
Deliveries Jan 2007 Scenario Deliveries
Demand Scenario Demand
FIGURE 4.11
Demand of ships since 1950 projected up to 2035 and deliveries.
less based on shipbuilding demand with a high value in 2007–2009 after which the index has fallen due to a fall in demand. In any case, the highest index has been around 170 and the lowest is 135 in 2012.
The contractual price of a ship is a function of international price standards based on the supply and demand of new ships, which must also satisfy the enterprise requirements of business growth based on shipbuilding cost. If the price of a new conventional commercial vessel (Pn) is under consideration having cgtn, it should follow that the normal price trend dictated by the price index extrapolated from a similar known ship’s (cgtb) price (Pb) in recent past indicates
P P cgt cgt
I
n b n I
b n b
= * *
where In and Ib are shipbuilding price indices for the new ship and the similar vessel in the respective years of construction. This price may be modified based on financing patterns, contract terms and currency fluctuation if a large amount of imported items are used. In the case of conventional ships, price is determined at international competitive rates to which the shipbuilding cost must confirm. The shipbuilder may intentionally take such an order anticipating a loss to catch a portion of the market. This also compels the builder to reduce cost through better management and financial control.
But value-added ships and structures do not follow this pricing procedure since these are built in small numbers where price trends are difficult to establish. Further, due to value addition, the machinery and equipment cost as well as overhead cost, including design and integration, may vary from ship to ship. Therefore, it may be necessary to modify a known price of a ship not only based on cgt, but other factors also. One such parameter is the area factor represented by length * breadth of the factory or workshop.
Another factor could be the technology of the ship. Then the price can be represented as a direct function of cgt * area factor * technology factor.
Naval vessels are highly value-added ships, and their price should be based on actual building cost estimation.
210 190 170 150 130 110
New building price index 90
70
501980 1985 1990
Years
1995 2000 2005 2010 2015
FIGURE 4.12
Clarkson’s new building price index for ships.