Shipbuilders must navigate the tough tides of recession

There is no missing the empty space at the vast shipyard on the outskirts of Wismar, on Germany's Baltic coast. The workers welding plates in the fabrication halls - each hundreds of metres long - are surrounded by large, unused areas that reverberate with the long echoes of hammers banging on steel. The yard's conditions are a microcosm of the crisis facing the shipbuilding sector worldwide.
The industry is burdened with significant costs supporting manufacturing capacity that grew rapidly during the shipping industry's boom between 2002 and 2008.
Much of it now lies idle and spare capacity only exacerbates the downward pressure on prices for any orders that are placed.
Without new orders coming in, the weaker yards are struggling to find cash to complete work on ships already under construction. They are nevertheless obliged under most contracts to complete the ships within a set period or return the tens of millions of dollars in deposits to the shipowner.
The conditions led Harald Neple, chairman of the Organisation for Economic Co-operation and Development's shipbuilding committee, to warn earlier this year that excess capacity was a growing problem.
"There is considerable concern that excess shipbuilding capacity, which was already looming as a problem despite the full order books, may now become significantly more serious," he said.
Germany's Wadan Yards, then owner of the Wismar yard and another facility at nearby Warnemünde, was forced in June to seek bankruptcy protection and support from both state and federal governments.
Since then a new investor has been found to take on the shipyards' assets - but not responsibility for completing existing orders. In October, workers at Wismar returned to work , completing a ferry for Sweden's Stena Line.
However, Marc Odebrecht, the yards' bankruptcy administrator, says the outlook is bleak for other shipyards. "The system is sick," he says. "No builder in any other kind of business has to take so many risks."
The key to the current problems is a rash of orders from shipowners earlier in the decade, which reached a peak in 2007.
Then, yards were full and owners' main concern was that if they were too slow to place orders rivals would snatch the space and be able to take advantage of the booming market more quickly. The conditions pushed up prices.
The easy access to finance also made shipowners overconfident. They would place an order for a new vessel after arranging financing for only the first two of the five payments that normally make up a shipbuilding contract.
Owners now face a sharp drop in values with a glut of spare capacity, which means some ships on order are worth far less than the price they agreed to pay for them.
This makes arranging finance for the remaining payments impossible.
The owners facing financial problems would prefer to cancel the orders.
But they are reluctant to forfeit their downpayments. Some banks are demanding extra equity from shipowners to cover the fall in the value of vessels ordered during the boom since the market's collapse.
In some cases, yards and shipowners have jointly agreed to delay delivery of orders not under construction, according to Charles Morrison, a director of London-based Braemar Shipping.
Owners hope that improving markets and easing financial conditions will allow them to finance the outstanding payments at a later date.
For yards, it can make sense to stretch out the construction period of a vessel, while at the same time cutting costs, to avoid the prospect of having no work.
Korean yards have been particularly prone to agreeing such delays, Mr Morrison says.
"A lot of the yards can reduce the number of subcontractors, which will reduce their capacity and therefore their capability to produce a certain number of vessels a year."
However, the public row between Mr Odebrecht and Laeisz & Co, a Hamburg-based shipowner that ordered two medium-sized container ships from Wadan Yards, shows how divergent the interests of yards and customers remain.
When Wadan declared itself insolvent, Laeisz used a clause in its contract that voided it in the event of the builder's insolvency.
Niko Schües, a partner in Laeisz & Co, says the ships are now worth $17m to $20m each, against the $42m each it had agreed to pay.
Mr Odebrecht accused Mr Schües of betraying the traditions of merchants from the Hanseatic League - the medieval group of cities around the Baltic - by terminating the contract.
Those tensions are reflected on a global level. In the OECD's recent talks on shipbuilding, the International Shipping Federation, which represents international shipowners' associations, called for yards to be more prepared to accept cancellations. The ISF argued this could prevent the prolonged market slump that looks set to engulf container shipping, bulk carriers and some forms of tankers.
Shipyards, however, remain firmly opposed to showing more leniency over cancellations.
They have already lowered their prices sharply in the hope of bringing in yet more orders.
The two sides have potential to do considerable damage to each others' businesses. But, as in the case of dispute between Wadan Yards and Laeisz, there is always the hope that they will find common ground.
Mr Schües says he would prefer a negotiated solution. "I think becoming personal is going beyond the point," Mr Schües says.
"[But] we are interested in a realistic compromise with the yard, for social responsibility and avoidance of long years of arbitration procedures."