Outcome 3 - statement discussion

Question 1

Shipbuilding cycles are controlled by the price mechanism, and this is where we must start. Shipbuilding
is one of the world’s most open and competitive markets.” Discuss this statement with reference to
shipbuilding prices (p629); shipbuilding demand, supply and the price model

Answer 1

Outcome 3.
Shipbuilding is incredibly competitive because:
* Shipowners take many quotes
* No trade barriers in the form of distance, transport costs and tariffs
* Price movements for different ship types closely correlated – shipbuilders compete for a wide range of ship types and will consider bidding for ships they might not usually consider
A consequence of the competitiveness is that prices swing violently upwards and downwards depending on the number of competing shipyards for a given volume of orders.
The price at which a new ship is sold depends on the trade off between demand for new ships and supply of newbuilding berths. Therefore explaining price movements depends on understanding demand for newbuilds and supply for berths.
Demand is influenced by:
* Freight rates – earnings increase, ships become more profitable, shipowners want a bigger fleet. Persistence of high rates=more cash
* Second-hand prices – investors want ships immediately; when freight rates rise they bid on the used market and prices go up until newbuilds are more attractive
* Market expectations
* Availability of credit
Supply is influenced by:
* Shipyard capacity – short term-depends on number of operational shipyards, orderbook, number of berths willing to sell at current prices
* Unit costs – depend on labour cost, labour productivity, material costs, exchange rates; if price doesn’t cover costs, will not bid
* Exchange rates
* Production subsidies
The demand and supply factors are the influences in price. Changes in these factors bring about changes in prices and therefore shipbuilding cycles