(Corrected) Odo CBR Commentary - Mitsubishi's woes could discourage Asian to enter cruise ship building

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Written by Kari Reinikainen Kari Reinikainen

Category: Top Headlines Top Headlines

Published: 12 November 2014 12 November 2014

(Corrects ship name in sixth paragraph in original text from Ruby Princess that was built by Fincantieri to Sapphire Princess that was the second ship Mitsubishi built for Princess.)

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The deep losses that Mitsubishi Heavy Industries, the Japanese shipbuilding group, said it would book from the construction of two 124,500 gross ton cruise liners could deter ambitions of other Asian shipyards from entering the cruise ship building business.

The Japanese shipbuilder said in connection with the publication of the interim report for the first half of its financial year that it will book a charge of JPY 39.8 billion in its first half financial year 2014 results, in addition to a JPY61.4 billion charge that it had booked against the two ship order in its accounts for the previous financial year.

Mitsubishi blamed problems with design and procurement for additional material for the losses, which combined amount to the region of $887 million. We also understand that the yard has had problems with the weight of the ships.

Figures from Odo Cruise Report & Forecast 2014 show that Mitsubishi accepted a price of $647 million for each of the 124,500 gross ton vessels. This gives a price of $5,196.8 per gross ton per vessel, which is markedly below the average price of $5,893 per gross ton of the AIDA fleet, including these two ships. The rest of the AIDA fleet has been built in Germany, save for the first ship that came from Finland in 1996.

The average price per gross ton of the newbuildings from Mitsubishi is also markedly below the $5621 average of newbuildings due for delivery in the 2015-17 period, that covers the entry into service of the AIDA ships. In the previous four year period, the average was much higher, at $6,159 per gross ton, as these contracts were signed before the outbreak of the financial crisis.

In our opinion, Mitsubishi took a risk by quoting a low price for the two ships in 2011 when the contract was signed, but it probably deemed this necessary to allow it to re-enter the cruise ship building business after almost a decade - prior to these ships, it had built Diamond Princess and Sapphire Princess for Princess Cruises in 2003-04.

Mitsubishi's problems highlight the complexity of cruise ship building projects and we believe Asian yards that have time to time featured in connection with potential cruise ship projects will be increasingly cautious to embark on these undertakings. Yards with little or no experience from passenger ship building have, in recent past, run into difficulties also in Europe and North America.

An agreement that Carnival Corp & plc recently signed with China State Shipbuilding Corporation and which also included Fincantieri to ease the Chinese builder's entry into the cruise ship sector is unlikely to produce quick changes in the dominance of the market by established builders.

However, should Fincantieri want to acquire STX France, as some reports have indicated, a successful acquisition would reduce the number of established major builders to just two Fincantieri itself and Meyer Werft, which is probably not an optimal number for major cruise shipping groups.