Philadelphia Shipyard Struggles to Survive on Order Drought
Date: Tuesday, June 5, 2018
Source: Wall Street Journal
Philly Shipyard, a remnant of America’s commercial shipbuilding power that has been rescued twice by taxpayers over the last 20 years, is reeling again. The manufacturer is laying off 20% of its workforce as it completes work on two small ships, with no more vessels on its order book.
The Philadelphia shipyard’s fortunes are tied to the Jones Act, a 1920 law mandating that ships moving goods between U.S. ports must be American-built, owned and operated. The law’s intent is to protect the U.S. shipbuilding industry and thereby preserve a national security resource.
Philly Shipyard has delivered more than half of all Jones Act oceangoing vessels since 2003, including container ships, product tankers and crude oil tankers. But those ships cost at least four times more than vessels built by foreign yards, and American shipowners must shoulder higher insurance premiums and heftier salaries for U.S. sailors compared with operators that use foreign crews.
On top of that, the business for such ships is largely limited to goods shipped from the continental U.S. to Hawaii, Alaska, Puerto Rico and Guam. All other U.S. maritime cargo moves through American ports on foreign-flagged ships.
That has left orders rare and far apart at the yard along the Delaware River in South Philadelphia.
“Jones Act vessels are approximately 31 years of age, well beyond the international standards, which is half of that,” said Basil Karatzas, of New York-based Karatzas Marine Advisors. “One would think that there would be a plethora of new orders, but the economics of the Jones Act market are complicated.”
The U.S. was the world’s dominant commercial shipbuilder as recently as 1975 when nearly 80 vessels of all types were under construction. But the business gradually shifted, moving first to Japan and then to South Korea and China, which over the past four decades heavily subsidized local yards. The last U.S. subsidies stopped in 1981.
Today, the U.S. amounts to less than 0.5% of ship construction world-wide, according to Aaron Klein, a fellow at the Brookings Institution.
Majority owned by Norway’s Aker ASA and listed on the Oslo stock exchange, Philly Shipyard is laying off 250 employees, reducing its staff to 950. In the first quarter, the business lost $3.5 million compared with a profit of $17 million a year earlier, and when reporting the results in early May the yard said it would lose money this year and next year even if it gets new orders.
Without new orders, the operation said it would be “challenging for Philly Shipyard to continue shipbuilding operations” after the last cargo ship is delivered in early 2019 toMatson Inc., a Honolulu-based operator specializing in domestic shipping. Philly Shipyard shares have lost roughly half their value in Oslo since peaking last August.
The yard declined a request for an interview with Chief Executive Steinar Nerbovik, saying he was unavailable.
Philly Shipyard had put its hopes on an expected order from Tote Maritime, another U.S. operator, to build up to four ships for Hawaii services, but the deal fell through in January.
A bipartisan bill called Energizing American Shipbuilding Act introduced in May calls for the construction of roughly 50 Jones Act vessels to handle fast-growing U.S. liquefied natural gas exports. But the bill is unlikely to gain any traction because of the high costs of operating such vessels.
The U.S. Maritime Administration says there were 124 active American shipyards in 2015, but only 22 were “capable of building naval ships and submarines, oceangoing cargo ships, drilling rigs and high-value, high-complexity midsize vessels.” Japan currently has up to 1,000 shipyards and it is estimated China has more than 2,000.
The two of the largest U.S. shipbuilders, General Dynamics Corp. and Huntington Ingalls Industries Inc., are thriving on a different business model by catering to military ships. Both are on a hiring spree to fulfill current U.S. Navy orders and may further benefit by President Donald Trump’s plans to build more warships and submarines.
South Philadelphia’s shipyard was once a major source of naval vessels, included the famed battleship USS New Jersey. But Philly Shipyard doesn’t build Navy vessels, so if no new orders come in it will either close down or look for another bailout.
The Jones Act continues to enjoy widespread support in the government and among U.S. legislators. Attempts by Sen. John McCain (R., Ariz.), chairman of the Senate Armed Services Committee, to repeal it have failed.
“I don’t know if the government will bail Philly out, but I am sure they will push for all the support it needs,” Mr. Karatzas said.
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