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Damen Shipyards' strategy to weather the offshore downturn

Damen Shipyards' strategy to weather the offshore downturn
It is a grim time for European shipyards. As in nearly every aspect of industry, the pressure of much cheaper labour costs in Asia has for years forced many either to relocate their facilities or die out.

But it is not until more recently that Europe’s remaining shipyards, many of which have offset their expensive labour with high expertise and specialisation, have faced a double threat.

The offshore sector is an area where high-volume, low-variation production of components falls short, and European yards have survived by specialising in bespoke equipment, becoming the Savile Row to Asia’s off-the-rack approach. But speaking to shipyards in Germany recently, we found that “oil and gas [repair work] is dead” and the remaining naval and cruise business was not making up for the shortfall.

In spite of this though, one company, Damen Shipyards, enjoyed a remarkable 2014, delivering 160 vessels across its network of 32 yards and net sales of EUR2bn. Every day it seems a new contract win, a new delivery, or a new retrofit is announced, and for the time being Damen’s European yards, unlike many of their neighbours, which appears to be weathering the choppy waters.

In an interview with Seatrade Global Damen ceo René Berkvens  explains: “We had a decent year last year and we will have the same this year. We had an excellent order intake and that will help us on the results for 2015 and maybe even 2016.”

But the worst of the storms are yet to come. “These successes have everything to do with the long lead times these projects have, and the time they take to complete,” says Berkvens. “In regards to the oil and gas business, we are in the second part of the cycle.

“The bad news on oil and gas came out in early 2014, but as shipyards, we are sitting in the second part of the cycle, which is coming in later. It’s a little deceiving to say that we will not be affected – we will. All shipyards will be affected by the downturn. It will take a little longer - I would expect order intake to drop this year, and the effect of the oil and gas work in 2016-17 - but everyone is struggling in the same way.”

Damen’s shipbuilding is no exception to the extremely specialised approach that its peers have taken on, but its advantage lies in the range of industries the yard services. “The oil and gas business is fortunately not the only thing we are depending on. Security and defence has been very active – that has helped our results for 2014 and will help 2015 quite a bit.”

But will this work in other sectors ultimately make up for the shortfall? “My estimation is that it will not,” says Berkvens. “It will help us to keep things going. We used to have quite a decent business in the construction of general cargo vessels, of the smaller size, and inland waterway barges, but that market has been hit very hard in the financial crisis and has not recovered yet.”

Furthermore, trade problems between Russia and shipbuilding yards in Eastern Europe is hitting Luxury Yachts, hitherto a key revenue stream. “Most of our facilities are based in Europe, in terms of numbers of yards,” Berkvens explains. “In terms of employees, though, most of them are in Romania, China and Vietnam, on the newbuilding side.”

In order to offset some of the pain, Damen is racing to capitalise on new business opportunities, some of which come in the field of regulatory compliance. Last year, Damen entered partnerships with a number of Ballast Water Management (BWM) manufacturers - all of them winners of US Coast Guard Alternative Management System (AMS) approval, the most stringent specification currently available – to form a “One-Stop Shop” for vessels to pop into and get a system fitted.

Specialised yards like Damen Shiprepair Dunkerque, which fitted a system to Global Marine Systems’ Cable Innovator in April, lend themselves to Ballast retrofits because of the complexity of the systems, and the nature of the work. No two jobs which are alike, whether it is drilling holes in the sides of hulls or negotiating deck space and pipe work, and this is likely to provide work in Europe for some time. The only question is to what extent the capacity will be available to capitalise on it.

“With ballast water, it’s very early days,” says Berkvens. “There are projects ongoing but that’s really for the early adopters – the organisations that want to prepare for it.

“But convention’s entry into force is very close - it might even be this week," Berkvens says, referring to IMO MEPC 68 taking place last week when the interview was conducted. “We expect it will happen sometime – if not now then in six months’ time – we expect that to be interesting business.”

How long can this ballast water systems bubble really last, though? “For existing ships it has to happen during the first drydock so my expectation is that it must happen for next five years. How that will be distributed I’m not sure, but that’s not bad actually – for ship repairers five years is a long time!”

The story on scrubbers, following the entry into force of the 0.1% sulphur limit in the North Sea and North American ECAs, is a positive one. “Within the Damen group we have 14 ship repair yards and most of them are along the North Sea stretching from Brest all the way up to the North,” Berkvens assures. “It’s an important business for us. At the moment, it’s still quite busy with oil and gas projects that are being retrofitted, and big conversion projects. I expect that will taper somewhat, and the question is what are we going to find in terms of replacing that business.”

Asked what Berkvens expects for Damen's future he says: “The long term plan won’t just be to have production in Asia, but also in Europe. China is rapidly becoming more expensive, and the exchange rate is having a serious effect on prices. We operate shipyards for newbuilding in Poland and Romania and we will continue to do so."