Rising costs and labor challenges pose new obstacles for American shipyards
At this point two years ago, it was the Covid-19 pandemic that brought unprecedented changes to how American shipyards operated.
Last year, it was supply chain issues and an early glimpse at fast-rising inflation that has since taken hold more broadly around the United States.
Now, the situation for U.S. shipyards is arguably even more challenging as supply chains remain erratic, worker shortages are persisting and inflation remains hot for some key materials. The net result is sharply rising costs for new vessel projects.
“The most significant change in my view is the jump in the cost of ship construction since pre-Covid, to the point that I am astonished there is any new work at all — but there is,” said Mark Pudlo, president of Seacraft Design in Sturgeon Bay, Wis.
Shipyards that his firm works with estimate overall new vessel cost increases ranging from 15 to 25 percent for the same vessel now versus pricing in late 2020. The cost of a vessel Pudlo’s firm designed in mid-2021 rose even more between the time design work started 18 months earlier.
“The contracted price was a good 35 percent more than what I had predicted,” Pudlo said.
Higher steel and aluminum prices are one reason for the overall increase in vessel costs — although by no means the only one. Data from the St. Louis Federal Reserve shows aluminum pricing has fallen since the spring but remains significantly higher than in March 2020. Steel prices have also fallen in recent months but are more than twice as high in some cases than when the pandemic started.
The cost of steel pipes and tubes, St. Louis Fed data shows, remained near pandemic-era highs this summer.
Commodity price changes are normal and most shipyards are adept at spotting trends and building some cushion into contract prices. But even the best estimators couldn’t predict in 2019 or early 2020 how the pandemic would impact pricing a year or two into the future.
Zachery Battle, President and CEO of Mavrik Marine, said the ongoing challenges of price inflation and labor shortages have not eased in any meaningful ways. He said staffing issues are an ongoing concern for his shipyard in La Conner, Wash. Mavrik is currently building three more high-speed Dorado-class ferries for the San Francisco Bay Area Water Emergency Transportation Authority (WETA).
“We hear stories of people who don’t have staffing issues and quite honestly I am happy for them,” he said recently. “But the staffing issues are a big deal for us.”
Like other shipyards adjusting to a new normal during the ongoing pandemic period, he expects contract terms and structures will need to change to better account for fluctuating materials costs. “All things being equal, going forward, contracts will have to be written differently as a result of current affairs,” he said. “For us it is simple: We have to do that, or we have to inflate our pricing.”
This trend is not limited to shipbuilders. The U.S. Army Corps of Engineers is proposing flexibility for remaining contracts in its $3 billion Soo Locks expansion mega-project. In short, the contract cost would rise or fall with commodity prices such as fuel or materials.
For shipyards that have managed inflation and labor challenges, the strained supply chain remains an ongoing concern. Katie Doughty Maddox, president of Washburn & Doughty Associates in East Boothbay, Maine, said this summer that unexpected delays have hampered some projects. In some cases, she said, vessel construction can be proceeding relatively smoothly until a particular part or fixture becomes difficult or impossible to find.
This trifecta of challenges — supply chain, inflation and labor shortages — is happening at a time of rising opportunity for many American shipyards. Demand for vessels serving the offshore wind industry has risen sharply over the past year, offering work to shipyards large and small. The pace of new construction could accelerate as more offshore turbine projects earn federal approval.
The passenger vessel industry is also starting to rebound from a steep drop in new projects during the early part of the pandemic. One New England naval architect said by email that he is adding staff to keep up with the stream of new ferry projects.
“We are seeing the passenger vessel market rebound in certain key ways but not as a whole,” said Ron Wille, president and chief operating officer at All American Marine in Bellingham, Wash., which has built numerous high-speed passenger vessels for ferry and tour operators in recent years.
The passenger ferry business, which took off in recent years as operators in New York City, San Francisco and elsewhere built efficient high-speed fleets, has been slow to rebound from Covid-19. Workers are starting to return to their offices, but weekday ferry ridership in these big coastal cities remains 30 to 40 percent lower than it was in 2019, limiting demand for new orders.
Demand is more robust for non-commuter ferries. The Cape May-Lewes Ferry, for instance, is preparing to build up to three new ferries to replace three vessels that date back to the mid-1970s. The Maine State Ferry Service is another operator embarking on a major investment in new vessels.
The federal infrastructure bill also could boost investment in new ferries. The $1.2 trillion package contained more than $900 million in ferry funding to be allocated over five years. Some of that funding is already becoming available. The Federal Highway Administration allocated $172 million to 35 states to bolster ferry service, and a separate $290 million is available for rural ferry service, greener propulsion and other capital expenses through separate programs.
Some states are also investing heavily in ferry service. Washington State Ferries (WSF) is pursuing an ambitious electrification program that includes retrofitting its three Jumbo Mark II ferries from diesel to hybrid-electric propulsion. The state expects to award a contract for the work later this year.
WSF is also moving ahead with a new series of hybrid Olympic-class ferries capable of transporting 1,500 people and 144 vehicles. The state Legislature has authorized $1 billion to fund the new ferries. WSF hopes to award a construction contract for the new vessels sometime next year.
Challenges aside, the last year brought several important milestones for the American shipbuilding industry. Fincantieri Bay Shipbuilding of Sturgeon Bay, Wis., delivered the 639-foot Mark W. Barker (profiled on page 8) to The Interlake Steamship Co. in July. The innovative ship is the first new U.S.-flagged Great Lakes freighter built in almost 40 years.
Pasha Hawaii put its new containership George III into service in the Hawaii trade lane this summer. The 774-foot ship is the first to fuel with liquefied natural gas on the West Coast. A sister ship, Janet Marie, is expected to enter service next year.
The passenger ferry Sea Change (profiled on page 14) has yet to enter service, but it gained worldwide exposure last fall after becoming the first commercial ferry to load gaseous hydrogen fuel. The 75-passenger hydrogen fuel cell ferry could soon enter service in San Francisco as part of a demonstration project.
But of late September, the outlook for new construction remained uncertain. Rising interest rates and persistently high costs could put new vessels out of reach for some operators. Others are weighing whether to build now rather than risk higher costs down the road, or wait a year or two in hopes that costs will fall. It is too soon to know which course is the correct one. •