KWHIY Kawasaki Heavy Industries Ltd (PK)

Mitsubishi Heavy Industries Ltd. plans to shrink its shipbuilding business after a big fall in orders and a heavy loss in its cruise-ship operations, people familiar with the matter said Wednesday.

These people said Mitsubishi will no longer take orders for large passenger and general cargo ships and instead concentrate on smaller vessels and marine engines. It is also exploring the spin off of its ship-design division.

The moves are the latest in a world-wide consolidation and reordering of the global ship building industry.

A Mitsubishi Heavy spokesman declined to comment.

Overcapacity and falling demand for seaborne trade have pushed freight rates to unsustainable levels over the past two years, causing billions of dollars in losses for the world's biggest shipping companies and a near halt to orders of new vessels.

Japanese shipbuilders are known for producing high-quality ships, but at a higher cost than competitors in Korea and China. Labor costs at Japanese shipyards on average are about two to three times higher than their competitors.

Mitsubishi Heavy, Japan's fourth largest shipyard in terms of capacity, relies largely on orders from Japanese shipping companies that have all but halted their demand for new vessels after years of heavy losses. The industrial conglomerate also builds cars, aircraft, defense equipment and electricity plants.

"The order-book for Japanese yards is down around 80% year on year," said Basil Karatzas, of New York-based Karatzas Marine Advisors and Co. "It is one of their worst years ever."

The 81 shipyards in Japan have a total of 113 orders this year compared with 497 in 2015. Mitsubishi Heavy has receive only five orders this year and nine in 2015, according to Maritime data provider VesselsValue.

Mr. Karatzas said some yards will exit the industry, while others like Mitsubishi Heavy will look for shipbuilding partners to cut costs and focus on higher-margin products like ship engines that make up around 20% of a new ship's price tag.

Mitsubishi Heavy said in August it was in talks with Imabari Shipbuilding Co. Ltd., Oshima Shipbuilding Co. and Namura Shipbuilding Co. Ltd. to form a shipbuilding alliance. Domestic peer Kawasaki Heavy Industries Ltd. said last weeks it was considering exiting the shipbuilding business.

Mitsubishi's decision to halt orders for big ships came after the company took a nearly ¥ 104 billion ($1.01 billion) loss on its cruise-ship operations earlier this year after delaying the delivery of the cruise vessel ordered by U.S. operator Carnival Corp. by more than a year, the people familiar with the matter said.

Write to Costas Paris at costas.paris@wsj.com

(END) Dow Jones Newswires

October 12, 2016 12:55 ET (16:55 GMT)

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