Korean Shipyards Outclass Chinese Competitors in High Value-added Ship Orders

The South Korean shipbuilding industry, which has lost ground to China, is gradually making its way out of the depression. The encouraging fact is that South Korean shipbuilders keep ahead of Chinese companies in terms of new order receipts. The number of orders for liquefied natural gas (LNG) carriers and very large crude-oil carriers (VLCCs), which are the strengths of South Korean shipbuilders, is on the increase and the price of vessels is also going up.

According to British shipbuilding and marine industry tracker Clarkson Research Services on October 10, South Korean shipbuilders won 1.63 million compensated gross tonnage (CGT) for 28 vessels in September, accounting for 65 percent of the world's total of 2.52 CGT for 75 vessels. South Korean shipyards maintained lead in the global order book for the fifth consecutive month in September. Chinese companies had a 14 percent market share with 350,000 CGT, or 17 orders, over the same period. Chinese firms, which swept orders based on the government’s support and low wages, are now struggling. Some market experts say that China’s government-led shipbuilding industry is exposing the limitations of technology and quality.

As South Korean shipbuilding companies put up a good show, they are highly likely to reclaim the number one spot in terms of global ship orders this year. Based on the cumulative new order volume in the January-September period, South Korea topped with the largest share of 45 percent, or 9.5 million CGT, far ahead of China with 6.51 million CGT.

This is largely due to the increase in the number of orders for vessels in which South Korea has a competitive edge. The price of VLCCs has sharply dropped and the number of its new orders is growing because of higher oil prices. The number of new orders for LNG carriers is also on the increase thanks to greater demand for LNG. The number of orders for VLCCs and LNG carriers grew from 14 and 10, respectively, in 2016 when the global shipbuilding market fell into the worst recession, to 38 and 43 this year.

In addition, offshore plants show signs of recovery. Hyundai Heavy Industries Co. signed a US$450 million (511.56 billion won) deal with U.S. oil company LLOG Exploration to deliver a floating production storage and offloading unit in the Gulf of Mexico. It came as the company's first offshore plant order in four years after November 2014. Since oil prices show an upward trend, the number of new offshore plant orders can rise in the future.

On the other hand, the number of new orders for bulk carriers, which has been the strength of Chinese shipbuilders, is rapidly decreasing due to oversupply. The number of orders for bulk carriers was 353 last year but it halved to 185 as of the end of the third quarter this year. The market already believes that South Korea will reclaim the top spot, which was yielded to China for six years in a row from 2012 to last year.

The fact that the price of materials and labor costs are going up in China is a burden on Chinese shipbuilding companies. Chung Seok-joo, director of the Korea Offshore & Shipbuilding Association, said, “Chinese shipbuilders have low technical skills but they are raising ship prices to offset the rise in material prices and labor costs. As a result, their competitiveness is weakening.” In fact, Zhejiang Ouhua Shipbuilding, which was considered a blue-chip company, went bankrupt in May this year due to the deteriorating business environment.

Rising vessel prices are also expected to improve Korean shipbuilders’ profitability. According to Clarkson, the Newbuilding Price Index (NPI) recorded 130 points in September, surpassing the 130 level for the first time after March 2013.

However, a considerable number of experts say that it is too soon to be optimistic about the situation. South Korea’s “big three” shipbuilders still show poor performance this year. The securities industry predicts that the operating loss of Hyundai Heavy Industries and Samsung Heavy Industries will come to 376.5 billion won (US$331.19 million) and 250.3 billion won (US$220.18 million), respectively, this year. Daewoo Shipbuilding & Marine Engineering Co., which is supported by the government, is the only company that is forecast to show a gain. An executive from the industry said, “This year, the number of new orders for vessels that are the strength of South Korean shipbuilding firms is on the increase and South Korean companies are winning more orders. However, it is too soon to talk about the revival. They have to improve efficiency by selling off their assets and cutting costs.”