The Tale of the 3 Shipbuilding Nations

The Tale of the 3 Shipbuilding Nations–a meteorological breakthrough 2014

Hwang sunghyuk / Hwang&Company,Ltd.

The shipbuilding market, which had remained shrunk since 2008, has seemingly started to be picking up since early 2013 to some degree. With the advent of 2014, however, it is losing ground with a dwindled vigor. According to the statistics from Clarkson Research, the global new-building (NB) orders inked during the first half of 2014 amount to 61.80 million dwt (944 ships, 20.50 million cgt), declining 27% on year. This development has been expected. The NB orders seen in 2013 was driven mainly by a handful of global speculative investors, exactly synchronizing with the thinning of the order-books being held by leading yards, while conservative operators are still hesitating to come forward. It was high time for the speculative financiers to pour their fund reserves intensively into cheap, eco-friendly, and fuel-efficient NB projects. Due to a spree of such speculative orders penned in 2013, the global shipping market, which had already been staggering due to the over-tonnage from the NB orders placed during the unprecedented boom that lasted from 2003 to 2008, has been shouldered with another oversupply of surplus tonnage.

In the first half of 2014, of the three shipbuilding nations – China, South Korea, and Japan – snatched 90 % of global NB orders, China bagged 31.80 million dwt (481ships, 9.10 million cgt, $14.6 billion), down 21% compared with the same period of 2013. South Korea clinched 17.20 million dwt (164 ships, 5.60 million cgt, $13.2 billion), declining 30% from a year ago. Japan won 9.10 million dwt (177 ships, 3.40 million cgt, $5.90 billion), showing a 40% decrease on-year. The ship prices that had upturned in 2013 began to fall down from the end of June in 2014. The price of a VLCC which surpassed the $100 million mark tumbled to $99 million level. A Cape-size bulker dropped, by $1 million, to $57 million level. Overall, the global shipping still remains overshadowed by dark clouds, failing to find an exit from the long tunnel. Traditional and conservative operators are taking a ‘wait-and-see’ stance, whilst putting all their investments on hold until they can visibly pick up clear signs of recovery taking shape in the market. Neither of the shipbuilding sectors – bulkers or tankers or box-ships – is showing a bright outlook in the short-term.

Korea’s 4 leading yards are dominating the market when it comes to the intakes of global NB orders. HHI’s ranking remains unchanged at the top with 11.02 million cgt, trailed by SHI with 5.5 million cgt, DSME with 5.36 million cgt, and HMD with 4.82 million cgt. Japan’s Imabari and JMU took up the places of No.5 and No.7, respectively. Global ranks – Nos. 8, 9, and through to 10 went to China, namely Shanghai’s SWS, Yangjijang, and Hudong. Korea’s STX O&S slid to the 6th place.

Japan is relatively stable in this particular respect. Although global orders plunged sharply in June, down 29% on-month, or nose-diving 75% on-year, Japan was able to collect orders for 1.69 cgt (91 ships), soaring 140% on year. Japan outweighed Korea in terms of order volume, mainly attributable to Abe’s lower-Yen policy that has drawn the picture in Japan’s favor. A bit of in-depth study into the NB statistics, meanwhile, can vindicate that Japan’s orders are showing a heavy leaning towards low-value ships like bulk carriers, of which 70% came from Japan’s domestic demands, with its overseas orders making up for only 30%.

China is resolute in its push for China-wide industrialization. China’s clinging on to shipbuilding is all-directional. Attractive finance packages inducing shipbuilding and offshore orders to China always top the summit agenda whenever Chinese leaders meet head-on with their counterparts hailing from global shipping nations. A Chinese policy of sticking to ‘China-built ships only’ in carriage of imported natural resources from abroad to China is now an obsolete cliché. China has successfully driven a growing number of global owners to build ultra-large containerships at China’s domestic yards with the various incentives. China has gradually been firming up stability in building LNG carriers that call for the highest level of shipbuilding technology. Plus, China is penetrating, at a faster pace, into the sector of ‘stainless steel-built’ chemical carriers that have so far been dominated by Japan. China can no longer be regarded as the world’s No One in mainly building low-value bulkers in quantitative terms. China is currently making fine efforts to become the world No 1 in all respects of shipbuilding.

Korea has reigned over the world as the largest shipbuilding nation since 1990s. It looked as if no other country in the world could dare to chase and defeat Korea when placed at its peak in both qualitative and quantitative terms. Korea boasts of having earned a premium as the superb naval nation that always complies fully with the NB’s technical performances, punctually meeting with the delivery as committed to in the contract. This premium has stayed with Korea in an era of boundless competition since 2008. When Korea was placed in the midst of hardships, large orders came from the sector of offshore and deep-sea oil exploration structures, requiring the highest technical expertise, thus enabling to help Korea out of its immediate crisis. It was coincidental, though, that oil prices kept rising and oil drilling environment and conditions were worsening. Korea took the advantage of the opportunity, capturing most of the massive high-value orders from offshore sector. Korean yards could fill the building berths with these offshore projects. But Korea fell down to the earth, having to face the harsh and daunting reality simultaneously with cooling-down of the offshore market. All of a sudden, Korean yard awoke to find itself lacking in competitiveness in building the commercial ships.

Nothing sounded feasible. Everything looked impossible for quite a spell of time. Due to loss of its competitiveness, Korea had to see most of the orders for bulkers and general tankers being shifted to China or Japan. Korea had no other option but to keep away from chemical tankers as well, because they were to be built of stainless steel and that they disturbed the process of building the majority of other ships placed in the same building site at the same time. Korea still stays self-complacent about continuing to dominate the sector of LNG carriers. But the two neighboring countries are chasing close on the heels of Korea at an alarming pace in this gas sector as well. China has already started to build ultra-large container carriers. The oil exploration and drilling sector is most vulnerable to the ups and downs of the oil market.

For this reason, it would not be dependable jobs in a good long-term for shipyards to have their building berths fully filled with orders coming from the offshore sector. While the composition of local contents as regards commercial ships is in excess of 90%, most of the equipment and machinery for offshore projects are outsourced from overseas makers. Given this, offshore orders of high prices do not always mean the projects of high profit, but bring lower profits to the shipyards or to make losses to the shipyards. Neutrally speaking, Korea’s shipbuilding has already been driven into a situation where no building sector is safe and competitive. One can diagnose that Korea’s shipbuilding has slowly been stepping into a phase of inward collapse which had earlier been experienced by Europe in 1960’s. The downfall can come abruptly in a day without prior notice, placing in jeopardy the employment of tens of thousands of workers and the Korea’s exports of ships worth $100 billion per year.

It is high time for Korea to diagnose the ongoing problems and to establish effective solutions contributing to prevent shipbuilding from collapsing. There is no time left to put it off until next month or next year. The daunting task must be kicked off right away. On a Korean setting, no yard can expect to receive a nationwide support as it does occur in China. Nor can Korea expect to get a loyal prop from home operators as is the case with Japan. On the contrary, some Korean operators who have just been resuscitated on ‘CPR’ from taxpayers’ money are found to be building commercial ships in China. This is a Korean reality. The basics of shipbuilding always lie in the building of commercial ships. Korea must get back to the basics in shipbuilding. No doubt, Korea should continue to have its competitive edge in terms of high-value ships calling for the state-of-the-art technology.

In parallel, Korea must not abandon commercial ships – bulkers, tankers, small containerships, and high-value chemical carriers. On the contrary, utmost efforts must be exerted by all means to improve the competitiveness of these commercial ships. Needlessly to say, giant yards are vitally important for Korea, but, at the same time, mid-size yards should remain afloat to entertain the niche market. Since giant yards cannot compete for smaller commercial ships due to their high fixed costs, indirect costs, or overheads, the closed yards in good shape should be re-opened to tame them fit for specialized building sectors. This is the only way Korea can safeguard its shipbuilding industries. Should Korea choose to take proper steps which leads to the simplification of its shipbuilding organization, cuts in overheads, and heightening of its productivity, overseas owners would certainly come back to Korea for bulkers as well, instead of going either to China or to Japan.

In this context, Korea’s national authorities, shipyard executives and labor unions must meet head-on together to debate and arrive at most effective solutions. A ‘panoramic’ far-reaching brainstorming session must be organized so that the government, the shipyard, and the workforce can jointly define and establish the policies to be newly introduced by the government, the ensuing tasks to shouldered and ironed out by shipyards, and the ensuing responsibilities to be shared by the workforce. Most important and on top priority is the survival of Korea’s shipbuilding, without which neither of the constituents – shipyards, the workforce, or the government’s policy planning – has any significance. It would be most deplorable to see the downfall of Korea’s shipbuilding industry due to becoming out of competitiveness in less than two decades since it started enjoying the prestige of being the world No One shipbuilding nation.