When Maersk Line, operator of the world’s largest container ship fleet, signed a $1.8bn order with Daewoo Shipbuilding on Tuesday, it highlighted a vital trend for South Korea, the world’s biggest shipbuilding country. Demand for new oil tankers and vast container ships is offering some relief from the industry’s worst slump in decades.
Orders for large crude carriers and container ships — the speciality of South Korean shipbuilders — have been relatively strong in a broadly sluggish period. Chinese shipyards, by contrast, are struggling with slowing demand for dry bulk carriers, their flagship products.
As a result, South Korean shipyards have recaptured the industry’s top spot in terms of new orders received, with a market share of 41 per cent, compared with Japan’s 28.9 per cent and China’s 24 per cent, according to Clarksons, the brokerage.
However, the industry — which is highly cyclical — remains in a protracted downturn.
Global vessel orders fell almost two-thirds year-on-year in the first quarter of 2015 to 5.6m compensated gross tonnes, a measure of the work required to build each vessel. Much of the slump reflects a big fall-off in orders for drill ships and offshore oil production facilities that had sustained the yards through the world economic downturn.
Behind the uptick in orders lie low oil prices and improving global trade prospects. Owners of crude oil tankers have been encouraged to buy new vessels by a recovery in charter rates stemming both from new demand to move oil following the price collapse, and by the tightening supply of vessels following a near halt to orders in recent years.
Container ship owners such as Maersk are scrambling to order new vessels far bigger than their predecessors — Maersk’s new vessels will be 400m long — to capture efficiencies of scale.
Owners of tankers for oil products, meanwhile, are ordering more ships as oil refineries increasingly move to Saudi Arabia, India and other places close to oil-producing areas and far from consuming countries.
Recent ordering activity has been buoyed by an influx of private equity money into the industry.
“Lower prices are spurring oil demand, leading to higher tanker rates,” says Jeon Dae-chun, analyst at Daishin Securities.
Although total global orders for new vessels have halved in the first three and a half months of the year, orders for oil tankers and container ships rose 47 per cent and 3 per cent respectively, according to Clarksons. Korean shipbuilders took more than 60 per cent of new orders for oil tankers thanks to competitive pricing of their fuel-efficient technology.
However, yards continue to suffer from the effects of a significant global overexpansion of shipbuilding capacity during the shipping industry’s long boom between 2002 and 2008.
“Increasing orders for oil tankers are like rain in the midst of drought for Korean shipbuilders, but they are not enough to fill their order books,” Mr Jeon says.
The persisting downward pressure on yard’s prices helped widen Hyundai’s operating loss to Won192.4bn ($174m) in the first three months of this year, while Samsung’s operating profit slid more than 70 per cent to Won26.3bn from the previous quarter. Daewoo suffered a Won172bn net loss in the first quarter — its first in eight years.
Hyundai received orders for eight new vessels worth $636m in the first quarter of 2015 — six tankers and two liquefied petroleum gas carriers — and board members from Saudi Aramco, the oil group, recently visited Hyundai’s headquarters reportedly to discuss buying up to 10 tankers worth as much as $1bn.
A gradual pick-up in demand for large container ships is also encouraging for South Korean shipbuilders, as Chinese rivals lack the technology and design know-how for large container ships. Ultra-large container ships are increasingly in demand due to their fuel efficiency and economies of scale amid low shipping rates.
In April, Samsung said it had won orders from a Hong Kong shipping company for six 21,100 20-foot equivalent (TEU) containerships, which will be among the world’s largest ships. That followed orders in March for four 20,100 TEU containerships from Japan’s Mitsui O.S.K. Lines.
However, analysts caution that the recent deals are unlikely to significantly boost South Korean shipbuilders’ profit margins, as vessel prices remain low amid stiff competition. For example, Samsung’s latest order fetched $158m for a 21,100 TEU containership — less than the $185m received by Daewoo Shipbuilding in 2011 for a smaller vessel.
“They seem to be offering
discounts to grab a bigger share of the slowing market,” says Angela Hong, analyst at Nomura. “The recent orders would not be so profitable but they could still add to their order backlogs so that they can have better pricing power in the future.”
Overall, the outlook for the $85bn South Korean shipbuilding industry remains murky as low oil prices damp demand for more profitable specialised ships used by the offshore oil and gas sector.
“It is hard to expect a real turnround as long as oil prices remain low,” says Kim Hong-kyun, analyst at Dongbu Securities. “They can’t make huge profits with just commercial ships. But things could be better next year if oil prices recover, boosting demand for drill ships and offshore production facilities as well.”
The Original Posted by Song Jung-a in Seoul Robert Wright in New York