After years of struggling to stay afloat, the South Korean shipbuilding industry is preparing for the return of growth. As signs of a global recovery emerge, the country’s big three shipbuilders — Hyundai Heavy Industries, Daewoo Shipbuilding & Marine Engineering and Samsung Heavy Industries — have also cleaned up their balance sheets through tough restructuring.
Although Hyundai Heavy’s plan to lay off another 2,000 employees at its offshore energy platform business is a reminder that the industry is not out of the woods yet, the sector is slowly recovering from a slump that saw billions of dollars in losses and cost tens of thousands of jobs.
“The worst seems over for them and they are at the beginning of the industry’s long-overdue recovery,” says Choi Jae-hyung, an analyst at Nomura.
Following a trough in new orders in 2016, most South Korean shipbuilders are still feeling the pinch, reporting operating losses this year, but analysts expect them to turn profitable next year.
Helped by growing demand for high-end vessels such as large container ships, oil tankers and vessels used to transport liquefied natural gas (LNG), South Korean shipbuilders have increased new orders 30 percent in the first seven months of this year, according to Nomura. They won 42 percent of new commercial ship orders in the first seven months of this year, with China and Japan taking 32.8 percent and 10.5 percent respectively, according to market researcher Clarksons.
Through the shipping downturn, Korean shipbuilders adapted and became more resilient to difficult market conditions.
Matthew Blumberg, analyst, Hayberry Global Fund
“The industry has clearly bottomed out with reduced overcapacity, although the heyday of the 2000s is unlikely to come back,” says Chung Sung-yop, an analyst at Daiwa Securities.
The outlook for the offshore energy platform business, which has caused big losses for Korean shipbuilders since 2014, is also improving, helped by oil prices rallying to $ 80 a barrel for the first time in four years. “Through the shipping downturn, Korean shipbuilders adapted and became more resilient to difficult market conditions,” says Matthew Blumberg, an analyst at Hayberry Global Fund. “We see 2019 as an opportunity for the Korean shipbuilders, where profitability will start to return as the ships ordered from 2017 are built and the backlog of orders grows to a level where pricing power is strong.”
But increasing competition from China remains the biggest concern. Although Korean shipbuilders are still the leading makers of high-end vessels, they have been undercut by lower-cost Chinese rivals on more basic ships such as carriers of bulk commodities including coal and foodstuffs. After a decade of rapid expansion backed by the government, Chinese shipyards have been left with excess capacity, which has depressed profit margins, but they are enhancing their technological prowess.
“China has become a big threat to us,” says Hyundai Heavy vice president Chang Kwang-pil. “They are catching up faster than expected, but they still lack technology on eco-friendly and energy-efficient ships, which will drive growth in the future.”
China has a stronger order backlog with 28.2 million in compensated gross tonnage, an indicator of the amount of work necessary to build a ship, as of July 31. This compares with South Korea’s tonnage figure of 18.4 million and Japan’s 13.7 million, according to Clarksons.
Still, analysts think Korean shipbuilders are five to 10 years ahead of their Chinese rivals in terms of technological capability. “For ships like LNG carriers, which cost about $ 200 million each, Korea will remain the first choice shipbuilder,” says Blumberg.
Industry officials also say more stringent global environmental standards to be adopted in 2020 will help Korean shipbuilders stay ahead. They expect higher demand for LNG-fueled ships, which use oil that will be hit by regulations aimed to reduce its sulfur content. “It will be the biggest market catalyst [to] benefit Korean shipbuilders,” says Choi.
Additionally, Hyundai Heavy and other South Korean shipbuilders are trying to boost productivity by increasing automation and digitalization in the production process, although they admit that might be insufficient to offset the gap in labor costs between Korea and China. Hyundai Heavy is developing technology for self-sailing ships, producing software packages that help ships find the safest, shortest and most fuel-efficient routes. It also plans to equip its new vessels next year with anti-collision software.
“Shipbuilding is a labor-intensive industry, so it is difficult to compete with China on price,” says Chang. “So differentiation through technology has become more essential for us. We may lose to China on volume, but we will never lose our hegemony in the higher end of the market.”
Additional reporting by Ben Bland in Hong Kong.
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By Song Jung-a
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