Home > Report > Korea Report

  
 
 
   
  Outlook on Korean Shipbuilding and Shipping Industries in 2006
  Author : Hwang & Co     Date : 06-03-08 10:53     Hit : 40607    
Korean shipbuilders experienced another exciting year, achieving the largest order back log for  selected high valued ships in 2005. They secured combined new building orders of 11.96 million CGT in 2005, while EU got 8.5 million, China 7 million and Japan 6.2 million CGT. They marked a record in the volume of construction by delivering 10.2 million CGT, about 17% higher than 2004. Even with the substantially reduced volume of order compared with 2004, Korean yards expanded their global market share to 38% in 2005 from 36% 2004, as the value of the ships grew higher. Combined order back log of Korean yards reached unprecedented level to 35.64 million CGT, which is enough works for more than 3 years.

The competing spirit among Korea¡¯s major yards for a better share of global market has bean always the motive power for Korean industry to keep outright No 1 position in the world. Korean shipbuilders foresee the sales in 2006 worth at around $18-18.5 billion, increased from $17.2 billion in 2005, $15.3 billion in 2004 and $11.1 billion in 2003. It is their brave attempt to increase the sales target in 2006, under the depressed market prediction. Global orders are forecasted to be shrunken to 35 mil (about 21 million CGT) this year, similar level of order in 2001 after Sept 11 terror in New York, greatly reduced from 55 mil GT(about 33 million CGT) in 2005 and 76 mil (45.6 million CGT) in 2004.

The investment especially for energy saving, pro-environmental and R&D by Korean shipbuilders will reach KW1.25 trillion, about 4% up on year this year, recording the biggest level since IMF forex crisis in 1997. It also covers the modernization of the aged facilities and installation of automated system to enhance the productivity. The each major yard increased the production capacity by 6-7 more high valued ships a year, by adding the number of docks, introducing the floating cranes and improving the productivity.

Korea¡¯s major yards have bean suffering from shrinking profit and even turning to losses, while they have delivered the vessels ordered during 2002-2003 at the below–cost–level prices, but they are expecting healthy profit this year and substantial improvement in the years to follow, as the low-price contracts were more or less completed their delivery by the end of 2005, the prices of coming ships have a good margins in the contractual value, the cost of shipbuilding steel became softened and high value added ships are flowing out. The growing expectation among investors for the greater profit, the stock prices of shipbuilders have doubled or even tripled in the past 2 years. The strengthened exchange rate shall affect to the balance sheet, but seems not much detrimental, as shipyards have already made cost calculation on the basis of KW 930-950 against USDollar.

Even though H. Clarkson¡¯s price index has furtively been raised and Korean yards arrogantly persist the price hike, the future prices are not yet clearly viewed its direction. Chinese yards already softened the price, say bellow $100 million for VLCC, while Korean yards raised their voice for the price of VLCC above $150 million by the end of the year. They have been encouraged by some substantial rushing orders for tankers in provision against new common structural rule by IACS effective April 1st. They fear that the unforeseeable factors in the rules may disturb their calculation of the cost, as they saw much gray area in CSR to be clarified before being fully enforced. Ship¡¯s prices are still chained by the exchange rate. KWon has been firm from 1050 to 960, and is expected further strengthened this year up to 950. Shipyards will try to make the price to cover the losing portion in exchange rate.

The prices for the coming contracts from this year will be largely governed by the balance of supply and demand in the market. The prices for the ships of 5 years age, which have been consistently higher for quite a while than the new building for 2008–2009 delivery, recently became equal or even converted to lower than new building, showing the elimination of imminent demand of ships. Total number of ships on order is still abundant, counting about 400 handysize tankers, more than 150 units of Aframax and about 100 VLCCs. In bulker sector, it is more vulnerable with 250 units of handymax, 160 Panamax and 240 capesize in order. The numbers are not decreasing after substantial number of ships have been delivered, because the new building orders were continued, wherever the earlier spaces had been available.

The over capacity in Chinese steel mills has brought significant fall in thick plate price by about 45% to CY3,300 ($409) from its peak of CY5,900 per ton within around 12 months. Korean shipbuilders have decided to increase their purchase of Chinese steel plates to lower the cost and more stable supply. HHI Group plans to increase the import to half million tons of Chinese plate this year from 200,000 tons in 2005, out of its total requirement of 3 million tons. HHI has purchased 55% of their requirement from domestic mill, 30% from Japan and remaining from other areas, such as China, Europe and South American mills. SHI is also to expand the import from China from 2% to 9% out of its 1.1 million tons total requirement. DSME also considers increasing the import of Chinese steel substantially from its current less than 1% level. SHI purchase about 50% from domestic, 48% Japan and 2% China, while DSME depends on domestic mills by nearly 80%, 15-20% from Japan and less than 1% from China. POSCO and DongKuk Steel Mill dropped their prices of thick plates to $630 per ton, but further reduction seems inevitable comparing with China¡¯s price.

In 2005, the prices of ship had been predicted to fall and the volume of order drop substantially, but prices have kept firm and orders maintained a stable level throughout the year. It is a bit early to judge the activities of this year, but I rather recommend to hold the decision until April 1st, when the new common structural rule comes into effect with clearer pictures and the waves of rushing orders are calming down, unless any imminent demand is in hand.

CEOs of Korean Shipping companies have laid emphasis on the aggressive management basis for the new year to seek profit model, expecting the business to become dull in the years to come. They see the year of 2006 as the time ending 3 years long super booming and determined to diversify their business lines to create profit under the unfavorable atmosphere. Hanjin sets up the risk management system to cope with unforeseeable factors and develop new markets such as India and MidEast, and HMM is to devote all its energy to make the most of strategic alliance in container business and diversify the profit models for others sectors. STX Pan Ocean plans to cooperate with its three business axis in the group, such as shipping/logistics, shipbuilding/ machineries and Energy, maximizing group¡¯s synergy effect.
Some small shipping companies, who jumped into the last train in the booming market, have been liquidated because the deteriorated freight for their ships which they purchased at the highest pries.
In general, the shippers try to believe that the balance will barely be maintained for the time being, enabling them to keep their nose above the water, thanks to Chinese market.

Dear Readers, we wish you all a prosperous year 2006.

Best Regards

Sung Hyuk Hwang.