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  Outlook on Korean Shipbuilding Industry 2004
  Author : Hwang & Co     Date : 04-02-23 16:05     Hit : 36513    
*OUTLOOK ON KOREAN SHIPBUILDING INDUSTRY 2004

It came like a dream, a dream exceeding any hope and expectation at the beginning of the year. Shipbuilding demand swept the yards and filled every corner of the space in the yard. Only limit was the capacity. The demand in New Year is still hovering around the yards seeking any available space.
It was explosive, unexpective explosion, with the seismic centre in China. About 10% expansion of Chinese steel industry has shaken the root of bulker market, skyrocketing the rate. The indication of increasing volume of the trade for the industrial goods and raw material, in connection with China¡¯s entrance to WTO, has rocked the container new building market, maximizing the size of container carriers at surprising prices. The increased import of crude oil, say about a 30%, has caused the shortage in the world tanker fleet with a fantastic rate boosting new building market.

Korean Shipbuilding industry has made unprecedented records in 2003. It has received orders, during 11 months until the end of November in 2003, for 441 ships of 26.4 million GT at $22.6 bil, about 200% rise on year, built 206 units of 12.6 million GT at $9.9 billion, about 13% up, and filled the order book with 735 ships of 44.1 million GT worth $37.5 billion, about 65% increase on year.

All the shipyards have shared the prosperity. HHI, as the biggest yard in the world, has increased its world market share, revising the world record of receiving order. DSME has kept comparatively conservative sales policy throughout the year, selling the reserved earlier berths in very high prices, but still achieved sales more than double of its annual target. SHI has been most aggressive and successful in the market. It has secured greater volume of orders with the higher value of ships such as LNG ships and 10,000 TEU class container carriers, the largest box ship ever designed. Hanjin has lost about 120 days before it settled the labor dispute, but they still keep smile on their face with good volume of order. Samho, HMD, STX and others have also enjoyed their own share of gains.

At the same time, shipping companies have also achieved remarkable achievement. The share price of Korea Line rose 449% from KW4,000 level at the beginning of 2003. It has earned constant profits from LNG carrier and bulkers on COA with KOGAS, POSCO and KEPCO, together with surging gains in spot market, recording operational profit at KW 70 billion on sales of KW 600 billion. Debt ratio has been dropped to surprising 200% level. Golar LNG acquired a 9.94% stake in Korea Line during December last year, raising foreign stake in the company to 43.14 %, causing practical concern on hostile merger. HMM has made brilliant performance in 2003, however, the feud between the family of late chairman, MH Chung, and his uncle over the management control of the company send its future a lot of cloud. SK Shipping is likely taking longer time than expected to remedy its wound from its illicit flush fund scandal.

With the pile of orders to digest for years to come, Korean shipbuilding industry in 2004 is very likely keeping quieter posture than 2003. It will concentrate on the profitability, which will be governed by external factors, rather than their own internal one like productivity. The exchange rate of Kwon is considered as a time bomb in the war to establish proper earning. Merryl Lynch predicted JYen could be strengthened to 90 level against USDollar this year, which will be naturally reflected into the exchange rate of Kwon-USDolloar. It has been maintained 1180 level through the later part of 2003 by persistent intervention by government, but many people forecast it will go below 1100 level in this year, which will seriously deteriorate the balance of earning in the industry. The exchange rate is an estimated threat, but the material price becomes real one to the yards this year. Especially the price of steel plate has been raised from KW 380,000 to KW 400,000 per ton in June last year and the yards were forced to accept another rise to KW 430,000 at the beginning of this year. The matter to make the yards¡¯ position worse is the ever-increasing demand of steel. The shipbuilding demand is likely to jump 12.5% in 2004, but capacity is not following the scale, that will inevitably lead the steel mills to call for another rise of the prices in very near future. Labor cost has been rising very fast, faster than labor productivity. Moreover, the five-day workweek system starts to be applied this year, increasing burden to the yards with about 10% additional labor cost.

The most urgent task for the yard this year shall be the improvement of the price. They have failed to take advantage of the best timing to raise the price under the ideal market circumstances, because of their own throat cutting competition. They have to find the way to control the excessive capacity of supply and to restrain excessive competition among themselves. The capacity is ceaselessly expanding at home and abroad. China plans to construct new yards including the one biggest in the world. If they build another yard in the size of HHI, it would immediately raise world capacity by 15%. Korean yards are expanding too. The productivity of Korean yards in general has been continuously improved with average 4-5% a year and it became natural increase of capacity. Moreover, some yards consider building ships on land, skidding to barge for launching. Other yards think of installing floating docks to cover the shortage of their outfitting quay. There is a hope for reducing world shipbuilding industry, that Japanese yards, who have lost competitiveness, may shrink their capacity for their mega-float project such as Haneda Airport expansion program, as it will not be easy for them to return to the industry for a while, after they concentrate their capacity on off-shipbuilding project.

New faces have been introduced in the industry, predicting a sizable change in the style of management. IY Chung retired as chief sales executive of HHI and DY Han came back taking the helm of marketing. YK Suh has been promoted, but moved to plant sales side. This change may lead the yard toward less harmonic operation with the neighbors and more aggressive on marketing. It may also invite more positive approach to the expansion of capacity including the construction of ships on land in its offshore yard. DSME management has been appreciated by the share holders without any change in the organization. SHI made some promotion for sales team including CH Park, ID Kim and JK Kim in the appreciation of their achievement last year. STX made a big change. WG Jang, who has led the yards for nearly 6 years converting it from a primitive shipyard into a world-widely acknowledged shipbuilding power, has been removed, and SK Kim took the helm of the management. He may be more tempted to take the measure for the expansion of yard capacity including land operation. Hanjin has kept management, who are still struggling for the recovery from the loss of about 120 days caused by strike last year, concentrating their efforts to persuade the owners to accept the delays of delivery due to the strikes.

Korean shipbuilding industry in 2004 is prospected to record another prosperity, as China¡¯s economy seems to continue its growth at more than 8.0%, demanding ships covering all sectors. Shipbuilders will sell their berths for 2007 delivery on selective orders of higher profitability, such as container carriers and LNG ships. There seems no shortage of order in New Year, but the most urgent subject for the yards this year will be the profitability, by overcoming flexible exchange rate, surging material prices, increasing labor cost, avoiding the cutthroat competition among the yards. Every blessing has been given to the yards, however, it is all up to the management of shipyards to hold such prosperity in their own grips.

We wish you all
Happy and Prosperous New Year.