Outlook on Korean Shipbuilding & Shipping Industries in 2005
Author : Hwang & Co
Date : 05-01-27 18:51
Hit : 17398
Outlook on Korean Shipbuilding and Shipping Industries in 2005
At the beginning of the year 2004, we had a dream, a brilliant dream, for abundant orders, good profitability, and healthy balance in supply and demand in the shipbuilding industry. Dream turned out partially true, but adversely to shipbuilders¡¯ wish. Dreamy shipping market became a nightmare to shipyards. The tremendous volume of order placed during 2002 and 2003 became the cause virtually to ruin the yards. It was serious hurting, even insulting, for the yards to see the owners selling the contracts at an incredible profit, while shipyards are desperate to reduce the loss by cutting employment and usual expenses. The naming ceremonies, which have usually been the biggest festival during contractual procedure, became no more of a feast to yards.
It has been normally understood that the cost of steel would be about 13-14% of total cost of tanker construction. It became 40% or more, as the shipbuilding steel prices kept going up. Many people forecast the KWon exchange rate would enter 900 level against US Dollar in 2005. Currency hedging becomes no more protective measure to yards, as the one for 2008 requires minus premium of KW 20-35. Some sales executives are sarcastic about the market situation, saying that he hopes to survive at his post until the end of 2006 and may be kicked out in 2007 to get some reasonable retirement allowance, because he could expect nothing if he leaves the job in 2005 and 2006 under the ongoing poor performance of the yard.
Some yards have quietly asked the owners of earlier orders to contribute a portion of owners¡¯ profit to compensate the loss of the yards. But there is another paradox. The owners, who actually took cash profit by the resale of the berths, have already left from the scene and real operators who are still with the yards and live with the ships through their lifetime, are unable to quantify their profits which will be seen in many years to come. But some of them have reportedly agreed on the compensation of the gap between contract and market price in consideration of long term relationship with the yards.
Shipyards have raised ships¡¯ prices more than 40% in 2004, expecting better profitability from 2006. But even with the improved price, they are not comfortable, as they are scared for what would happen in the days to come. Yards stopped making firm offers for the remaining berths in 2008 from last October, mainly because of uncertainties how the market would determine the ships¡¯ prices in the months to come. However, for special clients to whom they should show some gesture of friendship, they have committed only berths in 2008 with no fixed price, which yard promised to give at the end of 2004. Before they left office for the year end holidays, the yard reluctantly gave the prices, in somewhat ridiculously high level, expecting owners to run away from the commitment. When they returned to the office, they were astonished to find all the prices had been accepted, giving them another regret not to have offered even higher prices.
The agony in the industry is what extent of level of orders will make the market stabilized. During the period of 1974-2000, the annual new building order in the world has been averaged at around 24 million GT. It has been explosively expanded from 2001, recording 30-37 million GT in 2001 and 2002, then suddenly jumped to 74 million in 2003 and seems to reach similar level in 2004. The volume of order book skyrocketed to 115 million GT level in 2003 and expected to reach 160 million GT in 2004. Yards have to see how the market digests this surfeit, or whether this diet is not over eating, but just normal cuisine for the current feast.
Global market seems to expand new building commitment for practically every type of ships in 2005 despite the dramatically raised price. Problem is the shortage of space to accommodate such orders. Korean and Japanese major yards, who have often burnt their fingers through the ups and downs of the market in the past, are skeptical to increase the building capacity, while Chinese yards are striving to reach a goal to be No. 1 shipbuilding country in the world by 2015, vehemently expanding its capacity and boosting its technical standard by construction of LNG carriers and super container vessels. Japan has never given up the industry and determined to hold a third of global market share, maintaining the building capacity of 10.0 million GT a year.
Korean shipbuilders received orders in 2004 for 441 ships of 25.7 million GT worth $30.2 billion, and delivered 260 units of 15.1 millions GT for $11.9 billion. The sales activities of Korean shipyards in 2005 will be rather conservative, taking lower level of orders than in 2004, being cautious in selection of ship type and in offering the prices. They have found that the only way to survive under the circumstances is to concentrate on the higher value ships, such as LNG carriers and high speed super container ships, in order to reduce indirect cost per unit to the utmost. Some of them found the way to accommodate the prevailing orders by adopting the ground construction concept without additional permanent building facilities, avoiding uncontrollable over capacity in the future when market goes down. The triple devils to the shipbuilding industry, such as the price hike of thick steel plate, equipment price rise and strengthened local currency, will trouble the yards, but be more or less stabilized in 2005, and the increased ships¡¯ prices will definitely improve yards¡¯ profitability. The remaining berths in 2008 will soon be drained and the yards will again be thrown into the hole to decide when and how they start to sell 2009 berths. All the CEOs of the major yards declared 2005 as the most difficult year, demanding their employees tighten the belt, but all of them admitted that the year from 2006 would be better than before. Korean shipbuilders will feel much comfortable in their sales activities this year, as WTO ruled against EU¡¯s claim that Korean government provided illegal subsidies to its shipbuilding industry.
All major shipping companies have achieved remarkable record in their operation in 2004. Their share prices have been soaring up to the records in many years, and foreign investors sharply increased their stake up to 40-50% in the Korea¡¯s major shipping companies like Hanjin, HMM and Korea Line. Golar has increased its stake in all of three and has reportedly taken $7.3 million in a few months time out of its 21% stake in Korea Line alone. Pan Ocean Shipping, who operates around 257 ships, has finally found mother haven after STX Group acquired 67% stake in the company, changing its name to STX PanOcean. HMM has graduated from joint management under the control of creditors and expanded fleet with 5 VLCC, 10 container carriers and 2 MR takers through new building as well as the purchase of second hand ships by its own management in 2004. Korea Line has been troubled by the rumors of hostile M&A by Golar, but managed to take the proper measure against it. It has soundly expanded its fleet to add 5 capers for the healthy operation in 2005 and thereon.