Korea's shipbuilders rebound as orders pour in

Samsung Heavy Industries' container ship of 13,000 twenty-foot equivalent units (TEU). [SAMSUNG HEAVY INDUSTRIES]

Korean shipbuilders are hitting the jackpot this year, with orders pouring in thanks to tighter environmental regulations.

Shipping companies are preparing for marine fuel regulations that will require ecofriendly ships. Korea has advanced technology and a track record of successful deliveries, giving them an edge over Chinese competitors who can compete on prices.

Between January and March, Korea's three largest shipbuilders landed deals worth $11.8 billion in total. This is a big jump from $2.1 billion in the same period a year ago, when global trade was going through disruptions due to the coronavirus.

In January and February, Korean shipbuilders took 52 percent of ship orders placed globally and calculated by ship volume, according to Clarksons Research data. China came in second with 40 percent and Japan third with 7 percent.

Leading the pack was Samsung Heavy Industries. Last week, the company announced it won a massive deal to deliver 20 container ships of 15,000 twenty-foot equivalent units (TEU) by 2025. That deal was worth 2.8 trillion won ($2.5 billion).

Shipbuilders from Korea, China and Japan bid for the contract from a shipper in Panama whose name was not disclosed due to contract terms. Many believed the 20-vessel order would be split among several companies. This was the largest single contract in the history of the shipbuilding industry, Samsung claimed.

With that order, the company was able to fulfill 65 percent of its sales target for the year by March, having won orders worth 5.1 trillion won in total.

"With signs of market recovery like a rebound in marine cargo and an increase in freight charges, we're continuing to log orders mainly for container ships and oil tankers," Samsung said in a statement.

Other Korean companies have also done well. Korea Shipbuilding & Offshore Engineering, the parent company of Hyundai Heavy Industries and Hyundai Mipo Dockyard, has fulfilled 33.5 percent of its orders target for the year, worth $5 billion so far. Daewoo Shipbuilding & Marine Engineering has signed for deals worth $1.8 billion, equivalent to 23 percent of its 2021 target.

These orders will lead to profits for shipbuilders from around late 2022, as it as it takes two to three years for ships to be complete. That's when the companies receive the full price written in a contract.

The bigger, the better

Analysts say this year's book is all about increased global trade and stronger environmental regulations.

Last year, global trade plummeted to a low in the first half when the coronavirus spread worldwide. But as trade slowly resumed in the second half, freight charges started reviving and so did demand from shipping companies to place vessel orders.

One proof that the worst is over is the popularity of massive container ships this year. According to Clarksons data, the volume of container ships ordered in January and February 2021 jumped more than 13 times on year to 1.5 million compensated gross tonnage (CGT).

"There was a high degree of economic uncertainty due to the pandemic last year and under such circumstances, the priority for shipping companies was to secure as much cash as possible and delay orders," said Lee Dong-heon, a Daishin Securities analyst in a March 29 report.

"At this point, they're more certain an economic recovery will come in the next two to three years. Ship prices, on the other hand, have not yet completely rebounded so they may have judged there's no point in delaying orders any longer."

The bigger a ship is, the harder it is to make, and technology is one of Korea's shipbuilders' strong points. The Ever Given, which clogged the Suez Canal for almost a week, was a container ship built by Japan's Imabari Shipbuilding in 2018. The massive vessel of more than 20,000 TEU was finally freed from the canal Monday, but an investigation into the cause of the incident has just begun. Some domestic analysts say the event may leave a bad record for Imabari, Japan's largest shipbuilder, especially in an industry where a single purchase decision involves billions of dollars and years of loans.

"The investigation may cast doubt on the shipbuilder's technology," Kim Hyun, an analyst at Meritz Securities, wrote in a March 29 report. "China already has multiple cases where its large container ships caused problems, so it's likely that the country's shipbuilders couldn't make it into the final round of candidates [in recent bids].

As the market recovers, it seems that shipping companies' priority for container ships is shifting from price to technology, which boosted the competitiveness of Korean companies."

The push to go green

The need for more ecofriendly shipping is a major factor in Korean shipbuilders' fat order books this year. Starting with a rule from the International Maritime Organisation that capped maximum sulfur content in marine fuel at 0.5 percent from 3.5 percent since last year, environmental regulations in the industry are expected to get tougher in the next two years, especially in Europe.

Among the 19 vessels that DSME won orders for this year, 15 are dual-fuel ships, meaning they run on crude oil — the main contributor of marine carbon emissions — and gas sources like liquefied natural gas (LNG) or liquefied petroleum gas (LPG), which have lesser environmental impact. Samsung has signed deals to build 14 LNG-fueled ships this year.

Vessels that run on LNG must be able to maintain an environment of high pressure and low temperature for the fuel. This requires a certain degree of technological sophistication, which Korean companies have already proven by building and delivering LNG ships. Hyundai Heavy Industries for example, was the first shipbuilder to deliver a LNG-fueled oil carrier in 2018.

That track record was what led to Daewoo, Hyundai and Samsung to all win deals to supply a total of 100 LNG carriers to state-owned Qatar Petroleum, over a seven-year period, a contract worth 23.6 trillion won. Qatar is the world's largest LNG exporter.

Yang Jong-seo, a senior researcher at the Export-Import Bank of Korea, says demand for ecofriendly ships will be a long-term trend and a positive one for domestic companies.

"Last year, shipping companies were on the fence, watching how things go," he said. "But this year, they have nowhere else to go. Among the regulations that may be affected from 2023 is one that forces ships to slow down if they don't run on ecofriendly fuel. If they don't replace outdated ships with new ones now, shipping companies won't be able to run a proper business by 2023."

BY SONG KYOUNG-SON [song.kyoungson@joongang.co.kr]