South Korea topped the global ranking in shipbuilding orders in January, continuing the positive momentum for its impressive performance last year, when the country’s shipbuilding industry maintained its top position in the global market for the third consecutive year.
The prospects for this year are even brighter. The Overseas Economic Research Institute of the Export-Import Bank of Korea has forecast that the local shipbuilding industry will see the volume of orders increase over 100 percent this year from 2020. The projection is based on the signs of recovery in the shipbuilding industry and the growing need to replace old ships worldwide under tougher environmental regulations. Attention turns to whether the Korean shipbuilding industry will get out of a long tunnel of recession and enjoy a boom again. Here is economic commentator Chung Chul-jin to examine the current situation of the local shipbuilding industry and its future tasks.
South Korea’s global top spot in terms of shipbuilding order volume is all the more significant, considering the extensive economic fallout of the COVID-19 pandemic last year.
According to U.K.-based global market researcher Clarkson Research Services, South Korean shipbuilders won orders of 8.19 million compensated gross tonnage or CGT for 187 vessels in 2020, accounting for 43 percent of the global shipbuilding contracts of 19.24 million CGT. It means Korea held the largest share of the market last year. Korea’s overwhelming lead in high value-added vessels, in particular, enabled the country to outrun its rivals such as China and Japan.
Last year, China was close behind Korea, with a market share of 41 percent. In fact, China was ahead of Korea until the end of June last year in terms of the accumulated amount of shipbuilding orders. But Korea was able to clinch twice as many orders as China in the second half of the year to grab the largest market share eventually. Korea has a competitive edge in liquefied natural gas or LNG carriers and very large crude carriers or VLCCs, with a unit price of more than 180 million US dollars and 80 million dollars, respectively. The last-minute large order intake last year was driven by orders for those high value-added vessels.
Again, Korea boasts technological expertise in high value-added ships. In 2020, Korean shipbuilders won orders for 36 large-sized LNG carriers or 70 percent of 49 orders across the world and 35 VLCCs, or a whopping 85 percent, of 41 global orders. It comes as little surprise that shipowners who want these high value-added vessels turn to Korean shipyards.
Another favorable factor for Korea is that the environment has emerged as a hot topic since the inauguration of the Biden administration in the U.S. Growing orders for LNG carriers are widely anticipated, and Korea is vastly superior to any of its competitors in this area. I’d say that the more environmental issues surface, the brighter the future of Korea’s shipbuilding industry is.
Clarkson Research Services forecasts a more prosperous year for the global shipbuilding industry in 2021, as seen in its estimation of a 23.7 percent increase in global orders from last year. And Korea is cited as the biggest beneficiary of the prospective uptrend in the industry. Korean shipbuilders have actually bagged a series of orders since the beginning of this year. Encouraged by the strong performance last year, three major shipbuilders in Korea set their order intake goals for 2021, much higher than those of last year.
In the field of shipbuilding, Korea handed over its top spot to China about ten years ago. But armed with strong technological competitiveness, it is ready to revive. Of course, Korea’s rivals such as China and Japan will not just sit idle. The three countries are expected to engage in more intense competition.
There are growing expectations for the end of the pandemic, with COVID-19 vaccines used for inoculations around the world. That’s good news for the shipbuilding business, in which economic recovery is highly important, just like other industries. Korea is closely followed by China, while Japan seems to be determined to reclaim the global top position in shipbuilding. It is welcome news that the global environment is improving, but it also means a fiercer competition among the three major shipbuilding countries.
Despite the positive outlook for the shipbuilding business, the growth rate of stock prices of Korean shipbuilders is below the average gain for the key stock index of KOSPI. The lukewarm market response is attributed to concerns about local shipbuilders’ pursuit of small profits and quick returns. In fact, the Korean shipbuilding industry posted a poor result in operating profit in the fourth quarter of last year. That’s because shipbuilders sold a large volume of vessels for a low margin of profit. So, the key is whether they will increase profitability, which has much to do with high value-added, eco-friendly ships and facilities investment. ESG, which stands for environmental, social and corporate governance, is also considered important.
ESG has become a keyword for industries overall, including shipbuilding. When measuring the sustainability and impact of an investment in companies, investors now value those three factors, in addition to the companies’ performance. The Korean shipbuilding industry has a “B+” ESG rating, which is not considered high. The industry has already secured technology competitiveness in eco-friendly vessels, with the economy showing signs of recovery. In this situation, an improvement in the ESG rating will have a positive impact on stock prices of local shipbuilders.
Another task of the Korean shipbuilding industry is to revive medium-sized shipbuilders that played an important role in developing the industry. Some of them were included in the list of global top ten shipyards in the early-to-mid 2000s, but they are expected to struggle to stay afloat this year.
According to data from the Export-Import Bank of Korea, seven mid-sized Korean shipbuilders received orders for a mere 14 ships last year. Mid-sized Korean shipbuilding companies won a combined 500 million dollars worth of orders in 2020, about one-eighth of 3.9 billion dollars in 2010. That means the gap between the rich and the poor is getting wider even in the shipbuilding industry. The collapse of the mid-sized shipbuilders will be a great loss to the industry, as it means one axis of the industrial ecosystem will disappear.
This year, the shipbuilding industry will have to focus more on high value-added vessels, environmental issues and ESG principles. Also, the Korean shipbuilding industry should flourish in tandem with the shipping or marine transport industry, just as in the early 2000s. Unfortunately, Hanjin Shipping, which was once the world’s seventh-largest shipper, went bankrupt in 2017, dealing a fatal blow to the industry. It’s a relief that the government has announced a five-year plan to reconstruct the local shipping industry.
I hope this will positively influence the shipbuilding industry as well.
The Korean shipbuilding industry has unfortunately been on the decline over the last ten years to force many related companies to go out of business and leave a deep scar on the economy. Now, the industry sees an opportunity to turn the situation around, on the back of expectations for increasing cargo transport volume after the end of the pandemic and rising demand for new ships in line with stronger environmental protection rules.
The Korean shipbuilding industry has steadily prepared for the future to keep up with the changing industrial environment. It should hopefully be able to seize the chance and make a successful comeback.