In what must surely be a relief for one of its flagship industrial sectors, South Korea beat China to claim the top spot in global shipbuilding orders for the fourth consecutive month, from May to August this year, South Korean data showed.

This is good news for South Korean yards, locked in a ferocious battle with China to claim the top spot in the global market. Korea surpassed China last year – for the first time since 2015 – as the see-sawing struggle for the top spot continues between the two manufacturing giants.

The news comes as two of Korea’s top three await the approval of international anti-trust regulators for a mega-merger. If that deal goes ahead, the merged entity would be well placed to benefit from incoming regulations that require upgrades to ships’ environmental technologies.

That is a spur that is desperately needed for a global industry that, since the early 2000s, has seen rises and falls amid multiple global economic headwinds, ranging from the 2008 financial crisis and falling oil prices to the rising use of terrestrial gases.

By the numbers

The recent positive results were possible thanks to South Korea’s dominant position in constructing ships such as LNG carriers, LNG-powered ships and VLCCs, or Very Large Crude-Oil Carriers. These high-value-added vessels require leading-edge technologies, as opposed to such ships as grain and bulk carriers.

According to data from Seoul’s Ministry of Trade, Industry and Energy, South Korean shipbuilders won orders for 735,000 CGT – Compensated Gross Tonnage – in August, accounting for 73.5% of the total global orders – 1 million CGT.

By contrast, Chinese yards won orders of 260,000 CGT.

For the wider January-August period, Korean shipbuilders gained the world’s No 1 position in terms of order value. Korean yards won orders worth US$11.3 billion, beating China – which won orders worth  $10.93 billion – into a close second place.

However, in terms of tonnage during the same period, South Korean firms received 4.64 million CGT – slightly behind their Chinese rivals, with 5.02 million CGT.

Still, it was good news overall. In the January-August period, South Korean shipbuilders posted 24 of 27 global orders for LNG carriers, and 10 of the 17 for VLCCs.

“Except for orders placed by the Japanese and Chinese governments, Korean firms won most of the global orders for LNG carriers and VLCCs,” the trade ministry said in a press release.

Meanwhile, the number of ships in Korea built in the January-August period came to 6.76 million CGT, up 14% from a year earlier. Since its construction volume hit a record low of 7.72 million CGT in 2018 due to a steep decline in orders in 2016, it has been on the rise as orders increased between 2017 and 2018. The time difference between orders and delivery is one to two years.

The global shipbuilding industry faced a steep decline in orders in 2016 when the number fell to 13.42 million CGT from 43.13 million CGT the previous year. Those numbers had been in recovery from the 2008 global financial crisis, but then the prolonged international trade dispute hit the global economy.

“Compared with the year 2010, when the shipbuilding industry was at its peak, about 70% of shipbuilders disappeared around the globe, with building capacity decreasing by 50%,” an industry insider told Asia Times.

And capacity is dwindling.

“This year’s shipbuilding orders are not expected to match last year’s due to the sluggish global economy,” an official at the Korean industry ministry told Asia Times. “Therefore, Korean shipbuilders’ order books may not reach the level of last year.”

Global shipbuilding order books in 2017 and 2018 amounted to 28.01 million CGT and 31.08 CGT, respectively, while orders in the January-August period this year posted 13.31 million CGT.

However, an industry insider offered a different view. He told Asia Times: “Despite an expected fall in placed orders, Korean shipbuilders may win as many orders as last year’s thanks to a rise in market share.”

Restructuring and recovery

The South Korean shipbuilding industry, which was the world’s No 1 until the early and mid-2000s, began to suffer after 2008.

As a result, major South Korean shipbuilders Hyundai Heavy Industries, Daewoo Shipbuilding & Marine Engineering and Samsung Heavy Industries shifted their focus to lucrative offshore drilling rigs.

That strategy offered some relief – but then a sharp drop in international oil prices from 2014 led to massive losses in the oil sector, cutting deeply into shipyard’s order books. The problems for South Korea were compounded as US shale gas and Russian piped gas increasingly came online, negating the needs for vessels and rigs.

In this environment, fierce competition among Korean firms led to lower-priced deals. Contracts were yet another problem.

“When major Korean shipbuilders won orders for offshore drilling vessels, they signed lump sum turnkey contracts under which they had to bear the expenses of frequent design changes,” Hong Sung-in, a researcher at the Korea Institute for Industrial Economics & Trade, or KIET, told Asia Times.

“The ordered large drilling rigs were to be used in extreme conditions such as deep-sea or the Arctic region, so unexpected changes in design occurred frequently,” added Hong. “Besides, the sharp drop in oil prices has removed the incentive for the oil companies to deliver and operate offshore drilling plants quickly. In the end, the nation’s large shipbuilders suffered trillions of won in losses.”

In 2015, a government-led restructuring was launched. In the broader restructuring process, some shipbuilders closed down, while mid-sized yards managed to survive through court receivership.

But Korea’s “Big Three” remained. Hyundai Heavy Industries and Samsung came up with “self-rescue” plans, streamlining their businesses and reducing employees.

Daewoo Shipbuilding & Marine Engineering (DSME) was more problematic. Nearly 10 trillion won ($8.3 billion) in public money was injected into the yard, a long-term victim of the 1997-8 Asian economic crisis.

However, it has never been returned to private ownership, despite repeated bailouts. That may be about to change.

Creating a super yard

A true monster of a deal now looms on the horizon.

The world’s largest shipbuilder, Hyundai Heavy, and the second-largest, DSME, are set to merge to form an entity with more than 20% of the total global shipbuilding market share and 60-70% of LNG carriers. But they are not there yet. They are seeking approval from foreign antitrust authorities to finalize the takeover.

“The biggest headwind of the merger deal is antitrust issues in Europe,” an industry expert said. “European authorities have recently launched a regular investigation on this issue after finishing the preliminary investigation phase.

“Labor unions of both companies are against the merger, but as long as the united entity shows strong performance so that it maintains the current level of employment, they will not oppose the deal,” he added.

Competitive edges

As in other industrial sectors, South Korean shipbuilders are facing dangerous competition from up-and-coming Chinese counterparts. Chinese yards offer lower costs and benefit from lucrative government contracts, but have bought over-supply to the global industry.

To counter low-cost Chinese competitors, South Korean players honed their competitive edge in high value-added ships such as LNG carriers, VLCCs, ULCCs (Ultra Large Crude-oil Carrier), ultra-large container ships and LNG-fueled ships.

“Among Chinese shipbuilders, Hudong-Zhonghua is the only one that can build LNG carriers, but they have only won orders from Chinese companies,” Hong of KIET said. “Korean shipbuilders are dominating markets for LNG carriers and LNG-fueled vessels, and maintain their competitive edge in the VLCC and ULCC market.”

But Hong added that the Chinese would gain technologies through experience in building these high value-added vessels with the support of the Chinese government and public companies placing orders. They are already highly competitive in building cost-sensitive vessels such as bulk carriers and container ships.

An industry insider estimated that the current technology gap between South Korea and China is about “10 years” apart.

Another aspect of Korean competitive edge is execution.

“China takes about 30 months to build LNG carriers, while Korea takes 22 months. The shorter the building period is, the more benefits ship owners enjoy,” he said. “In particular, China cannot afford the technology to build LNG icebreakers that sail through the Arctic region.”

As global warming enables increasing use of Arctic sea routes, this sector is expected to expand.

“VLCCs are expected to use LNG as fuel in the future and shipowners prefer Korean shipbuilders for building LNG-fueled ships,” the industry player continued. “That means ship owners recognize the technological gap.”

Vessels of tomorrow

The International Maritime Organization (IMO) has introduced regulations to reduce sulfur oxides in ship fuels to 0.5% from the current 3.5%. The regulation takes effect in 2022.

This will require shipowners to switch fuels to high-priced, low-sulfur fuel oils, or install “scrubbers” – technologies that reduce sulfur emissions from vessel engines.

The IMO also plans to toughen, by stages, regulations on emissions of greenhouse gases. Therefore, more and more ship owners are expected to place orders for LNG-fueled vessels which meet these environmental requirements.

“From 2022, when the Phase 3 IMO regulation to reduce greenhouse gasses takes effect, some vessels will have problems with operations,” an industry expert told Asia Times. “So the demand for LNG-fueled ships is expected to rise, and Korean shipbuilders have a strong competitive edge in this field against their Chinese rivals.”

And new technologies will breed new sub-sectors of the industry.

Experts said that automated sailing vessels would also appear in the future, a development that is also imminently expected in the automobile industry. Developing hydrogen-fueled vessels is also underway to cope with strengthened environmental regulations.

Experts said Europe is ahead of other regions or countries in this field, but South Korea has also invested heavily in R&D on future vessels.