S.Korean shipbuilding industry under massive restructuring
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South Korea's shipbuilding industry has been under massive restructuring since 2006 as global shipbuilders are undergoing one of the biggest structural changes in their history.
Currently in the global shipbuilding sector, the biggest restructuring has fallen on small shipbuilders that focus on small ships while mega-sized builders such as Hyundai Heavy Industries, the world's largest shipbuilder, have avoided streamlining.
Small shipyards have been undergoing restructuring for the past five years due to the limited number of yards that have received new orders and a stronger outlook for small ships stemming from huge replacement demand.
A new mega-trend -- fuel efficiency and lower carbon dioxide ( CO2) emissions -- has already caught on in the global shipbuilding sector, set to bring about an upheaval across all the shipyards.
Top-tier shipbuilders have been on the move far ahead of CO2 regulations by the International Maritime Organization (IMO) while leading shipping companies have been buying fuel-efficient ships on concerns over higher oil prices and weaker freight rates.
"Restructuring in South Korea's shipbuilding sector will kick into high gear from this year," Lee Sok-je, a Seoul-based shipbuilding analyst at Mirae Asset Securities, told Xinhua.
"The restructuring, initiated since 2006, will begin to further materialize starting this year as more than half builders of small ships have been struggling with lack of new orders for more than two years."
Small is competitive
The resturturing of small shipyards came when new orders were given only to a handful of top-tier builders.
The number of yards with new building contracts declined to 130 in 2010 from 405 back in 2007, according to Mirae Asset Securities and a London-based Clarkson, the world's largest shipbroker.
Builders of small-sized bulk carriers and tankers suffer a bigger headache. In 2009, 169 ships were ordered to 50 yards among the total 198 yards globally. In 2010, the number of ships ordered increased by more than three times to 525 ships, but the opportunities were given to only 75 yards.
Of the total 198 yards building small bulk carriers and tankers, more than 100 of them received no new orders over the past two years. If shipyards go without contracts for more than two years, they are considered actually open with no business while their fixed cost sharply rises.
Contrary to more than 100 inactive yards, less than 100 yards will likely be very competitive down the road due to positive outlook for small ships coming from strong replacement demand. The demand outlook for small-sized ships is better than for large ships because of the decrepitude of small vessels.
According to Clarkson, handysize bulk carriers, over 15 years old, amount to 54.7 percent of the total fleet compared with 25.1 percent in handymax, 30.5 percent in panamax and 30.1 percent in capsize respectively.
Handysizes, the smallest vessels among bulk carriers, have a carrying capacity of between 10,000 and 40,000 deadweight tons ( DWT), with handymaxes at between 40,000 and 60,000 DWT, panamaxes at between 60,000 and 100,000 DWT and capesizes carrying at least 180,000 DWT.
Meanwhile, new orders for small ships are not sufficient to replace the decrepit vessels. The new orders-to-15 years old ratio in handysizes reaches 61.1 percent, much lower than 169.9 percent in handymaxes, 184.6 percent in panamaxes and 209.1 percent in capesizes.
"In case of bulk carriers, freight rates in small-sized ships stabilized more than large-sized ones, reflecting lack of supply in small vessels," Lee said in an interview with Xinhua.
"The biggest beneficiary will be the builders of small vessels which have been neglected over the past 20 years because of their small scale." FUEL EFFICIENCY IS EVERYTHING
Competitive small shipbuilders will be the biggest beneficiaries from the new fad of fuel efficiency and greenhouse gas controls.
Top-tier shipping companies are increasingly focused on fuel efficiency as fuel prices remained relatively firm in contrast to weaker freight shipping rates.
Historically, shipping rates moved in proportion to fuel costs because shipping firms shifted their burden of increased fuel prices to freight rates. But such trends have been reversed since September 2008 when fuel prices and freight rates collapsed.
Oil prices recovered from the 2008 rock bottom, reflecting strong demand from developing countries and supply shortage while freight rates had a limited upside.
According to Clarkson, the price of Singapore 380-centistoke bunker, used mainly as marine fuel, is currently trading at 450 U. S. dollars per ton, doubling the bottom price back in September 2008. In contrast, average shipping rates stand at around 15,000 dollars per day, far away from 45,000 dollars at the peak.
The reversal in moves between fuel prices and freight rates forced shipping lines to focus more on fuel efficiency. According to Mirae Asset Securities, a 10 percent improvement in fuel efficiency can save costs equivalent to as much as 100 percent of a new ship's price.
For example, containerships, handling 11,000 20-foot equivalent units (TEU) of cargo, can save 11,450 dollars per day, 4 million dollars per year or 120 million dollars throughout its 30 years of life if it ameliorate its fuel efficiency 10 percent higher. 11, 000 TEU containerships are priced at 110 million dollars.
The proposed greenhouse gas regulations by IMO, the U.N. shipping agency, from 2015 is expected to force shipping companies to buy more fuel-efficient vessels.
The IMO will likely regulate CO2 emissions through greenhouse gas (GHG) fund starting 2015 by forcing shipping firms to trade carbon credit. For example, a shipping line with poor fuel efficiency should pay 450 dollars for bunker prices as well as 150 dollars for carbon tax imposed by the GHG fund.
The fund gives the received carbon tax to other shipping firms with better fuel efficiency as incentives. All in all, fuel- efficient shipping companies pay only 300 dollars with the help of 150-dollar incentive while non fuel-efficient companies pay 600 dollars for fuel prices and carbon tax.
Top shipbuilders have already been on the move to meet increasing demand for fuel-efficient vessels. Hyundai Heavy Industries has developed a shaft generator that can alone result in fuel savings of up to 7 percent. STX Offshore and Shipbuilding received Energy Efficiency Design Index (EEDI) certification and proved its fuel efficiency is 20 percent better than existing vessels.
New building contracts are subject to required EEDI with CO2 reductions by 10 percent from 2015, by 20 percent from 2020 and by 35 percent from 2025 respectively. If actual EEDI exceeds required EEDI, the vessel cannot be delivered.
"The winners in the global shipbuilding sector have been large builders for the past 20 years, but more opportunities will be given to small builders which survived the current restructuring and achieved technological developments of fuel efficiency," Lee said. RECLAIMING NO.1 POSITION
South Korean shipyards will reclaim their No. 1 position in the global shipbuilding industry from 2011 due to competitive design skill, lots of skilled labors and technological achievements, Lee forecast.
Fuel efficiency of a vessel is determined not by engines, but largely by design skill, manufacturing skill and qualified component suppliers, according to Mirae Asset Securities. South Korean yards secured all these requirements that cannot be copied easily by second-tier competitors.
Furthermore, South Korean small-ship builders were equipped with skilled labors and technological development. Historically, the technological and quality improvement of small vessels was much slower than of bigger vessels. Most yards were replicating old-fashioned ships because of their small scale.
Lee said that Hyundai Mipo Dockyard and STX Offshore and Shipbuilding emerged as the big leaders of the small ship segment from 2002, predicting they will be the biggest winners among the country's shipyards.
Hyundai Mipo and STX O&S have outstanding advantages over peers, including bigger scale, flexibility of product type and in-house design skill.
According to Mirae Asset Securities, Hyundai Mipo can deliver 80 vessels per year while most of its rivals are only delivering three to five. STX Dalian, a subsidiary of STX O&S in China, can deliver 50 to 60 vessels per year with its capacity fully utilized.
Both Hyundai Mipo and STX O&S are able to build any type of vessel while their rivals are only sticking with only one or two kinds. Hyundai Mipo can expand its product mix from PC tankers to containerships, bulk carriers and Liquified Petroleum Gas (LPG) carriers.
They secured in-house design and engineering resources to lead the industry, thought to be required to meet the upcoming environmental regulations and rising fuel prices. In-house design is also essential for operational efficiency. No shipyard has achieved a high level of operational efficiency without the help of in-house designers, Lee added.
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