Flexibility and new capital will sustain larger Korean yards

A foundation stone of South Korea’s economy is its shipbuilding industry, which has been hard hit by the recession; however, a government stimulus programme is providing a vital lifeline, writes Barry Luthwaite

No shipyards have been immune from the financial crisis. Even the Korean government has had to establish a US$1.7 billion finance programme to assist Korean owners pay for their shipbuilding programmes and preserve employment. On a private basis, Hyundai, Samsung and Daewoo have already turned to the bond markets to raise cash as they have good credit worthiness. The issue is not so hopeful for smaller Korean yards, with bankruptcies occurring.

The Korea Development Bank has set up a fund, the KDB Shipping Programme, which will lend to shipping companies who are unable to obtain finance from banks, owing to the current lending crisis. The objective is to ensure Korean builders receive on time payments at various construction stages. The KDB Shipping Programme is additional to the US$3 billion fund set up by the Korea Asset Management Corp (Kamco) to provide finance for existing newbuilding contracts and purchase of secondhand vessels.

The first recipient of this assistance was Korea Line Corp, which was lent US$200 million to pay for three newbuildings at Daewoo and STX. This owner is heavily exposed to 27 new ships, seven of which are VLCCs, but the assisted contracts were not initially identified.

Next year the owner will debut in the VLCC sector with the first of four units from Daewoo. Contracted in May 2008, these will be owned on a joint basis with Daewoo under a new company known as DK Maritime Co. They are priced at US$150 million each. Two more are committed at Hyundai’s new Gunsan complex and a single unit from STX’s Jinhae yard.

Understandably, shipbuilders are reluctant to yield to owner demands over vessels ordered at record high prices. Nevertheless, renegotiations can sometimes bring material gain. Belgium’s CMB reached accord with Hanjin Heavy Industries to change two 180,000 dwt bulk carriers into three 114,000 dwt Aframax tankers. The bulk carriers originally cost US$194 million in total but the Aframaxes will yield US$212 million en bloc and provide an extra ship.

This is believed to be the first time Hanjin has ever accepted a vessel switch. The bulk carriers were originally for construction at its new Subic Bay, Philippines facility but the three Aframaxes will now come from the main Youngdo complex in Busan. Owing to the box ship market collapse, more tanker construction will be allocated here.

With ambitions to challenge the other major builders, Hanjin has invested heavily in the Philippines and this year started to deliver its biggest vessels to date from larger building docks. The first two tankers of a new 114,000 dwt Aframax design – Dubai Princess and Dubai Paradise – were delivered to Emarat Maritime from Subic Bay. The UAE owner will receive six sisters over the next 18 months but from Hanjin’s Busan site.

This relationship with the UAE owner led to Hanjin gaining its first ever VLCCs in the form of two for construction in the Philippines. A second drydock, 550m x 135m, was commissioned at Subic Bay last spring, from which the two VLCCs will be delivered in May and June 2011.

Hanjin was the very first Korean shipbuilder to establish an overseas facility, committing US$1.5 billion to build Hanjin Heavy Industries & Construction Philippines (HHIC-Phil). With the market slump however, the company is looking to diversify more into offshore in the Philippines.

The leading shipyards are now establishing consortiums with developing countries in order to secure new orders. Some of these are centred specifically on tankers and offshore related craft. South Korea’s AHO Group has signed a contract with PDVSA of Venezuela to rebuild and expand the Astinave naval yard facilities in a US$600 million deal. Sungdong Shipbuilding & Marine Engineering will be employed as advisor and will provide Astinave with technology for construction of Aframax tankers by 2012.

Samsung has invested in Atlantico Sul, Brazil in order to access a share in the large newbuilding tankers planned by Transpetro (Petrobras). STX, through its Aker takeover, already has a foothold in offshore construction in Brazil and plans further expansion linked to Petrobras. Daewoo has entered a long-term deal with the Omani government to operate a new shiprepair facility.

Despite the dire market conditions, there are grounds for confidence. 21st Century Shipbuilding has evolved a 20,000 dwt chemical tanker. Sinochem, China has now signed a letter of intent for four units of the new design, slated for delivery in the first half of 2011. An order is expected to firm before October. Sinochem has signed a strategic alliance agreement with the yard, pledging itself to more newbuildings in the future. TST