Aggressive Korean yards replacing ships with offshore

The low newbuilding prices are putting pressure on Asian shipyards, and revenues are going down fast. Constructions for the offshore industry replaces the massive decline in ship orders for the commercial fleet. ShippingWatch has visited Daewoo Shipbuilding & Marine Engineering, which is building Maersk Line's new Triple-E, among others.
Photo: Thorbjørn Hansen
Photo: Thorbjørn Hansen


Being an Asian shipyard these last few years hasn't been easy, with newbuilding prices and orders having declined significantly. A development which South Korean shipyard Daewoo Shipbuilding & Marine Engineering (DSME) has tried to shield itself from by focusing more on the offshore segment, says Mini Choi, assistant manager at DSME, when ShippingWatch visits the shipyard.

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"DSME has changed its focus to increasingly building offshore, because the demand for bulk, tank, and container has declined. Prices have also gone down, and there's money in newbuilding for offshore. It's difficult today, and it makes the young ones nervous. But there are many who'd like to work here because the salary is good," she says while we're touring one of Maersk's Triple-E ships, which are beeing built at the yard.

Rumor has it that the salaries here are close to the level of yards in England and the United States.

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The offshore trend can be confirmed by looking at DSME's IR report from May, which shows that new orders for commercial ships in 2013 up until and including the end of April was USD 0.20 billion, while offshore amounted to USD 2.70 billion and, according to the report, accounts for 93 percent of orders received in 2013.

Downturn hits the small and medium-sized yards

2012, in particular, was a tough year, the result of which, according to DSME, came in at KRW 125.2 million, compared to KRW 679.4 million the year before. But even though the industry has been hit by the downturn, the three major yards Hyundai Heavy Industries, Samsung Heavy Industries, and DSME are doing fairly well, says professor Lee Byoung-Hoon at Chung-Ang University in Seoul, who has studied the shipyard industry, to ShippingWatch.

"They've managed to secure orders for constructing marine facilities, not shipbuilding, which is struggling a lot due mainly to the global financial crisis," he says, adding that:

"Many small and medium-sized yards have closed their factories, and STX Group, one of the major Korean shipbuilders, recently announced that it was having difficulties. The developments have resulted in downsizing and loss of jobs, especially in local areas such as Tongyeong, where the government has presented a plan to to grant special political assistance in order to manage the recent downturn that has hit the job market."

Yards have raised the living standards

The Daewoo shipyard is located in Okpo city on the island of Geoje in the Souther part of the country. A 20-minute drive from there you'll find another of the country's major yards, Samsung Heavy Industries. And the shipyard industry has been enormously important to the small fishing society, since the decision to place the yards here was made back in the early 1970s.

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Around 250,000 people live on Geoje island today, and everyone is either directly or indirectly involved with the industry, which has raised the living standards considerably and has brought both 7/11 and Starbucks to open branches in Okpo, where restaurants, clothing, and electronics stores have also sprouted. At DSME, 9,000 workers are employed by the yard itself, while the other 14,000 are working for subcontractors and other partners. Samsung has roughly the same amount of employees.

Photo: Thorbjørn Hansen
Photo: Thorbjørn Hansen

And it's not only in the local communities that the shipyard industry has played and still plays a major role, says professor Lee Byoung-Hoon:

"The shipbuilding industry has been an important part of the growth engine for our country and export, together with cars and electronics. The industry has also been a key sector for creating jobs in regions such as Ulsan, Geoje, Busan, and Mokpo, primarily in the Southern part of Korea," he says.

This is no wonder, considering the formats that are playing out at the DSME yard. In order for the machine to work, there are a lot of other facilities present - just hang on here: 300 gardeners employed to maintain the many trees, with their nice, round forms, as well as the flower beds strewn across the shipyard's grounds, while an international school takes care of teaching the approximately 235 children of expats working at DSME.

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23 restaurants serve food for the employees, and when the restaurants serve chicken soup for lunch, 10,000 chickens need to be slaughtered, says Mini Choi of DSME while touring the Triple-E ships, at great amusement for the journalists tagging along.  A couple of minutes to one, after lunch, all the workers gather in small groups and when the clock strikes one they bend back in unison in order to stretch their backs. Then comes the loosening of the shoulders by rotating their arms. Still syncronized, even though the groups can't see each other. This is followed by a pep talk, where the last work of the day is planned. It all seems very efficient. And efficiency is a word often used when describing the country's growth development.

China leading on DWT

Today, however, South Korea is not the world's leading shipbuilding nation measured by deadweight tons. In 2005, China decided it would be the largest shipbuilder in the world by 2015. And the country reached that goal in 2011/2012 due to a combination of private investments and, especially, government investment. Japan was unable to keep up in that competition, though it's currently experiencing a boost aided by the low Yen. The difference between China and Korea lies in the detail, where Korea is known for its quality and technological ingenuity, Chinese shipbuilding has a reputation for being a bit soft in those regards. And there are rumors that some shipping companies are having corrections performed after the ships are delivered from China.

Photo: Thorbjørn Hansen
Photo: Thorbjørn Hansen

But the industry has had the same importance for the economy in China and Japan, says professor Lee Byoung-Hoon:

"In the last four decades, shipbuilding has played a significant part in boosting our economic growth and industrial upgrading. The same history can be found in Japan between the 1950s-1980s, and in China in the 00s. This indicates that the shipbuilding industry can be a source of growth for developing countries, in particular, which have a cheap and trained work force," he says.

Difficult times ahead

Danish Ship Finance is less than optimistic about the prospects for the business, according to the latest Shipping Market Review:

"By the end of 2013 we estimate that order coverage will reach 15 months. This can be translated into a 5-10 percent reduction in newbuilding prices. The global extra shipyard capacity will be more than 80 percent in 2014. In this scenario, newbuilding prices are expected to drop to USD 1,450 per cgt, just above the low reached in 2002."

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