Korea’s biggest shipbuilder warns LNG boom will not offset virus

Forthcoming megadeals worth billions of dollars to manufacture LNG carriers will not be enough to offset the damage from the coronavirus pandemic, the head of one of the world’s biggest shipbuilding companies has warned.

The order books for the South Korean shipbuilders — who hold more than a quarter of global market share — are a bellwether for future international shipping activity and global trade.

Ka Sam-hyun, chief executive of the country’s biggest shipbuilder, Hyundai Heavy Industries, told the Financial Times that while some customers have already requested payments and deliveries of ordered vessels to be delayed, the worst could be still to come.

“We cannot pinpoint when and how the current situation will be brought under control. However, what is clear is that a short-term demand shock for the shipbuilding industry is becoming obvious,” Mr Ka said in an interview.

The warning comes despite Qatar’s state-owned oil producer reserving capacity with Korean shipyards as part of its plans to spend $20bn building more than 100 carriers to ship fuel from the world’s largest liquefied natural gas project off the country’s north-east coast.

Shares in South Korea’s so-called “Big Three” shipbuilders — Hyundai Heavy Industries, Samsung Heavy Industries and Daewoo Shipbuilding & Marine Engineering — soared in Seoul on Tuesday after Qatar Petroleum confirmed the plans, recovering much of the ground they had lost during the first five months of the year.

Analysts are hopeful for further upside with announcements linked to massive LNG projects being developed by France’s Total in Mozambique and by Russia’s Novatek in the Arctic expected as soon as in the coming weeks.

Sung Yop Chung, an analyst at Daiwa Capital Markets in Seoul, said Hyundai Heavy’s main shipbuilding unit was poised to benefit from the longer-term growth of the LNG market as well as the shift by shipping companies towards more environmentally friendly ships.

However, Mr Ka said with new orders shrinking by almost one-third in the first quarter, the potential windfall from the LNG contracts “is not big enough” to change the fundamental problems facing Korea’s shipbuilders.

“The whole volume of work cannot reach to even less than half of [the Korean] shipyards’ LNG carrier building capacities. Moreover, the portion of those Korean shipyards’ LNG carrier production is not more than 30-40 per cent of each company’s total shipbuilding capabilities,” he said.

According to industry tracker Clarksons Research, investment in new vessels so far in 2020 is down 60 per cent year on year to $10bn. Beyond falling global consumer demand stemming from the pandemic, tensions between the US and China over trade and the lower oil price have further spooked ship owners.

“Once [ships already under construction] are delivered, I’m pretty sure shipping companies are not going to be placing new orders,” said Roberto Giannetta, chairman of the Hong Kong shipping liner association.

Exacerbating the problems facing the Korean companies has been the rise of state-backed Chinese shipbuilders — in scale and technological capability — which are now increasingly winning a bigger share of international orders, Mr Ka said.

For Hyundai Heavy the downturn meant its planned merger with local rival DSME has taken on greater importance.

The deal is being scrutinised by foreign regulators over competition concerns — a key decision from the European Commission has been delayed from May to September because of the virus.

Mr Ka argues that in order to compete with Chinese groups and reduce prices for ship owners, the Korean shipyards need to substantially reduce duplication of their spending, particularly in research and development in areas like manufacturing automation and the technologies associated with developing cleaner-fuelled ships.

“Our efforts to merge with DSME carries a great significance for our survival,” he said.

Additional reporting by Javier Espinoza in Brussels and Song Jung-a in Seoul