Effective competition with South Korea may be 20 years off, says report

PUBLISHED : Monday, 07 July, 1997, 12:00am
UPDATED : Monday, 07 July, 1997, 12:00am

China is 15 to 20 years away from becoming an effective competitor to South Korea in shipbuilding, according to a research report by brokerage Merrill Lynch.

Korea itself will need the same amount of time to catch up with Japan, it adds.

Merrill Lynch acknowledged that Chinese shipyards were considered very good at welding and steel cutting.

But because the shipyards were mostly state-owned, they had yet to develop competitive management capabilities.

These were probably more critical to shipbuilding success than low labour costs, the report said.

It added that China faced a second impediment in that most of its shipbuilding docks were located on the west banks of rivers, where silting was most prevalent.

It therefore needed to perform regular dredging work, putting the industry at a cost disadvantage.

'Although China has two VLCC (very-large crude carrier) docks, no VLCC orders have been received so far,' Merrill Lynch said.

The brokerage said the long-awaited VLCC replacement cycle had finally begun, with a strong pick-up in orders reported last year.

It said shipbuilders continued to report new orders and inquiry levels were rising.

'We expect such order growth momentum to be sustained until the year 2000,' it said.

Merrill Lynch said that in the current operating environment buying new ships was more profitable than repairing older ships.

Demand for VLCCs is generally driven by scrapping levels.

The time to replace ships built in the 1970s was arriving and orders were unlikely to be delayed much further, it said.

However, the report said the end market for VLCCs was already mature, with demand for oil shipping still below 1980 levels.

The brokerage said it did not expect ship prices to reach the US$100 million levels of 1991-92 because of the considerable increase in shipbuilding capacity and expectations of fierce competition between Korea and Japan. It was hard to see VLCC prices going above $90 million.

Merrill Lynch said the recent flurry of VLCC orders would keep major docks in both Korea and Japan busy until 1999 or early 2000.

But it said increased demand for new VLCCs would coincide with fading demand for bulkers and container carriers.

The brokerage said global capacity had risen by some 15 per cent over the past few years.

The overall load factor was expected to decline to 85.8 per cent in 1996 from 87.1 per cent in 1994. It would bottom out next year.

Separately, the Korea Shipbuilders' Association said its members continued to invest abroad, including in a shipyard being built in Shanghai and a repair yard in Vietnam.