South Korean shipbuilders weigh US$6.5 billion cost of Ukraine crisis, but could China reap the benefits?
- South Korean and Chinese shipbuilders rank among the industry’s top players, but the industry is under pressure from the coronavirus and Russia’s invasion of Ukraine
- Korean firms face the risk of delayed payments after Seoul backed Western sanctions against Russia, while Chinese firms could benefit from Beijing’s stance
Russia’s invasion of Ukraine, which has added to disruptions caused by the ongoing coronavirus pandemic, has created increasing uncertainty for most industries, with shipbuilding one of them.
South Korean and Chinese shipbuilders rank among the industry’s top players, and as tensions are growing, the impact of the geopolitical decisions made in both Seoul and Beijing over the Ukraine crisis are starting to filter through.
Shipbuilders could also encounter problems in securing new contracts with Russian owners, as well as the growing competition from China, after South Korea was listed as an “unfriendly” country by the Kremlin earlier this month.
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Moscow has indicated that firms in countries on the list would need to obtain its approval for business transactions.
“Russia-linked orders are heavily focused on liquefied natural gas ships from Korean yards, with Samsung Heavy Industries the most exposed,” said Adam Kent, managing director at Maritime Strategies International.
He did note that the immediate impact on the global shipping industry would likely be minimal, given ships linked to Russia account for only 2.5 per cent of the global order book.
Samsung Heavy Industries is reported to be delaying the delivery of two liquefied natural gas (LNG) carriers that are due this month.
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Reports also stated that the company has the largest backlog of orders from Russian entities among South Korea’s top three shipbuilders, totalling US$5 billion.
“Nothing has been decided as of yet with regards to the Russia situation,” a Samsung Heavy Industries spokesman said.
Korea Shipbuilding & Offshore Engineering, Samsung Heavy Industries and Daewoo Shipbuilding & Marine Engineering are South Korea’s main three shipbuilders, and they are reported to have contracts with Russian entities valued at around US$6.5 billion, which includes LNG carriers and equipment.
For contracts secured years earlier, shipbuilders have received initial and ongoing payments, with around 20 per cent paid when the contract is signed.
We do not see the risks as being too great, but given we are unable to tell how the situation will unfold, we are closely monitoring related matters
“It takes five to six years for carriers to be built and more than 60 per cent of the payment is made when the carrier is delivered,” said a spokeswoman with a Korean shipbuilder, who asked not to be named due to the sensitive nature of the situation.
“For us, there is still a lot of time until we reach this stage for our contracts.”
Shipbuilders are also considering scenarios where Russian entities are unable to make payments should sanctions in response to the invasion be extended.
“If this is the case, shipbuilders can look to other markets,” the spokeswoman added.
“We do not see the risks as being too great, but given we are unable to tell how the situation will unfold, we are closely monitoring related matters.”
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Under the current situation, South Korean shipbuilders are likely to delay the completion and delivery to Russian firms, given the payment risks.
“Given [Daewoo Shipbuilding & Marine Engineering ] is building two LNG barges and three Arc7 LNG carriers for Russia, risks need to be checked,” Daishin Securities analyst Lee Dong-heon said.
“While the company has relatively greater competitiveness in LNG carrier-building technology, and has hit the trough when it comes to earnings, fuelling expectations for improvement in the mid-to long-term, it needs to improve its financial structure and check the situation relating to Russia.”
Chinese shipyards are also positioning themselves well, when it comes to improving vessel efficiencies and reducing emissions
The two countries are engaged in a heated race for the title as the top shipbuilding nation, with China overtaking South Korea in new global orders last year after attracting 49 per cent compared to 38 per cent.
“Chinese shipyards are also positioning themselves well, when it comes to improving vessel efficiencies and reducing emissions, having already constructed LNG dual-fuelled, methanol-fuelled and ammonia-ready ships,” Kent added.
“China isn’t currently capable of constructing ice class LNG carriers, so it is difficult to see how China can, in the near future, benefit significantly from the breakdown in relationship between Russia and South Korea.”
China has been increasing its share with cost competitiveness, but Korean shipbuilders are on their toes as China has quickly caught up in constructing high-value added LNG carriers.
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“As shipbuilding is a highly capital-intensive industry, strong government support and political stability is prerequisite to survive this industry which gives an edge to the Chinese shipbuilders over the other players across the globe,” Allied Market Research said.
The race for new orders is still neck-and-neck, with South Korea beating its competitor in new global orders in February after attracting 67 per cent compared to 26 per cent, according to market tracker Clarkson Research.
“The shipbuilders with the most advanced technology do not necessarily secure the largest number of orders. Given there is a limit to production capacity, when shipbuilders reach their capacity, they tend to focus on more profitable contracts for high-value-added carriers,” said the spokeswoman with the Korean shipbuilder.
The conflict in Ukraine is projected to weigh on the shipbuilding industry for the remainder of the year.
There is a market expectation that demand for shipping LNG will witness a considerable rise owing to replacements of Russia’s gas transported via pipelines
“Beyond direct connections with Russia, the impact on the shipbuilding industry will be mediated through the change in demand for new builds due to the economic fallout of sanctions and high energy prices on the global economy, with Europe especially exposed to risk,” Kent said.
Allied Market Research said the turmoil in energy markets owing to Russia’s invasion of Ukraine could bolster the shipbuilding industry.
“There is a market expectation that demand for shipping LNG will witness a considerable rise owing to replacements of Russia’s gas transported via pipelines,” it said.
“The Russia-Ukraine war has forced countries such as Germany, which imports a considerable amount of LNG from Russia, to rethink their energy policies about importing gas.”
