Competitiveness Is Key to Booming Shipbuilding Business

Having received the largest-ever first-half volumes of orders during the first six months of this year, the shipbuilding industry already reached annual sales forecasts, and is now expected to focus on high value-added products during the remainder of the year.

▽ Sales Targets Met

The domestic shipbuilding industry received orders worth 7.81million CGT (compensatory gross tones) in the first half this year, breaking the earlier record of 6.61CGT set in the first half of 2000. In particular, orders for high value-added large containers and tankers of more than 5,000TEU class are steadily increasing.

Hyundai Heavy Industries received $4.82 billion-worth orders during the first six months period, topping this year`s target amount of $3 billion. Samsung Heavy Industries also won shipbuilding deals worth more than $2 billion, nearing this year`s target of $2.83 billion. The company`s sea plant division already sealed $838 million-worth deals, topping this year`s target of $700 million.

With orders continuing to flow in, shipbuilders are now handling a great deal of workload that would have taken two and a half years to complete. With docks all filled up, they are even considering selectively receiving orders for high value-added products.

Prices of ships also remain strong. The price of very large crude oil carriers (VLCCs), having dropped down to $62.5 million in October last year, recovered to $67 million last month.

▽ Competitiveness Is Key

Domestic shipbuilding companies are taking a distant lead over Japanese rivals in high value-added vessels such as LNG ships and VLCCs. With production costs remaining lower compared to Japanese rivals, they are also ahead in design.

˝Heavy investments in facilities during the mid 1990s have lead to enhanced competitiveness of the industry,˝ pointed out Hong Sung-in, deputy research director at the Korea Institute for Industrial Economics & Trade. ˝Productivity of young workforce the industry hired at that time has been reinforced steadily, widening the gap with Japanese rivals.˝

The size of workforce in Japan has, in fact, reduced down to 38,000 from 160,000 in the mid 1970s, indicating that there have been few employments. And productivity is degrading as a result of the aging of workforce.

With ship owners` demands diversified, the rigid production structure and the lack of design workforce have become a major stumbling block to securing competitiveness.

▽ Outlook

The global shipbuilding industry goes through a mid and long-term boom-and-bust cycle, affected by the global economy and market conditions. Having gone through an expansion period from 1960 through 1974 and a restructuring period from 1975 through 1990, it has entered the period of replacement demand in the late 1990s.

˝Growing demand for ships indicates that ship owners are optimistic about an economic recovery as well as it is time to replace old ships,˝ said Cho Yong-joon, analyst with Daewoo Securities.

Owners are also rushing to seal a deal to purchase ships before prices rise. Shipping companies are also seeking to increase sizes of ships to achieve the economies of scale. Strong demand also comes as the European Union bans operations of single-layer oil tankers on its sea after the Prestige incident off the coast of Spain in November last year.

smhong@donga.com