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Asian Shipbuilding: a Dynamic Market

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Asian Shipbuilding: a Dynamic Market SPONSORED STATEMENT ASIAN SHIPBUILDING: A DYNAMIC MARKET Asia will remain at the heart of the global shipbuilding industry for the foreseeable future, although the relative strength of its key players will alter, writes Sumanta Panigrahi, Managing Director and Head – Asia Pacific, Export & Agency Finance, Treasury and Trade Solutions at Citi. he global shipping and offshore – and therefore the foundations for Asia’s For example, in South Korea energy equipment industry has success – are identical. Each requires shipbuilding is concentrated among shifted unequivocally towards steel: rapid growth in steel production the chaebol (industrial conglomerates), Asia. South Korea, Japan and capacity in Japan, South Korea and such as Samsung Heavy Industries and China now dominate with China facilitated the growth Hyundai Heavy Industries, which receive around 80% of orders: of of shipbuilding in these markets. strong support from policy banks and a the 134 liquefied natural gas Shipbuilding also requires skilled significant proportion of South Korea’s (LNG) tankers built since 2009, 133 were labour: ship manufacturing is both export credit agency (ECA) funding. Tbuilt in Asia: 100 in South Korea, 20 in complex and competitive. Labour Similarly, in Japan, ECAs make buyer China and 13 in Japan, according to costs are a significant component of financing available and facilitate low cost IHS Maritime. vessel costs, and low costs in China – working capital for shipyards (which While domination by Asian estimated to be between a 10th and a is crucial given the three to four-year manufacturers is expected to continue, 15th of OCED countries’ – have helped shipbuilding timeframe). In China, it is important to recognise that each its shipbuilding grow. In recent years, government support includes access of Asia’s shipping giants has distinct however, skilled labour shortages have to capital from government agencies strengths and challenges. Shipbuilding contributed to rising wage costs in China. and policy banks and programmes to in Japan is going through a renaissance. A third requirement is technological support buyers. It is focused on larger The sharp depreciation of the yen knowledge. Traditionally, Japan and South shipbuilding companies such as China has provided a cost advantage to Korea have offered superior technology Shipping Development Company and manufacturers. Meanwhile, overcapacity and reliability compared to China. China State Shipbuilding Corporation. in China is driving painful consolidation. However, following investment, China now One final factor that has driven Asia’s produces better ships in more complex shipbuilding dominance is the growth The path to dominance segments such as ultra-large container ships of the offshore segment, prompted by Asia’s dominance in shipbuilding has of 12,000-14,000 20-foot equivalent units the deep-sea drilling boom. Demand taken decades to achieve. Japan became (TEU). China is also now making inroads for Arctic Class semi-submersible ships, a global shipbuilding force in the 1960s, into the fast-growing LNG segment. which can cost up to US$1bn each, has South Korea in the 1980s and China in A fourth input that drives shipbuilding soared. While the sophisticated drilling the 1990s. Now yards from Japan, South is government support. Many equipment on Arctic Class ships is Korea and China are the largest players in governments champion shipbuilding manufactured in Norway, the hulls (which each of the four major market segments: because it creates skilled employment, represent 70%-80% of the total cost) are tankers, bulk carriers, container ships stimulates related industrial activity built in either China or South Korea. and offshore vessels (such as floating and has potential political and military Similarly, the dramatic boom in shale production and storage platforms and importance. However, while political gas in the US and Australia has spurred LNG regasification vessels). support for shipbuilding is important, an increase in spending on LNG vessels The principal inputs for each segment financial support matters more. of almost 40% between 2008 and 2012. 30 | GTR EXPORT FINANCE SUPPLEMENT 2014 WWW.GTREVIEW.COM SPONSORED STATEMENT Spending is expected to peak in 2016 Japanese equipment was used – because at approximately US$8bn, and capital the end user of LNG is in Japan. expenditure could rise by US$50bn over the next five years. South Korean South Korea shipyards will account for the majority of The shipbuilding sector South Korea and new builds, while Chinese market share buyers of ships from the country have banks support only 10% of shipbuilding will increase over the next five years. traditionally had easy access to funds companies. The remainder rely on other LNG and offshore vessel demand from ECAs and development banks, such sources of financing and have been is expected to grow, partly in response as Korea Trade Insurance Corporation exposed to the downturn. With total to growing environmental awareness. (K-Sure) and the Export-Import Bank deliveries in 2012 estimated at 45 million Natural gas emits half of the greenhouse of Korea (Kexim) and policy banks, DWT, excess capacity is leading to gases of coal and offers a way to rapidly including Korea Development Bank industry consolidation. reduce emissions. Development of (KDB), Korea Exchange Bank (KEB) and Despite frantic cost cutting by some unconventional gas reserves such as the Korea Finance Corporation (KFC). shipyards in order to win business, shale gas and coal bed methane as both However, the South Korean ship buyers have been careful not to a feedstock and a competing source government is currently consolidating simply give business to the lowest cost of natural gas, combined with the some of the agencies that support shipbuilders. Instead, there has been considerable prospective reserves of the shipbuilding. While government support prudent scrutiny of shipyards’ strength Arctic, will also increase demand for overall is certain to remain strong in the and the likelihood of closure. appropriate vessels. long-term, the restructuring of support At the same time as consolidation is having some short-term impact on of capacity is taking place, the industry Japan’s revival financing availability. The bankruptcy is trying to capture more of the higher Following the introduction of the of STX Pan Ocean in June 2013, which end value chain, such as LNG and package of measures aimed at reviving South Korean agencies and policy offshore vessels. For example, Cosco the Japanese economy (including bond banks have significant exposure to, is (Nantong) Shipyards has shifted its purchases and increased government also creating some uncertainty about focus from shipbuilding to oil services- spending) the yen has depreciated by over government support. related vessels, especially for deep sea a third against the US dollar over the past and harsh conditions. To help strengthen 18 months. Most shipbuilding is priced in China’s reputation in these segments, US dollars so local currency depreciation orders have been placed by state-owned improves pricing for buyers. Moreover, enterprises. For example, in a deal the risk of FX volatility is taken by the by China Petrochemical Corporation shipyard, despite only 20% to 30% of the (Sinopec) to ship LNG from Australia purchase cost being paid up front. it was a requirement for LNG vessels to Japanese costs are now comparable be manufactured in China. In addition, to South Korea and China while China has worked to secure technology reliability and consistency are considered support and supervision for such projects superior: consequently activity has from Japan. increased with, for example, the order of two bulkers, worth US$68mn, from A dynamic market Japanese Oshima Shipyard by Taiwanese The constantly changing dynamics of dry-bulk carrier U-Ming Marine “SHIPBUILDING IN JAPAN the industry mean that it is important Transport in November 2012. IS GOING THROUGH A for ship buyers to work with a bank with The flexibility of Japan’s ECAs, Japan strong relationships with global ECAs. Bank for International Cooperation RENAISSANCE.” ECAs are increasingly important to (JBIC) and Nippon Export and Sumanta Panigrahi, Citi facilitate innovative transactions such Investment Insurance (Nexi) has also as Golar LNG’s US$1.125bn financing supported its shipbuilding resurgence. agreement in July 2013, which has a In August 2013, Hong Kong-based term loan guaranteed by K-Sure and Pacific Basin Shipping finalised terms Consolidation underway in China another funded by Kexim (Citi was of 12-year post-delivery ECA financing China’s global market share of all types global coordinator, bookrunner and for two handymax bulk vessels, lead of vessel has risen from 6% (based on documentation agent). arranged by Citi. The facility, which deadweight tonnes (DWT)) in 2000 It is equally advantageous to select a totals US$50.9mn, had Citibank Japan to 2003 – far below South Korea and bank that is active across all segments of as co-financing lender. JBIC and Nexi Japan – to 43% in 2012. Shipbuilding the market because financing innovations supported the transaction despite the capacity tripled to 63 million DWT from in one segment can be applicable vessels being manufactured in China 2008-2013. This explosive growth is now elsewhere. Broader capabilities, in as the shipbuilder had an equity and causing problems as it is geographically capital markets, for example, are also technology tie-up with a Japanese dispersed but concentrated in the bulker increasingly important. In November shipyard. Similarly, support has been segment (an estimated 60% in 2012), 2013, Kexim, K-Sure and China’s extended to shale gas exports from which is the worst performing sector in Sinosure approved bond issuances, as an Australia and the US – although no recent years. State-owned and policy additional financing alternative. WWW.GTREVIEW.COM GTR EXPORT FINANCE SUPPLEMENT 2014 | 31.
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