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Korean Shipbuilders: Demand Continues to Gain Momentum

Shipbuilders are back in business as the battered industry’s recovery continues to gain speed.

Global shipbuilding orders increased 30% in June compared to a year ago on the back of strength in the tanker and LNGC (liquefied natural gas container) segments. Nomura analyst Jaehyung Choi wrote this morning that the bidding process for offshore projects, which had been delayed from 2015/16, has restarted. Choi noted that Hyundai Heavy Industries (HHI), Samsung Heavy Industries (SHI), Daewoo Shipbuilding & Marine Engineering (DSME), Sembcorp, Keppel and China Offshore Oil Engineering Corp have all submitted bids for Shell’s Vito project in the Gulf of Mexico worth $500 million. Meanwhile, HHI, SHI, DSME, Sembcorp and Keppel will submit bids to Norway’s Statoil for Johan Castberg FPSO (floating production, storage and offloading vessel) worth $500 million to $600 million by August.

Ship prices also improved in June:

The Newbuild Price Index rebounded to 122.9 in June from 122.7 in May, due mainly to a recovery in ship prices for tankers and containerships. On a negative note, the June LNGC ship price fell to USD179mn from USD 182mn. We maintain our view that the ship price could rebound moderately in 2H17F, as shipbuilders fill their backlog and start to negotiate with shipowners to raise ship prices, reflecting: 1) a steel price hike; 2) environmental regulations, along with a new order recovery cycle.

There have been concerns that Korean shipbuilders could be losing their competitive edge, but Choi isn’t worried:

There was concern in the market that Hudong Zhonghua has won four LNGC carriers against Korean yards on 29 June from Mitsuil O.S.K Lines (for Yamal projects), while we are not too concerned about Yamal orders, considering: 1) CNPC (China National Petroleum Corporation) which holds 20% of shareholding in Yamal projects support to place an order to Chinese yards; 2) KR yards still have more construction experience of LNGC compared with those Chinese yards with high technology like the LNG reliquefaction system. Of note, Hyundai Heavy Industries won 1 LNGC in June from Knutsen OAS Shipping. Meanwhile, containership YTD new order trends remain weak at -51%, while we are positive that CMA-CGM has started the bidding process for nine units (6 units + 3 units of options) of large-sized containerships, where Korea’s Big 2 yards have a competitive edge.

Choi favors Samsung Heavy Industries (010140.KR) and Hyundai Heavy Industries (009540.KR) among Korean shipbuilders. He sees between 32% and 39% upside for the two stocks.
Source: Barron’s

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