South Korea, once a world leader in shipping and shipbuilding, is aiming to reclaim its leading edge as global demand grows for cleaner, greener LNG-powered vessels.
But the country’s strategy, which involves deploying huge subsidies to the struggling sector, has ruffled its rivals.
South Korea’s shipbuilding sector was on the brink of collapse in 2016 after reeling from almost two decades of declining demand and increased competition.
A global economic slump in the early 2000s, massive overcapacity in the shipping industry, low freight weights, and increased competition from Chinese and Japanese yards combined to turn the once-robust South Korean shipyards into near graveyards.
China in particular has usurped much of South Korea’s power, namely because its state-owned enterprises can undercut pricing.
China is known for being willing to lower prices to win orders, says Denis Petropoulos, president of Bramer Group Asia, in The Maritime Executive.
“China is capable of stealing the market from its competitors because it will win favour by pricing itself down,” Mr Petropoulos says.
But not all is doom and gloom.
There is a window of opportunity for South Korea in the form of demand for LNG carriers.
The country’s shipbuilders, Samsung Heavy and Daewoo Shipbuilding and Marine Engineering, are the most popular shipbuilders for LNG tankers, according to Reuters.
Together, they are responsible for almost half of the LNG carriers operating worldwide.
South Korea is known for its particular expertise in LNG builds, putting it in an enviable position as demand for alternative-fuel vessels is predicted to continue to rise.
But the specialised skills set that has given South Korea a competitive edge in the LNG market is starting to erode.
“China is already starting to build them, and by 2020 it will be churning them out,” Wendy Laursen, news editor of The Mining Executive, predicted in 2016.
Meanwhile, shipbuilding rival Japan is being helped by its weaker currency the yen, making it more competitive against South Korea’s stronger won.
However, the South Korean shipbuilding industry is too big an employer and too critical to the country’s economic health to be allowed to fail.
In order for the country to ensure the health of the industry in the long term, it must maintain its position as a leading supplier of LNG vessels.
To do so, South Korea’s government and its maritime ministry have been working hand-in-hand with industry on a number of efforts.
South Korean president Moon Jae-in stated in early 2018 the government would develop special measures to spur “innovative growth of the shipbuilding industry,” with almost $2 billion in subsidies for replacing older vessels, according to Jamey Bergman in LNG World Shipping.
In April, the country’s Ministry of Oceans and Fisheries announced it would be underwriting 200 ship orders.
This was followed in July with the state-sponsored Korea Ocean Business Corporation announcing it would issue guarantees and make additional investments to support the industry.
Other public-private projects include:
• Government and public sector orders for LNG-powered vessels, including two 200,000-tonne bulk carriers to operate South Korean and Australian routes.
Alternative fuel vessels are seen as a more expensive alternative to traditional fuel and less attractive to private companies. As a result, government underwriting will stimulate demand.
• Lower port-use rates and tax cuts to encourage LNG-powered vessels to use South Korean ports, and efforts by the South Korean government to turn its coast into a regional LNG bunkering hub.
• A government bailout of Daewoo Shipbuilding and Marine Engineering to the tune of $2.6 billion in 2017, and a refocus of the company’s efforts on alternative fuel and fuel-efficient ships, including LNG vessels.
Subsidies and other governmental assistance to shore up a floundering shipbuilding industry is nothing new.
China and India, for instance, have both employed the practice.
“Subsidies worked well for Indian yards in the 2000s, and a new range of subsidies has been made available since the start of (2016),” C.R. Venugopal, division head of plan approvals at the Indian Registry of Shipping, is quoted as saying.
But not everyone is happy with the government’s decision to provide public-sector assistance to the industry.
Japan, in particular, has made no secret of the fact that it feels the subsidies provided by its main rivals — China and South Korea — are unfair and are ‘warping’ the market.
It has reached out to the World Trade Organisation for relief.
In addition, the European Union Commission is investigating South Korean subsidies, after complaints by Denmark and other member states.
Denmark alleges the subsidies violate the free trade agreement between the EU and South Korea.
However, because of the huge impact the maritime industry has on a country’s economy, it’s likely Japanese President Shinzo Abe’s and the EU’s complaints will fall on deaf ears.
The economic health of South Korea is dependent on the health of its shipyards, and the government appears determined to work with the private sector to ensure a viable maritime industry and a strong country as a whole.
The LNG Marine Fuel Institute understands and supports the vital role governments play in enabling industry’s integration of LNG as a transition fuel in order to strengthen economic ties between nations, and create a new global employment sector and reduce the harmful effects of ship emissions.