"Transcript of a recent interview with TV news anchor & presenter Ms. Sooyoung on the impact of Qatar Petroleum's $19.1 billion newbuilding order for South Korean shipyards & what they must do to ensure their survival"
Qatar’s state-run LNG producer signed agreements with South Korea’s “Big 3” shipyards on Monday to secure more than 100 ships through 2027, in the largest-ever single LNG vessel order. How significant is this deal in the industry?
This deal is without any doubt of tremendous significance and for this we need to understand not just what lies behind it, but also how the future is likely to unfold.
Countries like Sweden & United Kingdom have temporarily stopped using their old coal power plants during the pandemic, which is roughly 2 years ahead of their projected schedule to stop using coal. However rather than using crude-oil based fuels in these power plants, LNG is considered a much better alternative, which without much fiscal investment, significantly reduces CO2 emissions.
The shipping industry on it's own every year consumes roughly 20% of all the oil that is produced as fuel for ships. In terms of transportation efficiency, slow steaming operations and large ship sizes built for economy of scale, have more or less reached their peak using distillates of crude oil as a fuel.
Meeting future environmental targets set by the IMO 2050 regulation, is clearly impossible with the existing range of oil fuels. In order to not significantly disrupt our current cost effective way of maritime transportation, LNG as a fuel is the only alternative because it can utilise the existing engine technology, infrastructure and storage facilities, without incurring significant capital investment and drastic change.
Other than Qatar Petroleum nobody else has been courageous enough to display clear leadership by making such a bold move, especially during the ongoing pandemic. It is therefore seen as a significant deal not just for LNG shipping, but for the entire shipping industry as a whole.
Is this deal big enough for the big 3 shipbuilders to overcome the setbacks they have faced? Especially for Samsung Heavy Industries which was in the red in Q1.
The deal is huge because this one deal is approximately 60% of the global LNG shipbuilding capacity until 2027. The 3 big shipyards firms will have to reserve a major portion of their shipbuilding capacity for this deal until 2027.
With only about 600 LNG ships worldwide, a 100-ship new building order appears to be a plan that is well thought through, considering the current economic climate, future regulations and LNG market dynamics. While it will increase the LNG fleet by about 17% over 7 years, both shipyards DSME and HHI have already seen their stock prices go up by more than 15%.
For Samsung Heavy Industries too this deal is significant despite being in red in Q1, as this order alone is going to keep them busy for the most part of this decade.
What are South Korean shipbuilders good at and how can they leverage it to sustainably grow in the industry?
I have been visiting South Korean shipyards from the mid-1990s, first as a seafarer and later in many other roles. My last visit was just a couple months before the Covid19 pandemic hit.
Over the years there has been tremendous improvement in the proficiency of workers and efficiency with which newbuilding projects are executed.
What has also improved significantly is not just the quality of ships built but also the complexity and sophistications of ships that are delivered from these massive yards in South Korea.
The the speed and rapid turnover of new ships, is a subject of detailed study by shipyards world over. This speed and efficiency needs be sustained and improved.
They’re facing growing competition from Chinese shipyards. What challenges do they face, and what strengths should they focus on?
Chinese shipyards are today where the South Korean yards were about a decade ago, but they are catching up fast and most are competing on lower cost of building. But they are not really known for their innovation or for building advanced ships.
Most Chinese shipyards are also heavily subsidised, which may not be openly apparent. While they have relatively inexpensive labour, the availability of cheap money tends to make them inefficient at making capital work effectively.
The South Korean shipyards on the other hand, need to continue this trend of having the upper hand in advanced ship building. Using emerging technologies and latest automation capability, developing and innovating further, will allow them to build and deliver ships that are built for the future and fit for purpose.
Shipyards need to offer better designs and efficient ships that will meet future regulations, all the while remaining competitive, if they want shipowners returning to them with more newbuild orders.
Meanwhile, LNG consumption this summer is forecast to drop 2.7%, the first seasonal demand contraction since 2012. How long do you expect the decline in demand to last and can the shipbuilding industry survive this?
Although the forecast is bleak, decline in demand is not expected to last long. The pandemic has impacted many industries, but most are expected to recover soon.
A bounce back is imminent especially because most countries are fast tracking their reduction in consumption of coal fired power plants.
Turning to renewables immediately is not practical. At the moment they are much more expensive and take much longer in terms of transition time, if we have to change the entire infrastructure from what we have today.
What factors should shipbuilders look out for?
What Shipbuilders need to watch out for is how quickly the world is changing, especially the maritime world. Although one of the last industries to see digital transformation, it has certainly begun.
Shipbuilders no longer have the luxury of time to react to changes in their own time. Unlike in the past, they certainly need to be much more agile and quick.
Keeping track of maritime trade, commodity transportation, political disruption, natural calamities, currency fluctuations, etc. and predicting their impact on the shipbuilding business is important, so that shipbuilders agile, better prepared and ready when things change.
They have to keep abreast of the latest technology developments and keep track of trends in other industries that are likely to spill over or can be proactively adopted by the maritime industry.
Amid low global demand, how can shipbuilders minimise costs and losses and are there ways to restructure their businesses in order to improve their balance sheets?
Other than mechanisation, shipbuilding has not changed significantly in a century. As the world changes around them, it is no longer sufficient for shipbuilders to do what they always did, they need to identify new ways of providing value to shipowners and operators.
When it comes to their balance sheets, perhaps there is a need to revisit their business models. They need to understand the ongoing changes in the maritime industry, this can only be done with engaging more closely with other stakeholders within the industry.
Shipbuilders need to be ready and prepared to capitalise on opportunities and trends early. Going forward it is those who are agile, proactive and creative with financing, leveraging and payments, that are going to find success.
Let me know your thoughts.
Commentaires