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Korean and Singaporean yards have adapted well to China s challenge
PLENTY of behemoths are being welded into shape in South Korea s shipyards at
the moment. Clustered around the southern city of Busan, the big three yards
Samsung Heavy Industries, Daewoo Shipbuilding and Marine Engineering, and
Hyundai Heavy Industries are churning out the world s biggest container ships,
400 metres long; an oil barge whose length, at about 460 metres, or 1,462 feet,
is almost half the height of Scafell Pike, England s tallest mountain; and some
of the largest oil rigs yet built.
But size isn t everything. Just as impressive, and more important commercially,
are four ultra deepwater drill-ships coming off the line at Samsung Heavy
Industries. Commissioned by a Danish shipping giant, Maersk, the first one has
just been christened: Viking, appropriately enough. Described by a Maersk
engineer as giant Black & Deckers , these ships are designed for work in the
deepest of waters, such as in the Gulf of Mexico. As inland and coastal wells
run dry after decades of exploitation, oil firms are being forced farther out
to sea, and ships like Viking, which will be used by Exxon Mobil, are designed
to meet their requirements.
Viking can operate in 3,000 metres of water, and then drill down through
another 12,000 metres of earth more than the height of Mount Everest (8,848
metres). The centrepiece of the vessel is the derrick, which is over 60 metres
high. But the most advanced bits of kit are probably the six thruster engines.
The engineers claim that they can keep the ship steady and drilling even in
waves of up to 9 metres.
Strong technical skills have proved to be the salvation of Korean shipyards.
Only a decade or so ago most analysts were assuming that China s heavily
subsidised yards would soon take much if not all of South Korea s share of the
world shipbuilding market, just as South Korean yards had wiped out much of
Europe s capacity a generation before. But it has not worked out like that. It
is true that China now gets more orders in terms of gross tonnage, but in the
year to July 2013 South Korea produced 76.2% more than China by dollar value.
The Koreans, and their Singaporean counterparts, are making money in a highly
competitive market by focusing on complex vessels like Viking (which cost about
$650m), often for the offshore market. China has failed to break out of the
basic bulk-carrier market, where ships may cost as little as $30m. As a result
it is China s yards that are struggling, confined to a part of the market that
is plagued by overcapacity, whereas Korean and Singaporean order books are
almost full. Maersk reckons the market for offshore rigs and drill-ships is now
worth $44 billion a year.
Sokje Lee, an analyst at J.P. Morgan in Seoul, explains that shipbuilding is
nowadays a design and quality business rather than a labour-driven one, and
South Korean firms, once a lower-cost alternative to their European rivals,
have spent heavily and wisely in becoming more technically sophisticated. Each
of the big Korean yards has thousands of in-house designers and engineers. This
has made them world leaders in the new generation of fuel-efficient,
cheap-to-run eco ships .
China s yards have focused instead on offering customers low prices and
irresistible financing deals. Sometimes they demand as little as 10% of the
cost on signing a contract, leaving the other 90% until delivery. Yet this
ruthless competitiveness has not won them a decent share of the lucrative
offshore market. Here quality, efficiency and sticking to delivery dates are at
a premium, and Chinese yards still score poorly on all counts. A recent report
from CLSA, a stockbroker, concludes that China is still far behind the Koreans
in the market for offshore vessels. Even worse, China will soon lose much of
its advantage on price. CLSA estimates that labour costs in its yards are
rising by 10-15% a year, while productivity remains low.
Singapore s two main yards, Keppel and SembCorp Marine, have also invested
heavily in quality and efficiency. They specialise more in deep-sea rigs than
in drill-ships and carriers. Keppel, the bigger of the two, is building a
record 20 such monsters this year; next year it will deliver the first of three
giant, $600m jack-up rigs (ones that are floated into place then jacked up on
their legs).
Time is money
The Singaporeans are also good at building things on time, which is vital in an
industry where late delivery can cost the operators of rigs and drill-ships
over $500,000 a day. Over the past five years, rigs ordered from Keppel and
SembCorp were, on average, delivered ahead of schedule, whereas Chinese yards
delivered 50-250 days late, says IHS Petrodata, a research firm.
The only cloud on the horizon for the Koreans and Singaporeans might be
fracking. The output of tight oil from onshore shale beds has soared in the
past few years, especially in America, and could one day reduce the demand for
expensive deep-sea rigs and vessels. Indeed, Mr Lee even suggests that the
offshore business might already have peaked. But Keppel, for one, is not too
worried. The demand for oil has so far kept rising; and as long as the crude
price is above $80 a barrel, the big oil firms will have the money and the
incentive to keep developing deepwater fields, and thus to keep ordering its
rigs.