Amid fierce competition for survival in a shipbuilding sector buffeted by both Chinese overcapacity and local restructuring storms, South Korea’s Samkang, the leading repair yard in the country, is eyeing opportunities beyond its core business.
Samkang posted operating losses of 20.9 billion won (US$18 million) in 2017 and 35.3 billion won ($30 million) in 2018. But the firm has forecast profits from the third quarter of 2019 as orders increase. Its books recorded orders of 335.4 billion won last year, and 293.5 billion won in the first half of this year.
To survive, Samkang has staked a claim in an under-serviced sub-sector – branching out into a billowing new field.
Repair beats build
The company was established to fill a hole in the industry, its chairman said in an interview with Asia Times.
“When I went to Singapore a few years ago, I saw a South Korean LNG ship come in for repairs because there were no repair shipyards for large ships in Korea,” Song Moo-suk, the chairman of Samkang M&T and Samkang S&C recalled. “I thought it would be profitable to enter the ship-repair business in Korea.”
Hyundai Mipo Dockyard was originally established as a repair yard. But after Hyundai Mipo – a branch of Hyundai Heavy Industry, the largest shipbuilder in Korea – switched to become a shipyard amid a boom in orders, South Korean vessels had to head overseas for repairs.
Song established his repair yard in 2017 after his firms acquired a shipyard in Goseong-eup, a small town on the south coast, from STX Offshore & Shipbuilding – which, like a number of Korean yards and their suppliers, was under court receivership. That facility, built to create large floating docks with a length of 430 meters and a width of more than 800 meters, was re-purposed by Samkang.
Samkang S&C repairs and renovates ships and produces floating gas-and-oil production facilities. Samkang M&T also provides body blocks of ships, and builds small and mid-sized chemical tankers and specialized vessels for the Korean Coast Guard.
As he climbs out of the red and into the black, Song is banking on a decision by the International Maritime Organization in 2016 that made it mandatory to install devices to reduce sulfur emissions from vessel engines.
“To attach the device to a vessel, the ship must be anchored in docks for a week to 10 days,” Song said. “We understand that there are 2-3 million ships that need the reduction system. There could be huge demand going forward.”
But there are clouds on the horizon.
Fierce competition is expected from China. Chinese yards introduced overcapacity into the global sector at a time when oil prices were low, forcing many energy companies to postpone or cancel orders for new vessels and rigs. Moreover, this overcapacity began at a time when shale gas was coming online, reducing the need to transport fuel shipments to the United States.
With many Chinese shipyards now struggling, many companies are turning to repair work. Still, Korean players retain their customary edge in efficiency and execution.
“Chinese companies take longer to install de-sulfurization devices than we do. If we provide high-quality service within a shorter period, we have a chance to win the competition,” Song explained. “Currently, demand for the installation of sulfur reduction devices is well over capacity.”
Samkang has the capacity to install devices in about 40 to 50 ships a year. It has already received 40 orders from Singapore and Israel.
Next year, Song expects rising demand from Japan, Korea and Singapore. “We produce the desulfurizing devices, but ship owners are currently bringing devices produced by other makers,” he said. “If we use our device on the ships we repair, profitability will improve.”
However, Samkang’s repair business still has a lower capacity than its overseas counterparts. “Singapore Sembcorp Marine, the world’s largest repair yard, can repair 40 ships simultaneously; [we can handle just] five to six ships,” Song conceded.
Even so, it is still the largest player in Korea, capable of repairing ships of up to 100,000 tons, thanks to its floating dock of that capacity, noted Eom Kyung-ah, a shipbuilding analyst at Seoul’s Shinyoung Securities.
But Samkang’s competition is not just global, it is increasingly domestic, too, as financially-strapped Korean yards pursue survival strategies.
Orient Shipbuilding in Busan repairs ships of between 10,000-30,000 tons while its Gwanyang yard, which can service larger vessels, has recently been sold to a foreign company. Another Korean repairer, Yeosu Ocean, can service vessels of up to 30,000 tons. Sungdong Shipbuilding & Marine Engineering, currently under court receivership, is seeking to transform itself into a repair yard under restructuring plans.
And there’s more. Busan, Korea’s second city on the south coast, is set to build a ship-repair complex at its new port. According to Busan City, the facility will require investments of 600 billion won on 654,000 square meters of land. The project is expected to be completed in 2024.
Casting a giant shadow
Speaking with surprising frankness, Song is not upbeat about the future of the Korean shipbuilding industry, which – along with autos, electronic components, electronic devices and petrochemicals – is a core sector in the country’s industrial portfolio.
“Currently, South Korean companies have a competitive edge in high-value-added ships, such as LNG carriers, but the technology gap will also be narrowed by Chinese shipbuilders, which have already gained an edge in price competitiveness,” he lamented.
“The weakest sector for Chinese shipbuilders is LNG carriers, but Chinese demand for oil and gas is already huge and will grow higher,” he continued. “Even if there is a risk, Chinese oil companies will place orders with Chinese shipyards….this will help Chinese shipbuilders acquire technology “
Another challenge is remaining competitive given Seoul’s labor policies, including the recently introduced 52-hour working week, Song argued.
Still, other industry watchers are more convinced of the longevity of the Korean sector.
“Korean and Chinese shipbuilders do not overlap,” said Shinyoung Securities’ Eom. “Few Korean shipbuilders now make [low-technology, low-priced) ships such as bulk carriers, and their technological edge in building LNG carriers remains intact.”
Eom cited hull-making technologies that enable greater fuel efficiencies as one Korean competitive edge.
Plainer sailing in wind power generation
Asked why his firm expanded into shipyards despite the sector’s problems, Song said he had no intention of expanding further. Instead, he will focus on upgrading efficiencies. “We will maintain our competitiveness by increasing productivity by focusing on one or two main business fields.”
And Samkang is diversifying beyond its customary horizon. Samkang M&T produces heavy wall thickness steel pipe, offshore plant modules, and wind farm jackets – key substructures for offshore wind turbines. Thanks to global demand for renewables, that fast-growing sector is spinning off orders worldwide.
Samkang M&T is the only South Korean company that produces complete offshore wind-power generator substructures, Song said. In January, the company signed a contract worth 60 billion won to supply offshore wind generator substructures to a Belgian firm. And that deal was followed this month by a 120 billion won contract for an offshore wind-power plant in Taiwan.
“The project to build a wind farm in Taiwan will continue until 2030,” Song said. He cited Taiwan’s hostile political relations with China as one reason his firm won the contract.
He anticipates another juicy deal with a Japanese wind player, worth 800 billion won, to be signed in February next year. Currently, Samkang engineers are in Japan, engaged in pre-contract coordination.
Thanks to these projects, the company is enjoying a growing reputation in wind.
“Now orders are coming in, even from Europe… European companies’ production capacity has reached its limit, so we are being asked to produce,” he said. But Samkang is also operating at maximum capacity through till 2021, Song said, though it remains in a position to supply parts.
The move to wind energy has been boosted by the Fukushima disaster, which led Tokyo to drastically reduce the size of its nuclear industry, and which also generated jitters about nuclear power in South Korea.
“There will likely be a boom in building offshore power plants in Japan,” Song said. “Korea is also likely to see the development of marine wind power as the Korean government favors renewable energy.”
China, too, is increasing wind power generation – but typically, the country uses only locally-made products.