Implications of Korean shipyards building Qatar's LNG carriers?
Updated: Oct 30, 2020
"Transcript of a recent interview with TBS eFM news broadcaster & current affairs host Mr. Henry Shinn 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 is the world’s leading LNG exporter next to Australia. Could you first tell us about its volume and major destinations?
When we talk about revenues both from oil & gas, Qatar Petroleum alone is responsible for about 60% of the GDP of Qatar. In terms of both oil & gas reserves, QP is considered the 3rd largest oil company in the world.
But when you look at Qatargas, which is one of the many subsidiaries of QP, it is the world's largest LNG company.
Qatar’s LNG production now is about 77 million tons per year, however, they have expansion plans to produce 126 million tonnes a year by 2027.
Qatar also has an advantage over other countries & that is, its gas extraction costs are some of the lowest in the world.
The LNG is shipped to countries all over the world, but their primary customers are in Asia, with one of the biggest being Japan, which imports around 15% of its total gas consumption from Qatar. Qatargas has had long-term contracts with Korean Gas Corporation or (KOGAS), guaranteeing the supply of about 2.4 million tonnes of LNG per year. China & India are the other major importers of Qatar’s LNG. Daewoo Shipbuilding and Marine Engineering, Hyundai Heavy Industries and Samsung Heavy Industries are to reserve a majority portion of their LNG shipbuilding capacity for Qatar Petroleum through 2027.The future orders from Qatar are worth over 19 billion dollars. So how significant is this deal?
Without any doubt, this deal is massive, and for this we need to understand not just what lies behind it, but also how the future is likely to unfold.
Firstly, the shipping industry itself every year consumes roughly 20% of all the oil that is produced, as fuel for ships. In terms of ship 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.
Secondly, countries like Sweden & the UK have 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 a much better alternative, which without much fiscal investment, significantly reduces CO2 emissions.
Finally, meeting future environmental targets set by the IMO 2050 regulations, is impossible with the existing range of oil fuels. LNG as a fuel is the only way out, by utilising the existing engine technology, infrastructure and storage facilities, without incurring significant capital investment.
Of course, other than Qatar Petroleum, nobody else has been brave enough to show leadership, by making such a bold move. I therefore see this as a significant deal not just for LNG shipping, but for the entire shipping industry as a whole. Where does South Korea stand in the world's LNG shipbuilding industry?
Unlike other yards in the world, the South Korean newbuilding orderbook is highly concentrated, which means, over 50% is focussed on building LNG carriers alone. It makes sense, because they achieve the highest profit margins and the utilisation of yard capacity.
This ofcourse is a testament to the shipbuilding capability, that the yards have strategically developed to build advanced ships.
What makes the Big Three shipyards different from other competitors?
At the beginning of this year, off the total newbuilding orders, Chinese yards took about 34% of the orders and South Korean yards took about 30% of the total orders.
The south Korean yards have increased their market share from 27% last year to 30% this year, this is mainly driven by the order for LNG carriers. Before the QP deal, they only had enough work for 1.5 to 2 years.
The top south Korean yards were expected to see a drop in utilisation from 65% to 62% in 2020, however that has now considerably changed with the QP deal.
Before the deal, the outlook of the shipbuilding sector was rather gloomy due to the coronavirus pandemic. According to global market researcher Clarkson Research Service, global new shipbuilding orders are expected to decline by 23 percent this year from a year earlier. How can shipbuilders manage the situation?
The ship building industry is certainly facing another difficult year. The industries’ decade long surplus capacity is spiralling, as ordering reaches new lows. Uncertainty over the next generation of vessels, and the macro economic outlook are dampening ship owner’s appetite for ordering new vessels.
And then, the oversupply in almost all ship types, and uncertainty in future vessel demand and design, is the reason for this competition across 281 shipyards worldwide. Of the 281 yards, 64 are the most prominent and include the large South Korean yards. The downturn has therefore impacted them less, in comparison to the rest, as they account for 75% of the orderbook, and 50% of the global shipbuilding capacity.
Qatar seems to be moving full steam ahead with the expansion. Would this deal become a turning-point for the overall shipbuilding industry?
In 2027, when Qatar’s LNG production expands to produce 126 million tons, it will be an increase of 64%.
Which is why they have this ambitious ship building program, it is timed to meet this significant increase in production. Therefore, the ships have to be delivered, and ready for transportation, by the time they achieve peak production.
Like I said earlier, Qatar also has a cost advantage over other countries with lowest gas extraction costs. Oversupply of LNG over the next 2 years, is going to put massive pressure on the LNG companies in the United states & Australia, which operate without much govt support.
This will undoubtedly have consequential impact on the LNG market and trade routes going forward.
Some analysts are looking at the deal rather cautiously that when Shell signed orders with Samsung Heavy back in 2009, only one vessel worth 3 billion dollar was actually ordered during the past 10 years. What’s your view on this?
The world is considerably different from when the Shell deal took place, which was more than a decade ago. Since then, the world has seen fracking technology mature and shale gas boom in the west.
There has a been an increasing demand for renewable energy sources, as the technology to harness them becomes cheaper and the impact of trade-wars of course is already there for us all to see.
The pandemic we experience today, of course was totally unexpected, and could not have been predicted. However, QP has always had a long-term view and have usually followed through on their plans, while ensuring efficiency, and monitoring cost escalations, very closely.
What are the hurdles and opportunities for Korean shipyards?
Let me start by talking about the hurdles:
Firstly, world fleet is only expected to grow by 8% over the next 2 years. This is the lowest number in 17 years, along with weak newbuilding prices, which means very thin profit margins.
Secondly, in shipbuilding, scale becomes a disadvantage and liability, in times of low ship building activity. Earlier this year, the top 5 shipyards globally had secured orders worth 53% of their combined capacity, whereas the next 5 yards secured only 20% of their combined capacity.
Finally, the process of consolidation has certainly reduced surplus capacity & increased utilisation, but the smaller Korean yards are struggling to employ capacity.
Now when we talk about the opportunities, things are slightly different:
I have been visiting the big 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 started. What I have seen over the years is tremendous improvement in proficiency of workers and efficiency in executing newbuilding projects.
What has also improved significantly in South Korea, is not just the quality of ships built, but also the sophistications of ships that are delivered from these massive yards in South Korea. This trend must continue to remain competitive globally.
It seems COVID-19 has amplified the uncertainty in the markets. There are concerns over further waves in autumn and winter while scientists are racing to develop vaccine. Any advice on how Korean shipbuilders to survive during this pandemic?
COVID-19 has certainly brought with it tragedy, with sickness and death for many people across the globe. It has also had a massive impact on many industries and businesses, like hotels, airlines, tourism, retail, etc. It is but natural, that it will have knock-on effects on other industries, including shipping and ship building.
Our current situation is also viewed as a time of fantastic opportunity, by those who are brave enough to identify and pursue it.
While most shipyards in China and Europe have almost completely shut down due to social distancing and lockdowns. The Korean shipyards must continue showing their leadership, in how they have been efficient and effective, in dealing with the pandemic so far.
Let me know your thoughts.