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Hyundai Heavy to Lift Prices for fuel-efficient vessels on Demand as China Shipyards Falter

Hyundai Heavy Industries shipyard in Ulsan, about 410 km (255 miles) southeast of Seoul. REUTERS/Lee Jae-Won

(Bloomberg) — Hyundai Heavy Industries Co., the world's biggest shipbuilder, plans to raise prices as demand for fuel-efficient vessels helps it skirt the global supply glut hurting Chinese yards.

Orders may exceed this year's target of $11.3 billion with about 60 percent of that already met, Ka Sam Hyun, executive vice president in charge of ship sales, said in a July 3 interview. The Ulsan, South Korea-based company plans to raise prices in the second half, he said.

"The big focus right now is on fuel efficiency," Ka said. "At a time when prices have fallen so much, shipping lines seem to be willing to pay a bit more to get better performing ships on time. This is why the top tier shipyards will benefit."

Hyundai Heavy's optimism contrasts with gloom over Chinese shipbuilders. An industry group last week said a third of China's yards may shut down in about five years as they struggle to win orders. South Korean yards, which have dominated the construction of mega ships, are benefiting as lines including A.P. Moeller-Maersk A/S order bigger, fuel-efficient vessels.

China Rongsheng Heavy Industries Group Holdings Ltd., the country's biggest yard outside state control, slumped to a record in Hong Kong trading on July 5 after saying it's seeking government financial support as orders and prices decline. The company also said it may post a loss in the first half.

Order Book

About 483 shipyards in China won $10.5 billion worth of orders in the first six months of this year, while 94 builders in South Korea won $18.5 billion, according to Clarkson Plc, the world's biggest shipbroker. Chinese yards, who dominate bulk- carrier construction, won 21.2 million deadweight tons of orders in the first half compared with 16.6 million tons for Korean companies, according to Clarkson.

The order book at China's shipbuilders fell 23 percent at the end of May from a year earlier, according to the China Association of National Shipbuilding Industry. One-third of the nation's yards that face the danger of closing have failed to get orders "for a very long period of time," Wang Jinlian, the group's secretary general, said July 4.

The entry of the Philippines as the fourth world's largest shipbuilder would be another threat to china's Shipbuilding Industry. The Philippine economic growth in the first quarter of 2013 surpassed China's economy. Austral Shipbuilder opened its shipyard in Balamban Cebu, Philippines on January 2013 eyeing bulk orders from the Philippine Government.

Hyundai Heavy, which had failed for eight years to win orders from China, signed a contract in May to deliver the world's biggest container ship to China Shipping Container Lines Co. Hyundai Heavy beat Chinese builders for the $683 million deal for five vessels that can each carry 18,400 20-foot boxes.

Sea Conditions

The new ships will use an engine that can automatically control fuel consumption to suit speed and sea conditions, helping improve fuel efficiency while reducing emissions and noise. Delivery will start in the second half of next year.

"We see more orders for bigger ships made by Korean companies," Sarah Wang, a Shanghai-based analyst at Masterlink Securities Corp., said. Shipping lines "require higher levels of technology and fuel efficiency to cut costs."

Since 2010, yards in South Korea delivered all except two of the 144 vessels that can carry more than 10,000 boxes, according to Clarkson.

Hyundai Heavy also benefited from demand for ships to haul liquefied petroleum gas, winning orders for 11 of these vessels this year, Ka said. Each ship has a capacity of more than 60,000 cubic meters. The company's total order target of $11.3 billion for this year includes contracts for its Hyundai Samho Heavy Industries Co. unit and is higher than the $8.6 billion it won last year.

'Still Hungry'

"We are still hungry," Ka said. "We have invested in new technologies and improving existing ones to cut fuel burned by ships. That's because during hard times, shipping lines become more interested in cutting costs whichever way they can."

Chinese shipyards are faltering as orders have tumbled because of the global excess of commodity, oil and container ships. The surplus fleet and a global economic downturn damped cargo rates and deterred owners from ordering more vessels.

The yards face labor unrest as they pare employees. Rongsheng said some workers who were "made redundant" formed a blockade outside the headquarters of the group's production base in Nantong on July 2. The company has sought financial support from the government even as it holds talks with banks for renewing existing credit facilities.

"The Chinese shipbuilding industry is still facing unprecedented challenges," Rongsheng said in a statement. "Demand in the global shipbuilding market has continued to decline and prices for new vessels have failed to rebound."

Chinese yards are trying to offset the plunge in new vessel prices and orders by expanding their oil-rig business. Rongsheng announced in October its first order to make a tender barge while rival Yangzijiang Shipbuilding Holdings Ltd. got its first rig contract in December.

"A lot of the shipyards in China are now shifting their focus on offshore because they can no longer survive by building ships," Park Moo Hyun, an analyst at E*Trade Securities Korea in Seoul, said. "We're going to see a big exodus to offshore from shipbuilding in China. This could be a very good opportunity for Korean shipyards."

Copyright 2013 Bloomberg.

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