Korean shipbuilders hold off China threat on high-value orders
South Korea is holding off China's challenge to its spot as the world's No. 1 shipbuilding nation by building pricier ships such as liquefied natural-gas carriers. Shares of Korean shipbuilders are rising as a result. Park Hyoung Ryol, who manages about $150 million at Consus Asset Management Co. in Seoul, says China's booming economy will create more demand for ships than its growing yards will take away. Chinese yards are catching up but people will keep ordering LNG carriers and oil tankers from the experienced yards,'' said Park. It's devastating if those spring a leak.'' He owns shares of Hyundai Heavy Industries Co., the world's biggest ship maker, and Samsung Heavy Industries Co., the second largest. China last year overtook Japan as the world's second-biggest shipbuilding nation as new orders more than doubled by tonnage. South Korea, whose contracts grew 75 percent, remained No. 1. Shares of Hyundai Heavy have surged 107 percent this year, Samsung Heavy is up 55 percent and Hyundai Mipo Dockyard Co., the world's No. 4 shipbuilder, has jumped 83 percent. Their gains have helped the nation's benchmark Kospi Index reach new highs. China imports more aluminum, steel, copper and coal than any other country, and all of those commodities travel by ship. The world's most populous nation accounts for one-third of the increase in global oil demand since 2000. Gas will account for 5.3 percent of the nation's energy needs by 2010, from 2.8 percent in 2005, China's top economic planning body said in its latest five-year energy plan. The country expects to import 20 million tons a year by 2015 to help curb harmful emissions. Korean yards grabbed 79 percent of LNG-carrier orders last year, according to the Korea Shipbuilders' Association, which cited figures from Lloyd's World Shipbuilding Statistics. Overall, Korea accounted for 40.9 percent of all new orders for ships by tonnage in 2006, up from 35.2 percent in 2005. Japan accounted for 22.9 percent last year, down from 26.9 percent in 2005, while China rose to 25.4 percent from 17.3 percent. Shipowners in Greece, the biggest ship-operating nation, spent a record $3.2 billion on new vessels in April as companies such as Athens-based Prime Marine ordered coal and LNG carriers. Last year, shipowners ordered a record $105.5 billion worth of new vessels, according to London-based Clarkson Plc, the world's biggest shipbroker. Korean companies won about half of the total by value. Still, the presidents of the six biggest Korean yards are concerned about Chinese competition. They met with Commerce Minister Kim Young Ju on April 16 to discuss ways to break away from the Chinese pursuit'' and signed an agreement with state-run utility Korea Gas Corp. to jointly develop LNG-carrier technology, according to a statement from the ministry. Investors such as Kim Jae Dong at Korea Investment Trust Management Co. in Seoul are more focused on the recent share-price jumps than the threat from China. These stocks may have overshot a little,'' said Kim, who oversees about $5 billion at Korea Investment. It will be hard for them to outperform much from here.'' Hyundai Heavy shares are valued at 18 times estimated earnings, Samsung Heavy is at 39 times and Ulsan-based Hyundai Mipo 21 times. That exceeds the average of 14 times earnings for the Kospi index. Consus Asset's Park said he stopped buying shipbuilders when Hyundai Heavy hit 200,000 won and then decided prices were too high to buy more. The shares closed above that level for the first time on April 4. Ulsan, South Korea-based Hyundai Heavy said first-quarter profit surged to a record 371 billion won ($402 million) on higher ship prices. Seoul-based Samsung Heavy, which has the world's biggest backlog of LNG carriers, said its first-quarter profit surged almost sixfold from a year earlier to 90.2 billion won. LNG carriers are the most expensive type of cargo ship. Based on first-quarter new orders, they are worth $3,900 per compensated gross ton, an industry measure of ship size and the time and materials required for production. That compares with bulk carriers, which are about $2,091 per compensated gross ton, according to figures from Clarkson. To keep gas in a liquid state, the temperature of an LNG carrier's tank can be maintained as low as minus 163 degrees Celsius, while the main features of a bulk carrier are large, empty spaces for piling in commodities such as coal or grains. Chinese shipyards led by state-owned China State Shipbuilding Corp. are grabbing market share with lower-priced ships. They took about 63 percent of bulk carrier orders in the first three months of 2007, according to Clarkson. Chinese companies aim to double output through 2015. Beijing- based China State Shipbuilding, the country's biggest commercial maker of ships, plans to create the world's largest yard by then, with 14 percent more capacity than Hyundai Heavy's. Guangzhou Shipyard International Co. said last month first- quarter profit surged fivefold after it expanded capacity. Yangzijiang Shipbuilding (Holdings) Ltd. raised S$943.5 million ($621 million) in its initial public offering last month to fund new facilities. It's inevitable that China will catch up,'' said Kim Seung Woo, who helps manage $400 million at Macquarie-IMM Investment Management Co. in Seoul. They could overtake Korea around 2010. Korean shipbuilders are taking steps to prepare for that.'' Korean shipbuilder shares are still cheaper than their Chinese rivals. China's Guangzhou Shipyard, the smaller of the country's two publicly traded shipbuilders, trades at 34 times estimated earnings. Singapore-listed Yangzijiang Shipbuilding is valued at 39 times. A 128 meter-tall crane known as the Tears of Malmoe'' towers above the Hyundai Heavy shipyard in Ulsan -- a reminder of the fall of European shipbuilders, who had dominated the industry until the 1980s. Hyundai Heavy bought it for $1 from the now-gone Kockums AB shipyard in the Swedish city of Malmoe in 2002. Residents of the city are said to have cried as they watched it depart, said Kim Miri, a Hyundai Heavy spokeswoman. Korea Investment's Kim isn't expecting the same thing to happen in South Korea any time soon. Korean companies will be affected by China in the next shipbuilding cycle,'' he said. It's a long-term concern, but not one that's affecting my investment decisions.''