Korean Shipbuilding Industries
Bull Driver No. 3: Bipolarization
21 May 2008 - 9 pages
* Slow deliveries again - One reason for the recent rally of tanker and bulk
carrier freight rates is the increasing delays in ship delivery. In 1Q08,
only 5.7mn DWT bulk fleet were delivered vs. 6.2mn DWT in 1Q07 (08 delivery
schedule at 30.4mn DWT). 7.0mn DWT tankers were delivered in 1Q08 vs. 9.1mn
DWT in 1Q07 (08 delivery schedule at 40.5mn DWT).
* Chinese yards, a source of major slippage - Chinese shipbuilders are
supposed to deliver 28mn DWT vessels in 2008, but delivered only 4.0mn DWT in
1Q08. We expect increased uncertainty over delivery in 2009 at 51mn DWT
delivery schedule, considering current slow operations of Chinese yards.
* Huge opportunity costs to ship owners - Freight rate hikes imply increasing
opportunity cost to ship owners from late ship delivery. For example, a
Capesize bulk carrier contracted in 2005 at U$63mn, if delivered on time,
could generate U$64mn charter income pa. If ship delivery is delayed by one
year, ship owners' opportunity cost would amount to new building prices.
* Bipolarization - Leading shipbuilding companies get better contract terms
and prices than in the past. Meanwhile, second-tier and new yards face more
difficulties with increasing delays of their ship delivery. We expect the
strong freight rates will drive further bipolarization of yards globally.
* Strong fundamentals supported - In 2008 Korean shipbuilders face more
favorable ground, stronger freight rates and limited competition from its
peers. We maintain our positive stance on the sector with our Buy (1M) rating
on Mipo and HHI.
B u l l D r i v e r N o . 3 : B i p o l a r i z a t i o n
This note is the third in a series highlighting key bull drivers for the
Korean shipbuilding sector.
One of the reasons for the recent hike of tanker and bulk carrier freight
rates is the increasing delays of ship delivery, especially from Chinese
yards. The rate hikes imply increased opportunity costs to ship owners.
For example, a Capesize bulk contracted at U$63mn in 2005, if
delivered on time, could generate U$64mn pa charter income. If
delivery falls one year behind schedule, ship owners' opportunity cost
amounts to the shipbuilding price. The rate hikes will accelerate
bipolarization of shipyards, in our view. Leading players get more
favorable contracts in prices and terms, while small and new yards could
face financial and operation challenges given their increasing delays,
cost hikes, and weaker orders.
S l o w D e l i v e r i e s A g a i n
Stronger freight rates despite weak seasonality
Despite weak seasonality, tanker and bulk carrier rates showed
exceptional strength. Clearly, stronger than expected demand growth
was the driver, but we believe slower delivery of ships was another driver. |
