Chinese shipbuilders are mounting a challenge against leading South Korean players on liquefied natural gas carriers, though their race to expand production amid the Ukraine war is raising concerns of a supply glut down the line.
China State Shipbuilding Corp. (CSSC) will start building a roughly 20 billion yuan ($2.76 billion) shipyard in the city of Dalian in November through local unit Dalian Shipbuilding Industry (DSIC).
The goal is to complete construction at the end of 2024, a source familiar with the matter said. State-owned port developer China Merchants Group has ordered a total of four large LNG carriers from CSSC.
DSIC so far has mainly focused on container ships and bulk carriers. It will now produce LNG carriers and other high-value-added ships at the new facility, using cutting-edge technology to boost manufacturing efficiency.
Hudong-Zhonghua Shipbuilding (Group), another CSSC subsidiary, is slated to finish building an estimated 18 billion yuan shipyard in Shanghai by the end of 2023. In April, the company signed contracts to produce six LNG carriers for Japan’s Nippon Yusen for over 8 billion yuan. It has received orders for more than 30 of these vessels in 2022 alone, pushing it to expand capacity.
China Merchants Heavy Industry and Yangzijiang Shipbuilding had also obtained the necessary licenses to build large LNG carriers by October, raising the number of Chinese companies capable of manufacturing such ships to five.
South Korea currently leads the world in producing LNG carriers, with its top-three players building 68 of the 78 vessels ordered worldwide in 2021, according to Clarksons Research.
They have responded to the rise of Chinese players with increased spending of their own. Hyundai Heavy Industries will increase capital investment by over 20% in 2022 to around 440 billion won ($309 million). Samsung Heavy Industries plans to increase investment 2.2 times, though its overall spending is still relatively low, and Daewoo Shipbuilding & Marine Engineering expects to boost investments nearly 30%. All three are slated to fix and expand their docks, in addition to other updates.
Global ship orders are rising to the extent of far surpassing last year’s figures. One big factor driving these trends is Russia’s invasion of Ukraine.
Europe had relied on Russia for roughly 40% of its natural gas. But since the invasion, European countries have been weaning themselves from Russian gas imported via pipelines and turned to gas imported by sea from the Middle East and Southeast Asia.
Plans by Qatar’s state-owned energy company to boost LNG production is another huge factor. QatarEnergy is ordering more than 100 new LNG carriers in deals worth roughly $20 billion. Most of the contracts went to South Korean shipbuilders, with Chinese makers receiving a portion as well.
The increase in orders from LNG producers and consumers is fueling demand for carriers. However, Japan has been overshadowed by Chinese and South Korean peers, who boast superior cost competitiveness.
Crowded out of that market, companies such as Imabari Shipbuilding and Japan Marine United look to distinguish themselves by developing vessels that can run on relatively eco-friendly fuels. These include LNG, which has low carbon emissions, as well as clean-burning hydrogen and ammonia.
The shipbuilding market as a whole peaked in 2011, when orders placed before the 2008 financial crisis were completed, and has since slumped amid a supply glut. The ascent of Chinese players has driven a price war in container ships and bulk carriers, while the recent global commodities rally has pushed up the cost of steel sheet, a crucial material for shipbuilders.
Chinese and South Korean companies are counting on highly profitable LNG tankers to chart a recovery, while their Japanese counterparts are looking to LNG as a fuel instead.
But by the time much of the current batch of orders is finished in 2024, the world could be look at a totally different environment — including the situation in Ukraine. The shipbuilding push in China thus could create another supply glut that sinks the market again.
Source: Nikkei