"Chinese Shipbuilders Absorb Middle East-Driven VLCC Demand" — China Dominates General-Purpose Shipbuilding Market as South Korea Responds With High-Value Vessels and U.S. Cooperation

Chinese Shipbuilding Nears 85% Global Market Share by First-Quarter Order Volume
South Korean Yards Focus on High-Value Vessels, Delivering Clear Earnings Growth
Deepening South Korea-U.S. Shipbuilding Cooperation Expands Seoul’s Influence in U.S. Naval Market

In the first quarter of this year, China’s shipbuilding output and order volume expanded sharply. As prolonged conflict in the Middle East drove a surge in demand for very large crude carriers (VLCCs), Chinese shipbuilders leveraged overwhelming price competitiveness to consolidate control over the general-purpose commercial vessel market. In response, South Korea’s shipbuilding industry is seeking to adapt to the rapidly shifting market landscape by strengthening orders for high-value vessels and deepening shipbuilding cooperation with the United States.

Chinese Shipbuilding Expands Rapidly on Price Competitiveness

According to the China Association of the National Shipbuilding Industry on the 12th, China’s shipbuilding output reached 15.68 million deadweight tons (DWT) in the first quarter, up 46% from a year earlier. The figure accounted for 57.3% of total global shipbuilding output. New orders surged 195.2% over the same period to 59.53 million DWT, giving China a global market share of nearly 84.9% by order volume. China’s state-run Global Times also asserted that the country ranked first in new orders for 15 of the world’s 18 major vessel categories. In particular, China reportedly secured market shares exceeding 90% in very large crude carriers, large car carriers, bulk carriers and large container ships above 10,000 TEU.

The rapid rise of China’s shipbuilding industry has been underpinned by the war involving the United States, Israel and Iran. With the Strait of Hormuz effectively blocked and crude transport routes lengthening, demand for VLCCs has surged. HSBC said in a report that new tanker contracts accounted for 32% of global ship orders in the first quarter, while VLCC orders reached 75 vessels, marking the highest quarterly level on record. Against this backdrop, ship prices have followed a clear upward trajectory. As of the end of April, the Newbuilding Price Index compiled by Clarkson Research, the British shipbuilding and shipping market analytics firm, stood at 183.41, up 1.34% from 182.07 the previous month and 37% from 133.76 in April 2021.

China has targeted the overheated market with its price competitiveness. Industry estimates put the construction price of a VLCC at Chinese shipyards at roughly $10 million below that of South Korean yards. A state-level supply chain, financing and equipment structure built on low labor costs and a low-cost operating system has produced significant cost savings. China benefits from lower raw material procurement costs because state-owned steelmakers and shipyards are closely linked, while government-backed financing reduces the burden of refund guarantees and ship-financing costs. In addition, with China State Shipbuilding Corp. (CSSC) at the center, China has internalized engines, equipment and block production, securing economies of scale. Its standardized production system focused on large commercial vessels has further lowered construction costs while shortening delivery times. As ship prices and freight rates have risen in tandem since the outbreak of the Middle East war, shipowners seeking to secure vessels quickly and cheaply have had little choice but to flock to Chinese yards.

South Korea’s Competitiveness in High-Value Vessels

As the competitive structure of the global shipbuilding industry shifts rapidly around China, South Korean shipbuilders are seeking a way forward through high-value vessels. HD Hyundai Heavy Industries, a subsidiary of HD Korea Shipbuilding & Offshore Engineering, won an order earlier this year from a U.S.-based shipping company for four liquefied natural gas (LNG) carriers worth $1 billion, while Hanwha Ocean and Samsung Heavy Industries have also secured major LNG carrier contracts. LNG carriers, which must transport LNG safely at an ultralow temperature of -162°C, require advanced cargo containment and boil-off gas control technologies, areas where South Korean shipbuilders are still assessed to hold a strong advantage. In fact, South Korea’s three major shipbuilders — HD Korea Shipbuilding & Offshore Engineering, Hanwha Ocean and Samsung Heavy Industries — hold about 70% of the global LNG carrier market.

South Korean companies are also standing out in the ultra-high-value offshore plant market, including floating production, storage and offloading (FPSO) facilities. FPSOs are massive offshore facilities that produce, process and store crude oil from deepwater fields, requiring a combination of design, engineering and deepwater operating technologies — a market China has yet to dominate. Hanwha Ocean is currently regarded as a company with particular strength in this segment. The company won Petrobras’ FPSO P-79 project for $2.3 billion and is scheduled to deliver it this year. It is also reviewing plans to develop a next-generation standardized FPSO model and establish a local production base in Brazil.

Eco-friendly vessels are also emerging as a core axis of industrial restructuring. As the International Maritime Organization (IMO) tightens carbon regulations, demand is rising rapidly in the shipping market for next-generation eco-friendly vessels, including methanol- and ammonia-powered ships and liquefied carbon dioxide (LCO2) carriers. Samsung Heavy Industries is accelerating the development of ammonia-fueled very large ammonia carriers (VLACs), while HD Korea Shipbuilding & Offshore Engineering is focusing on securing methanol and ammonia dual-fuel engine technologies. This clearly differentiates South Korean shipbuilders from Chinese rivals that still rely heavily on price competitiveness in general-purpose commercial vessels.

With the global shipbuilding industry effectively divided between China-centered general-purpose markets and South Korea-centered high-value markets, South Korea’s three major shipbuilders are all posting strong results. HD Korea Shipbuilding & Offshore Engineering recorded revenue of about $5.48 billion and operating profit of about $913 million in the first quarter. These figures were up 20.2% and 57.8%, respectively, from a year earlier. Over the same period, Hanwha Ocean’s operating profit rose 78% to nearly $297 million. Samsung Heavy Industries posted revenue of about $1.95 billion and operating profit of about $184 million. Revenue increased 16% from a year earlier, while operating profit surged 121%.

Entry Into the U.S. Naval Market Gains Momentum

The shipbuilding cooperation framework with the United States, led by the MASGA project — short for “Make American Shipbuilding Great Again” — is also cited as a factor strengthening South Korea’s competitiveness. MASGA was formally proposed during South Korea-U.S. tariff and investment negotiations in July and August last year, and later evolved into a core industrial cooperation agenda between the two countries. According to The Wall Street Journal, South Korean negotiators at the time presented the U.S. side with a $150 billion investment and cooperation plan for the American shipbuilding industry. The project included investment in U.S. shipyards, supply chain restructuring, local workforce training, naval vessel maintenance, repair and overhaul (MRO), and shipbuilding cooperation.

Since then, South Korea’s three major shipbuilders have moved into U.S. Navy warship programs one after another, expanding their presence in the local defense industry. A representative example is the partnership between HD Hyundai and Huntington Ingalls. The two companies agreed to jointly participate in bidding for the conceptual design of a next-generation logistics support vessel ordered by the U.S. Navy. The structure calls for warships to be built at Huntington Ingalls’ shipyards based on HD Hyundai’s design drawings, key equipment exported to the United States and shipbuilding know-how. The two sides have submitted a joint proposal for the bid and signed a memorandum of agreement (MOA) covering investment in joint production bases in the United States and a block-module supply structure.

Samsung Heavy Industries has also entered the U.S. next-generation logistics support vessel project together with NASSCO, a subsidiary of General Dynamics, and plans to gradually expand cooperation in government-ordered vessels and commercial ships. Hanwha Group has participated through Hanwha Philly Shipyard in Philadelphia in the conceptual design phase of the U.S. Navy’s next-generation frigate program. The project forms part of the Golden Fleet initiative, with the core objective of building a new frigate based on the Legend-class design through an investment of $25 billion.