U.S. Shale Gas Offers Hope for Struggling Shipyards Cutting Jobs

  • World may need 180 more vessels for transporting LNG
  • Asian shipyards have been forced to reform and seek bailouts

For the many shipyards in Asia that have been fighting to survive a slowdown by cutting jobs and seeking bailouts, rising demand for cleaner fuels is offering a glimmer of hope.

Contracts for vessels to transport liquefied natural gas are picking up amid an abundance of shale gas in the U.S. and increasingly stringent curbs on pollution. The world may need about 180 more vessels to move LNG, benefiting shipbuilders with expertise in this area such as Hyundai Heavy Industries Co., Daewoo Shipbuilding & Marine Engineering Co., and Mitsubishi Heavy Industries Ltd., according to Hana Financial Investment Co. in Seoul.

“Gas is going to be the bright spot for shipbuilders,” said Park Moo-hyun, an analyst covering the shipbuilding industry at Hana Financial. “Gas prices have fallen, making it an economical option to generate electricity and power the transportation industry. We might see a spurt of orders as early as in the second quarter.”

Shipments of LNG are projected to rise as much as 5 percent a year between 2015 and 2030 as more gas is used as fuel in power stations and the marine industry instead of dirtier coal and oil, according to Royal Dutch Shell Plc estimates. China and India will lead that demand, generating more jobs for Asian shipyards that have struggled with a drop in orders for offshore projects as oil prices have fallen by half over the last three years.

Asia is the largest destination for LNG, which is made by cooling natural gas until it becomes a liquid, making it suitable to be carried over long distances in specially built ships with insulated tanks. Globally, the three biggest shipyards, all based in South Korea, have as much as 80 percent of the LNG tanker market, according to Park.

Declining orders for other types of vessels and offshore rigs have led to losses or profit drops at shipyards including Hyundai Heavy, Samsung Heavy Industries Ltd. and Singapore’s Keppel Corp., forcing them to trim production capacity and cut more than 20,000 jobs just last year alone. Japan’s Mitsubishi Heavy is considering spinning off its shipbuilding operation, while Kawasaki Heavy Industries Ltd. has said it’s reviewing whether to continue the business.

Among the worst-hit, indebted Daewoo Shipbuilding, the world’s largest shipyard, is waiting for a second conditional lifeline from its two biggest creditors to complete work on pending orders and stay afloat. Korea Development Bank and Export-Import Bank of Korea already had pledged 4.2 trillion won ($3.8 billion) of funding support in the form of loans and debt-for-equity swap in 2015.

New Orders

In March, Hyundai Heavy agreed to build one LNG ship for a Norwegian customer, and Daewoo Shipbuilding won a 414.4 billion won order from a European client to build two LNG carriers, with an option for two more.

These add to orders for six such vessels that Hyundai Heavy and Daewoo Shipbuilding won last year and will provide some relief to shipbuilders that are undergoing reform.

“In the long term, there is definitely demand for LNG ships,” said Choi Gwang-shik, an analyst at HI Investment & Securities Co. in Seoul. “Because gas is a much cleaner fuel and cheaper, it will be used more broadly in many sectors such as fueling ships.”

Annual global LNG production capacity is set to expand to 377 million tons by 2019 from 272 million last year, according to Bloomberg New Energy Finance. The increased gas supplies have helped shipyards gain contracts to build small offshore facilities known as floating storage and regasification units, and the need for more tankers to carry the fuel from port to port.

Read more on how LNG is reshaping the politics of global energy

Still, it’s still too early to predict any meaningful recovery for shipyards even though demand for new ships looked to have bottomed in the fourth quarter of last year, according to Yuanta Securities Korea.

“While we have seen some demand coming back, the level of recovery felt by each shipyard will be very different,” said Lee Jae-won, a shipbuilding analyst at Yuanta Securities. “There are still a lot of LNG tankers on order and that would mean any new orders will still be limited.”

What’s helping vessel orders, in addition to increased gas demand, may simply be wear and tear. Some 126 ships started to cross the 20-year mark about three years ago, making them inefficient for deployment, according to Hana Financial.

“The natural gas era may bring about the LNG renaissance,” Hana Financial’s Park said. “The need for more efficient LNG ships has become greater and shipbuilders that can deliver this will benefit the most.”