[Friday Story] Low-Bid Contracts Are a Thing of the Past... Bargaining Era for Shipping Rates

Growing Negotiation Power in Shipbuilding
Order Backlog Exceeds 2 Years and 6 Months
Tense Price Tug-of-War with Shipowners

Hyundai Heavy Industries dock view.

[Asia Economy Reporter Choi Dae-yeol] "When the order backlog exceeds two and a half years, negotiations on ship prices tend to favor the shipyards. The tug-of-war with shipowners has become tense."

Kang Jae-ho, Executive Director in charge of sales at Hyundai Heavy Industries, the world's largest shipbuilder, said that now is a situation where they can sufficiently assert their voice in negotiations with shipowners. This was hard to imagine even in the second half of last year, when the industry was hit hard by COVID-19. However, this situation changed dramatically within half a year due to expectations of economic recovery and high oil prices driven by demand recovery.

Since 2013, when global shipowners shrank and ship orders suddenly stopped, the practice of 'low-price orders' that had held back the shipbuilding industry for eight years is collapsing. With container ship freight rates soaring and new ship demand rapidly increasing due to environmental regulations at the International Maritime Organization (IMO) level, the positions of shipowners and shipbuilders are reversing.

The shipbuilding industry is a typical order-based industry where shipowners who need ships provide estimates, and shipbuilders evaluate prices and conditions to make contracts. Until now, due to lack of work, shipbuilders had no choice but to accept even absurd prices offered by shipowners reluctantly.

However, since the end of last year, new orders have increased, allowing shipyards to accumulate work. Thanks to a sufficient order backlog, they have become selective, even rejecting orders from shipowners who offered low prices. According to Clarkson Research, a shipbuilding and shipping market analysis agency, the new ship price index stood at 132.7 this month, steadily rising since bottoming out at 125.1 in November last year. This is the highest level in over six years since mid-2015.

A view of a shipyard in Geoje

The shipbuilding industry expects to break away from the long-standing low-price order practice as order volumes accumulate this year. Low-price orders cause a chain reaction of damage from large shipyards to small subcontractors, shaking the entire shipbuilding industry. After the most recent boom in the mid-to-late 2000s, some large companies started low-price orders as the shipbuilding market declined, which eventually spread throughout the industry. At that time, STX collapsed due to low-price orders combined with internal problems, and other large shipbuilders suffered poor performance for several years.

A representative from Korea Shipbuilding & Offshore Engineering said, "There are almost no slots (spaces for shipbuilding work) left until 2024, but we have received many inquiries for various ship types, including medium-sized container ships with easy port access. If ship prices do not rise to the desired level, there is no reason to rush contracts."

However, the industry expects it will take another two to three years to get through this lean period. Shipbuilding usually takes about two years after the final contract signing, including design work. Although it varies case by case, most clients pay more as delivery approaches, so sales will not immediately increase nor will cash flow improve significantly.