![QatarEnergy's operating facilities in Ras Laffan Industrial City on March 2 [AFP/YONHAP]](data:image/gif;base64,R0lGODlhAQABAIAAAAAAAP///ywAAAAAAQABAAACAUwAOw==)
QatarEnergy’s operating facilities in Ras Laffan Industrial City on March 2 [AFP/YONHAP]
A prolonged Iran war is expected to weigh on liquefied natural gas (LNG) carrier orders for Korean shipbuilders as pressure grows on Qatar’s energy sector, while supporting broader shipbuilding demand as longer shipping routes strain global vessel capacity, according to industry sources.
Earlier this month, Iranian strikes on Qatar’s Ras Laffan industrial complex disrupted about 12.8 million tons of LNG capacity, roughly 17 percent of the country’s total exports. In response, QatarEnergy announced an indefinite halt to LNG production and warned it may invoke force majeure on long-term supply contracts for up to five years, including those with Korea.
A combined 60 LNG carriers tied to Qatar currently sit in shipbuilders’ backlogs, from HD Hyundai, Hanwha Ocean and Samsung Heavy Industries.
Shipping firms are also losing out during the conflict, the resolution of which seems to be far off. Restrictions on transit through the Strait of Hormuz remain in a firm deadlock. While some countries are attempting to negotiate safe passage with Iran, normal shipping routes are unlikely to resume without naval escorts.
A limited downside for LNG carriers, upside for broader shipbuilding
LNG carriers are generally delivered in tandem with the completion of liquefaction facilities, as shipping demand only materializes once production capacity comes online. A halt in QatarEnergy’s production disruption could instigate risks that could lead to delivery delays or worse, cancel vessels that have already been ordered.
However, analysts view the risk as manageable, as the Middle Eastern market share takes up a smaller portion than expected. Nineteen percent of LNG carrier demand is linked to liquefied plants already under construction, but just 2.6 percent for projects in the front-end engineering design stage in the region, and virtually none at the proposal stage, according to a Samsung Securities report.
“Across all stages of development, the Middle East makes up only 6 percent of total LNG carrier demand, compared to 66 percent for North America,” the report said. “On the contrary, continued instability in the Middle East could impede the expansion of North American LNG projects. Korean shipbuilders are seen as having a competitive edge over Chinese rivals in these markets, potentially positioning them to benefit from shifting demand patterns.”
Outside the LNG carriers, the prolonged war translates to more bullish gains for the industry, as strained capacity leads to a surge in vessel orders, according to Prof. Kim Myung-hyun at Pusan National University’s Department of Naval Architecture and Ocean Engineering.
“As flows through the Strait of Hormuz become constrained, more tankers will be required to move oil via alternative routes, including longer or indirect shipping paths,” Kim said. “This is already prompting increased vessel orders, with major shipowners reportedly stepping up tanker investments.”
More than ever, Korean shipbuilders are now focusing on high-value vessels such as LNG carriers, very large crude carriers and ultra-large container ships.
For example, global orders for crude oil tankers have surged to 91 vessels so far this year, according to data from Britain-based maritime analytics firm Clarksons Research, a sharp surge from just five orders placed during the same period last year. The figure already accounts for roughly two-thirds of the 143 tankers ordered in all of last year.
The increase is being driven by replacement demand as aging vessels reach the end of their service life. Tankers are typically phased out after 15 to 20 years, and many ships ordered during the prior shipbuilding boom between 2003 and 2008 have begun entering replacement cycles since last year.
A very large LNG carrier built and delivered by HD Hyundai Heavy Industries [HD KOREA SHIPBUILDING & OFFSHORE ENGINEERING]
Order surges are expected to be expedited further amid the war, as traffic through the Strait of Hormuz is halted. With around 20 percent of global crude shipments passing through the chokepoint, the disruption is forcing tankers to reroute around the Cape of Good Hope for the time being, a historical key waypoint for ships traveling between Europe and Asia. The longer sailing distances are expected to increase demand for additional vessels with longer ranges.
However, recent tanker orders have been heavily concentrated in China. Of the 91 crude oil tankers ordered globally this year, China secured 69 vessels, which is about 75 percent of the total, while Korea accounted for the remaining 22 orders.
Freight rate surge masks profit pressure
A further surge in freight rates is expected to be implemented from April, according to corporate sources. However, the price hike does not necessarily translate to better profits for shipping companies. In fact, prolonged disruptions along key routes are likely to hurt earnings, as operating costs continue to climb, including bunker fuel prices — now more than double previous levels — that add to already mounting cost pressures.
Although freight rates are rising overall, the surge is largely driven by higher costs rather than stronger demand, pointed out a source from a shipping company who requested anonymity. As a result, shipping companies are struggling to pass on rising expenses, including fuel costs, to customers.
“Higher freight rates may offset some of the cost increases, but weak demand and intense competition are limiting carriers’ ability to raise prices,” he said. “Even if rates stay high into the second half, it shouldn’t be seen as the start of a sustained upcycle.”
The source added that many companies are likely to slip into losses from April, as rising operating costs outweigh the profits from higher freight rates.
The fragmented market also contributed to the prevention of a drastic hike in freight rates. To avoid the Strait of Hormuz, carriers are rerouting vessels or using offshore transshipment hubs such as Khor Al Fakkan in the United Arab Emirates. This often means unloading cargo, moving it overland and reloading it onto another vessel. While this keeps the goods moving, it adds extra costs, extends delivery times and adds to congestion at alternative ports.
At the same time, ships that once served Middle East routes are being redeployed elsewhere, particularly on India-bound routes. This shift has created excess capacity in those markets, putting downward pressure on freight rates on the China-India route.
BY LEE JAE-LIM [[email protected] ]
