SOUTH KOREA: An Introduction to Shipping

South Korea: Shipping 

CHOI & KIM 

In the face of the economic turmoil in the second half of 2022, South Korean container shipping companies and bulk shipping companies are now bracing themselves for a significant slow-down in business. They had until recently expected to report positive earnings surprises into 2023. Logistics is back on track as the pandemic disruptions in the supply chain have subsided, but the global economy is trapped in greater instability as the US Federal Reserve has taken a series of giant steps. Having been ranked fourth in carrying capacity by DWT for years, the South Korean shipping industry is extremely sensitive to global economic climates. Nevertheless, no financial crisis seems to be looming over Korean shipping lines, which have amassed cash during the short-lived boom brought by the pandemic.

Two South Korean shipping companies had been members of the Alliances - Hanjin Shipping and HMM - until 2017 when Hanjin went bankrupt, leaving only HMM, which has since maintained its membership status. Hanjin’s fleet was divided and sold off to domestic and foreign buyers, but its bankruptcy trustee is still distributing the remaining assets to creditors. HMM mainly operates containerships and has benefited more than anybody else from the high freight rates fuelled by the pandemic since 2020. The company has held onto the goal of expanding its fleet to 1.2 million TEU by 2026 from the 817,000 TEU today according to its longer-term strategy. However, it remains to be seen whether HMM will stick to the strategy in the face of the rapid change in market conditions. Discussions are underway about the privatisation of HMM, which is currently under the management of Korea Ocean Business Corporation (KOBC, a state-owned company), as a way to restore the company’s vitality. KOBC recently announced for the first time its long-term plan to privatise HMM by 2025.

The high freight rates during the 2020-2021 period were not only a blessing because they attracted the attention of the Korea Fair Trade Commission (KFTC) to the shipping industry. The KFTC suspected that shipping lines were making excessive profits by, for example, adjusting numbers of carrying ships and colluding in the fixing of freight rates in the midst of the pandemic. The KFTC investigated the practices that the shipping industry has used since 2003. As a result, the antitrust watchdog levied a pecuniary penalty of USD 68 million on a number of intra-Asia carriers (12 South Korean and 11 foreign ones) in January 2022, which was followed by a pecuniary penalty of USD 57 million on carriers operating between South Korea and Japan (14 Korean and one foreign ones) in June 2022. The shipping companies are having a hard time understanding why the long-standing practices that had been tolerated for at least 15 years were suddenly treated and regulated as violations of the Monopoly Regulation and Fair Trade Act. In addition, the country’s Shipping Act basically allows shipping companies to collude in fixing of freight rates. However, the KFTC deems that the shipping companies violated the procedural requirements for freight collusion under the Shipping Act, and there is evidence of unfair trade acts, such as shipping companies penalising shippers who opposed their freight rate fixing without infringing on other shipping lines’ business. This case has now been referred to the South Korean court.

The situation of the South Korean shipbuilding industry in 2022 can be described as poverty amid plenty. In the first half of 2022, South Korean shipbuilders won more new orders for LNG carriers and container ships than ever. Behind this triumphant performance are the war in Ukraine and the environmental regulations by the IMO and the EU. The IMO intends to implement the Energy Efficiency Existing Ship Index (EEXI) and the Carbon Intensity Indicator (CII) in 2023, and the EU plans to introduce the Emission Trading System (ETS) in 2024. The South Korean shipbuilding industry has traditionally been very competitive in the construction of LNG carriers and containerships, and there is still strong demand for new vessels going forward. However, the growth in orders has not led to improvements in the finances of the shipbuilders due to the increasing ship construction costs (eg, rising steel prices and labour costs), as well as COVID-19 operational disruptions. The big three shipbuilders of the country (HHI, SHI, and DSME) posted a combined loss of KRW 1 trillion (USD 715 million) in the first half of this year.

The privatisation of DSME is still underway. HHI’s attempt to merge with DSME was thwarted by the European Commission’s objection in January 2022. There was an announcement in September 2022, however, that Hanwha Group (a South Korean business group that provides energy and defence solutions) intends to acquire DSME. Some 22 years have passed since DSME was placed under the management of Korea Development Bank (KDB), and the shipbuilder has incurred one loss after another. Hanwha Group’s plan is highly likely to succeed.

The Serious Accidents Punishment Act (SAPA), which went into force in January 2022 in South Korea, has alarmed the CEOs of South Korean companies including those in the shipping industry. Under the Act, the CEO or the chief safety officer (CSO) of a company who fails to take measures to build an adequate health and safety system and thereby causes a serious accident (at least one death or two injured people whose treatment takes six months or more) will face criminal prosecution. By July 2022, when seven months had passed since the enactment of the Act, the country has seen 104 such serious accidents. This indicates that the said Act has not been very successful in pulling down the number of accidents. In all such cases involving criminal charges, only the CEOs (rather than the CSOs) have been charged. It is evident that the South Korean judiciary and law enforcement are targeting CEOs. Controversy has continued over the constitutionality of the SAPA for the reasons that its language is unclear and the punishments are excessive. Recently, a motion was filed with the Constitutional Court of Korea on the constitutionality of the first case charged under said Act. The South Korean businesses and legal communities are closely watching to see how the Constitutional Court will rule.