SOUTH KOREA: An Introduction to Shipping
Shipping
In 2021 and 2022, 79 South Korean ocean-going shipowners benefited from the massive spike in logistic costs driven by pandemic-induced supply chain disruptions. They enjoyed record-breaking revenues and operating incomes. HMM, the country’s premier shipping entity, reported an impressive USD13 billion in operating income during this period. By the close of 2022, HMM, Pan Ocean, KMTC, and Sinokor topped the revenue rankings among South Korean shipping companies in that order.
In the midst of the market shifts, South Korean shipowners, banking on the 2021-2022 surpluses, have diversified their operations by, for instance, commissioning new eco-friendly vessels and annexing fellow shipping businesses or port terminals. Yet, as the market began to normalise in the second half of 2022, these firms have refrained from undertaking further aggressive ventures. This restraint likely reflects lessons learned from the pre-2016 era of fleet oversupply and economic stagnation in the sector.
Debate is ongoing about the privatisation of HMM, which is under the aegis of the South Korean government (ie, through the Korea Development Bank (KDB) and the Korea Ocean Business Corporation (KOBC)). Although the government initially targeted 2025 for full privatisation, a concrete plan has yet to be finalised. HMM recently expressed its intent to acquire Hyundai LNG Shipping, the contract carrier for Korea Gas Corporation (KOGAS). HMM’s decision was likely motivated by Hyundai LNG Shipping’s role as the exclusive carrier for KOGAS, the primary gas supplier for South Korea. Hyundai LNG Shipping was established when HMM, amid the business tumult in 2014, sold its LNG division to a private equity fund.
One challenge confronting South Korean shipping companies is the increasing difficulty in finding competent licensed mariners to man their growing fleets. Statistics show that 80-90 percent of licensed mariners of South Korean nationality opt for alternative career paths before attaining the ranks of chief officers or chief engineers. Presently, the country’s shipowners are mandated to employ South Korean masters and chief engineers only; the opportunities for foreign seafarers are capped at the roles of chief officers and first engineers. The pool of licensed South Korean mariners is dwindling, and the existing ones are aging. The government is considering the possibility of lifting nationality restrictions in respect of master and chief engineer positions.
The high freight rates between 2021 and 2022 proved to be a double-edged sword for South Korean shipping companies, attracting the scrutiny of the Korea Fair Trade Commission (KFTC). The KFTC suspected that shipping lines were enjoying excessive profits by, for example, adjusting carrying capacities and colluding in the fixing of freight rates in the midst of the pandemic. The KFTC launched an investigation into shipping industry practices dating back to 2003. Following the investigation, the antitrust watchdog imposed a fine of USD68 million on a number of intra-Asia carriers (12 South Korean and 11 foreign ones) in January 2022, followed by a fine of USD57 million on carriers operating between South Korea and Japan (14 Korean and one foreign one) in June 2022. The KFTC’s decision is being contested in the Korean High Court. While the Marine Transportation Act in South Korea essentially permits the fixing of freight rates among shipowners, the KFTC maintains that the targeted carriers colluded on rates, thereby disadvantaging and coercing dissenting peers into compliance, and such forced compliance constitutes a violation of the Fair Trade Act. A ruling from the High Court is expected in 2024.
The Serious Accidents Punishment Act (SAPA), which came into force in January 2022 in South Korea, has alarmed the CEOs of South Korean companies, including those in the shipping industry. Under the said Act, CEOs or chief safety officers (CSO) who fail to take measures to establish an adequate health and safety system, resulting in a serious accident (defined as at least one fatality or two injured people requiring over six months of treatment) now face criminal prosecution. As of March 2023, South Korea had recorded 568 such serious accidents, representing only a 9% decrease from previous figures. This suggests that the Act has had very little impact on significantly reducing the number of accidents. As of March 2023, three Korean shipowners are involved in SAPA criminal investigations by the public prosecutor’s office. In all cases involving criminal charges, only the CEOs (rather than the CSOs) have been charged.
Shipbuilding
Since 2020, South Korea’s leading shipyards have witnessed a remarkable upswing in business, buoyed by a flood of orders for new vessels, including mega containerships, LNG carriers, and eco-friendly vessels. In 2022, the collective order book for the country’s Big Three shipyards – Hyundai Heavy Industries (HHI), Samsung Heavy Industries (SHI), and DSME – exceeded their aggregate target by 120 percent.
In July 2023, the International Maritime Organization (IMO) adopted the “2023 IMO Greenhouse Gas Strategy”, which includes an ambition to reach net-zero GHG emissions from international shipping by or around 2050 and, as a result, the leading South Korean shipyard trio continues to enjoy a deluge of orders for building new ships fitted with dual-fuel engines. LNG-fuelled vessels make up the largest share of ships under construction, followed by methanol-fuelled vessels. On the innovation front, HHI is developing hydrogen-fuelled engines and SHI is working on ammonia-fuelled engines.
South Korean shipbuilders are grappling with a significant shortfall in research and design personnel. As higher-paying industries like semiconductors, electrical and electronics, and automobiles have lured away much of the talent, South Korean shipyards are now operating with roughly two-thirds of the talent pool they had a decade ago.
In April 2023, Hanwha Group, a key player in the defence industry, finalised its acquisition of DSME. Following the acquisition, DSME has been rebranded as Hanwha Ocean. DSME specialised in constructing naval vessels, including surface combatants and submarines. Hanwha Group aspires to become South Korea’s answer to Lockheed Martin.