12 February Shipbuilding News. Korea ups shipbuilding financing 40% Delivery delays to raise exchange rates. Breaking through European crisis

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1 Korean Shipping messenger A collection of articles and daily news for the shipping industry with focus on the Korean shipping and shipbuilding markets. 12 February 2010 Shipbuilding News Korea ups shipbuilding financing 40% Korean government decided to make an upward adjustment on Korea Export-Import Bank's limit on shipbuilding finance by 40% this year to support struggling shipbuilders in urgent need of liquidity. In addition, Korea Export Insurance Corporation (KEIC) will support KRW 2.1trn (USD 1.8bn), alleviating conditions of cash payment guarantee. According to Ministry of Knowledge Economy and Export- Import Bank's notice on Feb. 10th, government will announce comprehensive countermeasures within this month which includes expansion of shipbuilding finance, KEIC's alleviated conditions of cash payment guarantee, upward adjustment of mid and long term export insurance coverage, and mid and long term export insurance support for domestic outward-bound shipping companies. First of all, government will expand shipbuilding finance by 68.5% from KRW 1.84trn of last year to KRW 3.1trn this year. Network loan to support liquidity of shipbuilders' subcontractors will also upward adjusted by 21.9% from KRW 2.69trn to KRW 3.28trn year-on-year. Accordingly, limit of total shipbuilding finance will be increased by 40.8% from KRW 4.53trn in 2009 to KRW 6.38trn in KEIC will join the supporting program by alleviating conditions of cash payment guarantee to support KRW 2.1trn this year. Cash payment guarantee is a system that, once KEIC stands surety, shipbuilders' subcontractors are immediately paid cash for the delivered equipments by banks and shipbuilders pay back banks later, hence, small and medium subcontractors can receive cash payment for delivered exports right away. An official from the government said, "Shipbuilding industry is in severe depression following global economy crisis and persisting fierce competition in receiving orders at sacrificing prices. Other issues to be solved are still left because restructuring must be carried out together in some cases." Breaking through European crisis Although there are growing expectation that shipbuilding industry will recover as shipbuilders have been getting orders since the end of last year, the insecurity in shipbuilding industry still remains entrenched with the forecast that the recent European debt crisis could badly impact ship financing. Korean shipbuilder STX Offshore & Shipbuilding announced on Feb. 9th that it has obtained the order for two tankers worth around $70m from an Italian shipowner. Prior to the STX s announcement, Samsung Heavy Industries has received an order for two oil tankers from a Swedish shipowner and Hyundai Heavy Industries has also grabbed an order for the world s largest circular-type floating production, storage and offloading (FPSO) unit. It is expected that the orders for newbuildings will be accelerated after the second quarter of this year. Eom Kyeong-ah, a researcher at Seoul-based Shinyoung Securities, said, Ship prices are going down and accordingly shipowners appetite for newbuildings is growing more. Currently, many shipowners are negotiating the newbuilding prices with shipbuilders. Therefore, it is expected that shipowners will start to order ships in earnest from the second quarter of Song Jae-hak, an analyst at Woori Investment & Securites, said, Orders for merchant vessels are expected to recover in earnest next year. But the orders for offshore plants and non-shipbuilding sectors seem to continue this year. In regard to the concern that the European-originated financial crisis could deal a blow to ship financing and so to Korean domestic shipbuilders, experts say it is just excessive concern. Eom dismissed the concern saying, Greece, the most concerned nation amid the European financial crisis, is still one of countries which currently buy most second-hand ships and France s shipping industry which had hard time last year is showing the fastest turnaround. So the concern that shipbuilding industry could be hit directly by the European disaster is just exaggerated. Song chimed in Eom s opinion, saying, The European financial crisis is definitely not good news to hear but it is not that unfavorable factor, neither. Delivery delays to raise exchange rates In the aftermath of the debt crisis facing some European countries, Korean shipbuilders are expected to delay deliveries of more ships, and this could put pressure on won-dollar exchange rates upward, analysts say. Of the 62 containerships which were scheduled to be delivered in January 2010, only 9 ships have actually been delivered. In Korea, the delivery rate is projected to have dropped below 20% since October 2009.

2 This is because shipowners canceled contracts and delayed deliveries. In particular, since seven out of top ten ship banks are European ones, shipowners seem highly likely to have hard time ordering newbuildings going forward as well. In this regard, Germany s national maritime co-ordinator Hans-Joachim Otto is said to have mentioned that German shipowners want to delay delivery of ships on order at Korean shipyards and the date of payment, and thus the German government is reviewing the ways to provide debt guarantees to its shipowners to support their move. Jeon Seung-ji, an analyst at Seoul-based Samsung Futures, said, The delivery delays of newbuildings on order could lead to postponement or cancellation of existing forward exchange and a fall of hedge ratio of new orders, all of which can affect the exchange rate to rise. Majors hunting kamsarmax It is reported that South Korea's large shipbuilders are targeting growing interest in kamsarmax bulker sector. After being starved of new orders for more than a year, Hyundai Heavy Industries, Daewoo Shipbuilding & Marine Engineering, Samsung Heavy Industries and Hyundai Mipo Dockyard have been forced to hunt for orders in such sectors which were usually the territory of smaller yards. Daewoo is said to have secured two letters of intent for up to four kamsarmax bulkers with Asian and European owners, while Hyundai Mipo has won a contract for two similar ships from Turkish newcomer Ciner group. Hyundai and Samsung have already started to market kamsarmaxes with the latter intending to switch a block factory in China to shipbuilding. There are around 30 enquiries in the market with some 10 to 12 orders already confirmed. A Daewoo official says it will build its kamsarmax orders in its No. 2 dock, which specializes in panamax boxships and tankers. He says, "There is no longer any demand for such ships, which is why we are looking to build kamsarmaxes." Price has been a major factor in the interest with Korean yards quoting between $35m and $37m for a kamsarmax, as compared with a market high of close to $60m in "There is a feeling that prices have bottomed out and this is a good time to order," said one local Asian broker. "And there is an expectation that Korean yards will put up prices because of the strengthening won and higher material prices," he added. The kamsarmax has the advantage in growing markets in developing countries with limited port facilities. The growing coal-import market to India and both the Indian and Asian iron-ore export market to China are promising for the design. Hyundai Mipo inks 82K bulkers South Korean shipbuilder Hyundai Mipo Dockyard has secured an order for two 82,000-dwt kamsarmax bulkers from Turkey s Ciner Group. Newbuilding price is said to be amounting to about $74m in total for delivery in the third and fourth quarters of Newbuilding players say the deal is a first in kamsarmaxes for the yard. The handysize and handymax specialist is said to have included the ship type into its portfolio as current demand for the smaller vessels is weak. Separately, Ciner had ordered four 35,200-dwt bulkers in mid-december last year at Samho Shipbuilding, located in Tongyoung City, South Gyungsang Province, South Korea. Contract value was about $110m in total for delivery in the first half of Samsung returning to bulker Samsung Heavy Industries is reportedly preparing to switch one of its two block factories in China to shipbuilding in a move to return to bulker newbuilding. Industry sources say the South Korean large shipbuilder is looking to build vessels below 100,000 dwt at the Chinese unit as anything beyond that would require the approval of the Chinese government. They add that Samsung is targeting kamsarmaxes in particular as demand for these ships is robust relative to other types. A yard official confirmed it is interested in the switch but adds that no final decision has been made. "Samsung is keen to build kamsarmax bulkers but constructing them in our Koeje Shipyard in Korea is not cost competitive. It would be a better idea to build them in China," he added. Market sources say Samsung will use its facility in Ningbo, in Zhejiang province, for shipbuilding. The other plant in Rongcheng City in Shandong will continue as normal. The Samsung official was not willing to confirm which factory has been earmarked for the new project. He explained: "Our Ningbo factory was set up 15 years ago and has more experience in fabricating ship blocks. Its productivity is higher than at Rongcheng, which was established three to four years ago. However, the site area there is 1.5 times larger than at Ningbo." Samsung says it is cutting back its shipbuilding production on the back of the orders slump and owners' requests for delivery delays. The number of ships it can roll out in a year will be reduced through limiting workers' overtime. "We are reducing overtime jobs these days to slow down production," confirmed the Samsung official.

3 Sungdong secured cape? Market rumors have it that German shipowner Reederei M Lauterjung has placed an order for an 180,000-dwt capesize bulker at South Korea s Sungdong Shipbuilding & Marine Engineering, on the back of a long-term charter to STX Pan Ocean. Contract price is said to be in the range of mid-$55m. Industry players say the owner has been looking at making a debut in capesize sector. Managing director Manfred Lauterjung, however, dismisses the reports as rumors. It is understood that Lauterjung has talked to Sungdong, although no contract has been signed and currently there are no further discussions. The matter is pending, according to one source. STX Pan Ocean is thought to have been one of various potential charterers should an order materialize. "At the moment there is nothing done," insisted the source. Daewoo teams up with Russian South Korea s Daewoo Shipbuilding & Marine Engineering is ready to bid for oil and gas projects together with the northern Russian shipyard of Sevmash. During a visit to South Korea last week, Sevmash General Director Nikolai Kalistratov confirmed that Daewoo is ready to take on joint operations with the Russian yard. A part of the deal will be the training of Russian specialists in the Korean yard. Also Korean representatives will visit Severodvinsk for acquaintance with the Sevmash, a press release from the company reads. Sevmash, which traditionally is specialized in the construction of nuclear submarines, has over the last years expanded into non-military shipbuilding and is today also engaged in the construction of platforms and other oil and gas installations. Troubled Shipbuilders Bet on Cruisers, Icebreakers Amid lingering uncertainty surrounding sales of containers and tanker ships, local shipbuilders are turning setting their sights on higher-valued cruise and ice-breaking vessels. Daewoo Shipbuilding & Marine Engineering (DSME) is reportedly in talks with a Greek shipping company over the construction of a mid-sized cruise ship. The deal is expected to be finalized in the first half of this year, industry watchers say. The world's third-largest maker by order value has been preparing to tap into the new business for the past few years, with the launching of an independent division for cruise ship deals. DSME is also conducting a joint project with Seoul National University for technology development in the field. Earlier, Samsung Heavy Industries, the world's No. 2 shipbuilder, won its first cruise bid in a $1.1-billion contract with California-based Utopia Residences in November last year. The company, which has been seeking to advance into the cruise ship market for over a decade, plans to deliver the high-profile vessel in Another local shipbuilding firm, STX, is approaching the field in a different way than the other two. It embarked on STX Europe in 2008, after taking over Norwegian-based Aker Yards. With a total of 15 overseas shipyards, it is now manufacturing three cruise ships ordered from its Italian and U.S. clienteles between 2006 to 2007 with their combined value over 2 billion euros ($2.74 billion). STX Europe expects to receive a new order this year, after a drought last year. "Negotiations are underway with cruise operators in Europe and the United States," a company spokesman said. Celebrating the embarkment of its first icebreaker, Korea is also gearing up to make more of the special-purpose vessels. Indeed, the country's history of their development traces back to before the launching of Araon in December. In 2005, Samsung Heavy developed the world's first icebreaking tanker and sold three vessels to Russian shippers. STX Offshore & Shipbuilding has also recently jointly developed an icebreaking container ship with its brother company STX Europe. Positive market outlooks are the biggest reason to attract Korean shipbuilders to the unbeaten track. In December, the Cruise Lines International Association forecast passengers taking cruises worldwide this year will grow 6.4 percent from 2009 to 14.3 million people. Ice-breaking ships also have a good chance of finding buyers soon, as arctic-navigating routes are under a brightening spotlight as a new shipping lane linking Asia and Europe, STX says. Cruise ships are more profitable than tankers. The Oasis of the Seas, the world's largest cruise ship built by STX Europe in its Finnish dockyard, is equal to seven to eight containers costing 1.01 billion euros. However, exporters still say such prospects are not likely to lead to immediate profits for the builders. "As new players, Korean shipbuilders will suffer some additional costs of 'entry expenses' before settling down in the cruise ship market during their early years as well as lingering risks," an analyst of a local brokerage said on condition of anonymity. "The same goes for the icebreaker market because it's not even formed on solid ground yet."

4 Shipping & Business News Ship-Owners Win $3.8 Billion Tax Battle Norwegian ship-owners defeated government bid to raise back taxes Norwegian ship-owners Feb. 12 won a legal victory against the government's bid to raise $3.8 billion in back taxes. Norway s Supreme Court ruled the retroactive tax was unconstitutional, spurring a rally in shipping shares, including Wilh.Wilhemlsen, Golden Ocean, Golar and Odfjell, on the Oslo stock exchange. The dispute dates back to 2007 when the Socialist-led government introduced a scheme to align Norway's tax regime with the tonnage tax system in many European Union countries under which ship-owners pay tax on the size of their fleet, not their profits. At the same time, the government imposed $3.8 billion in back taxes on undistributed profits retained by shipping companies over eleven years of a previous tax regime. The retroactive tax affected over fifty ship-owners, including several listed companies. The Norwegian Ship-owners' Association alleged the new tax system was a betrayal of a tax break deal in 1996 aimed at maintaining the competitiveness of the Norwegian fleet. Several shipping companies threatened to move their headquarters abroad to avoid the taxes. A lower court found in favor of two ship-owners -- Farstad Shipping and BW Gas -- in the summer of 2009, ruling the retroactive tax was unconstitutional. Norway, which is not a member of the European Union, has one of the world's biggest fleets, comprised mainly of tankers and dry bulk carriers, break bulk ships, car carriers and specialized parcel tankers. 200 capesizes to enter As is reported by Dahlman Rose & Co analyst Omar Nokta, 200 capesize bulk carriers were considered to enter global fleet in The number is far lower than Clarkson Research s statistics, which reached as many as 355 ships. In Omar Nokta s view, the deliveries of many new orders were postponed to In addition, about 17% orders might be cancelled. But the delivery situation in 2010 was still thought to be optimistic. The freight rate and volume would be influenced accordingly. The dry/bulk cargo market would be better over the year due to great potential of iron ore demand. Analyst said that China s demand of iron ore could lead the market. Maersk shipbroker even predicted that China s iron ore import would climb up by 7%, namely 670m dwt. It s enough to make up the decreasing in Japan and Europe. Huge slowdown in boxship deliveries Containership delivery delays and cancellations, plus demolition, are having a dramatic impact on fleet projections, with annual capacity growth of little more than 5% now forecast for this year and next. That compares with double-digit expansion that was being projected before owners began requesting deferrals and trying to get out of order commitments this time last year. Clarkson Research estimates that 46% of containership capacity expected to join the fleet in 2009 had not been delivered by the end of the year. Although cancellations are still a rarity, most yards have agreed to slow production schedules, with the result that Clarksons now estimates that the fully cellular fleet expanded by 6.3% last year, with the container capable fleet growing by just 5.2% in 2009 to 15.1m teu. That is way below earlier expectations of 13% growth that had been anticipated at the start of last year. The much smaller rate of growth is expected to continue into this year and next, with Clarksons now looking for capacity to increase by 5.2% and 5.4% respectively. But despite this development and signs of recovery in freight demand on key routes, the London broker is warning of a long haul before the container trades are back in equilibrium. While the outlook for the market balance in 2010 looks marginally brighter, the legacy of contracting trade growth in 2009 means that global box trade volumes are unlikely to get back to pre-recession levels until at least 2011, Clarksons says in its latest Container Intelligence Quarterly. Although much reduced fleet growth expectations, coupled with a gradual recovery in trade, means that there is potential for the balance between supply and demand growth to steady in 2010, this is unlikely to be enough to make up for the huge trade deficit left over from the global crisis, and it may take a number of years for trade volumes to get back to pre-recession levels, the company states. Additionally, if volumes do return, and freight rate restorations continue to be successful, this positive impetus to the market comes with the added threat of reactivating too soon the significant proportion of the fleet still idle. It is likely that market players will continue to feel the negative effects of the downturn for quite some time. Breaking down fleet growths, Clarksons predicts that capacity in the 8,000 teu-plus sector will grow by 20% this year and 22% in 2011, having expanded by 18% in In the 1,000 teu-1,299 teu size bracket, capacity decreased by 0.8% last year and is expected to decline by the same amount again this year. Clarksons estimates that nearly half the containership orderbook originally scheduled for 2009 delivery had not been delivered during the year.

5 Subdued deliveries of fresh capacity have been combined with significant levels of demolition in an attempt to rein in capacity growth, and the smaller boxship sectors saw negative net fleet growth in At the same time, the newbuilding market continues to be stifled, leaving the orderbook at 36% of existing fleet capacity. At one stage it stood at 60%. With the charter market still suppressed and 11% of the fleet inactive, it appears unlikely that 2010 will see significant contracting activity, warns Clarksons. China shipbreaking hits new high Ship demolitions at China s yards hit a record 3.2m ldt last year due to overcapacity in the global shipping markets, according to China National Shiprecycling Association. A total of 440 vessels comprising 3.2m ldt were scrapped at the country s yards in The volume of imported ships and domestic vessels the yards recycled soared 400% and 150% year-on-year respectively. That resulted in income from import and value-added taxes to more than Yuan1bn ($147m) for the Chinese government, the association said. CNSA said that the country s shipbreaking industry basked in a strong revival last year, which outperformed the previous market boom in About 94% or 3.1m ldt of the total scrap tonnage last year was imported vessels, a 37% higher compared with the volume of 2.2m ldt in Value of the imported ships was as much as Yuan5bn, CNSA said. The number of workers in the demolition industry leaped threefold compared with the pre-financial crisis level, according to CNSA. CNSA executive vice-president and secretary-general Xie Dehua said: The global financial crisis precipitated into a serious overcapacity for shipping companies. That revived the prolonged shipbreaking downturn in China. Korean Shipping Messenger Daily News Report is released and distributed freely by Mutualmar. The information in this report is derived from a variety of sources, public and private and Mutualmar explicitly does not claim it is the source of this information. While Mutualmar has used reasonable efforts to include accurate and up-to-date information in this report, makes no warranties or representations as to the accuracy of any information contained herein or accuracy or reasonableness of conclusions drawn there from. Mutualmar assumes no liabilities or responsibility for any errors or omissions in the content of this report.