Tuesday, August 29, 2017

Container Freight Carrier Collapse and Poor State of Shipbuilders Prompts Government Intervention

(although they won't see it like that)
Shipping News Feature
SOUTH KOREA – The country's authorities were seriously stung when Hanjin Shipping collapsed earlier this year, the container giant fell unsupported, and the ramifications are still being felt. Earlier this month we witnessed a gathering of the tribes with the announcement of the Korean Shipping Partnership (KSP) although many say, whilst this presented a show of unity by the 14 independent container and bulk carriers, none have actually moved from the insular positions traditionally adopted by the native freight carrying lines.

The KSP was organised after government prompting and now, with the country’s other major shipping interest, shipbuilding, coming under threat, it has moved once again to try and stay ahead, particularly of its Far East neighbouring competitors. Last week the Ministry of Ocean Affairs and Fisheries, which forced the KSP collaboration, has confirmed details of a new plan whereby the entity it is creating, the Korea Maritime Promotion Corporation (KMPC), will link support for both shipping and shipbuilding industries, thereby protecting the market position for both.

Cynics will say this is simply protectionism for two facets of the trade which are failing and the sight of a government underwriting industries in trouble will doubtless trigger a reaction from countries claiming the new deal contravenes World Trade Organisation (WTO) regulations. The KMPC is to be funded with an initial $2.8 billion with a promise of a further $1.7 billion if required. In April both Japan and the EU lodged protests when stakeholders in the Daewoo Shipbuilding conglomerate stumped up $2.5 billion to keep it afloat, this just 18 months after another $3.78 billion injection by creditors to complete shipbuilding contracts underway.

Whilst the Republic claimed that the Daewoo finance was not government funding, the money came from a one billion dollar shift in obligations to the national pension fund and the balance from the Korean Development Bank and the Export-Import Bank of Korea which competitors complain are government controlled entities. This time funding comes mainly direct from government funds with the Korea Maritime Guarantee Insurance ($495 million) and Korean Ships and Oceans ($900 million) apparently providing the balance.

So how does the new organisation propose to save the two industries considered for so long as economic drivers in the country and now both plainly in deep trouble? It appears it will underwrite the financial requirements of both shipping lines and shipbuilders with proposals for a ‘scrappage scheme’ to encourage new ship construction by subsidising the breaking of older vessels and it will encourage investment in new technologies, particularly the construction of LNG powered vessels.

The KMPC is to be set up in June 2018, headquartered in Busan and on similar lines to Korea Maritime Guarantee Insurance i.e. as a financial vehicle which the government can then say is not a direct subsidy vehicle, not too convincing to outsiders, but about the only defence that can be used. As it was the government which also just officially announced the Korean Development Bank and Industrial Bank of Korea will supply up to $90 million in support of bankrupt shipbuilders by way of refund guarantees to those with orders on the blocks so those vessels can be finished and delivered, it’s hard to see how it can disassociate itself from any funds forthcoming from the KMPC.

With the new outfit sworn to underwrite everything from existing financial support programmes to guaranteed payments for a variety of projects including container terminals, renewed vessel chartering and purchase agreements on ships new and ‘pre enjoyed’, it remains to be seen whether this new venture is not only acceptable to the international community but whether it can turn the tide for the two industries simultaneously.

Photo: KMPC will be sited in the traditional shipping location of Busan on the country’s south east coast.