26 April Shipbuilding News. S.Korean shipyard orders up. Builders still face crisis. Hyundai inks kamsarmax trio

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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. 26 April 2010 Shipbuilding News S.Korean shipyard orders up Hyundai Heavy Industries Co., the world's largest shipyard, and other South Korean shipbuilders had an almost 200 percent increase in orders in the first quarter as a recovery in global trade boosted demand for new vessels. South Korean shipbuilders received orders for 1.54 million compensated gross tons, a measure of building time and human resources used per ton, in the three months to March 31, the country's Ministry of Knowledge Economy said today in a statement. Shipyards won orders for 520,000 compensated gross tons in the first quarter of South Korea, the world's biggest shipbuilder, accounted for 51.5 percent of the global shipbuilding market, the ministry said. Orders may show further improvement in the second quarter as a recovery in U.S. consumer demand may spur shipping lines to buy new vessels, the statement said. The global recession and excessive capacity from five years of shipbuilding that broke records caused new orders to plunge in 2009, leading to the collapse of some shipyards, including C&Heavy Industries Co. of South Korea in late Builders still face crisis It seems that small and medium-sized shipbuilders continue to go through crisis while newbuilding market signals gradual recovery. The Export-Import Bank of Korea (Korea Eximbank) said in a small and medium-sized shipbuilding industry report recently that Korean small and medium-sized shipbuilders' orders intake in the first quarter recorded the highest since the financial crisis totalling 867,000CGT worth USD 1.71bn, which is only about 83% level of Q1 of 2008's, and concluded that the industry had not entered recovering stage yet. Yang Jong-seo senior researcher of Korea Eximbank said, "Small and medium-sized shipbuilders took more newbuilding orders than expected given the current market condition, however, most of the orders were taken by medium and large-sized shipbuilding companies such as Sungdong Shipbuilding & Marine Engineering (SSME) and SPP Shipbuilding, and only four small and medium-sized shipbuilders received newbuilding orders." "41 out of 45 total newbuilding orders taken by small and medium-sized shipbuilders in Q1 were bulkers whose market share is preponderantly occupied by China. Even taking recent appreciation of Chinese currency into calculation, it is highly likely that outdistancing China in terms of bulker newbuildings market share was a result of low-priced contracts," explained researcher Yang. According to Korea Eximbank's independent research, total newbuilding orders intakes including shipbuilding giants' in Q1, 2010 was 2.05m CGT, which increased by about 3,300% year-on-year. However, orders intakes of China decreased by 21.7% to 796,000CGT and Japan by 74% to 104,000CGT, according to Clarkson Research Services' data. The huge hike of Korean shipbuilders' orders intake is mainly resulted from greatly increased newbuilding orders of strategic ship and hull types of fast deliveries by shipbuilding giants to fill in vacancies at docks caused by existing newbuilding contracts cancellations and postponement of deliveries. On the other hand, small and medium-sized shipbuilders' orders intake looks like a result of subsistent orders intake by hugely lowering newbuilding prices to secure liquidity capitals and workloads. An industry official said, "Korean shipbuilders' lowering newbuilding prices attracted more newbuilding orders from overseas shipping companies who prefer Korea yards. Considering statistics of total newbuilding orders intake as a whole, newbuilding market has not got out of slump yet." It was also suggested that key to recovery of small and medium-sized shipbuilders under crisis is at financial institutions since Korean government, who does not want to be at dispute table issuing subsidy, failed to present specific shipbuilding industry support measures. "Financial institutions need to use win-win policy in terms of securing long-term customers through continuous shipbuilding industry's growth rather than eyeing short-term profits. They have to make efforts for normal RG issuance and supporting liquidity crisis considering the scale of small and medium-sized shipbuilding industry and employment effect," urged researcher Yang. Hyundai inks kamsarmax trio Greece's Restis Group has inked a deal with Korea's Hyundai Heavy Industries to build three kamsarmax bulk carriers. The trio, which is understood to be for delivery by HHI s Ulsan yard in 2012, will be the prominent shipowner s first newbuilding orders for four years, according to its own estimate. The project is still awaiting refund guarantees.

2 We are cautiously optimistic, said Victor Restis, the head of the family-controlled group. The risk must be a calculated one. If we want to still be running a large fleet in five years time then we have to at least renew the existing fleet. Mr Restis said that the kamsarmax deal could be the first of a number by his company in the months ahead. I believe that in the next two years we will enter a number of contracts for new ships, he said. The group has not placed a shipbuilding order since late 2005 when it contracted a number of capesize bulkers and aframax product tankers at Sungdong Shipbuilding & Marine Engineering. No price has so far emerged for the Restis kamsarmaxes, but brokers reported a price of $37.5m apiece for a pair of 82,000 dwt bulkers contracted by Lyras Maritime at the same yard about one month ago. Although prices are nudging upwards, brokers see this as a close indication of what Restis may be paying. Other Greek owners confirmed to have placed orders for kamsarmax bulkers in recent weeks include US-listed Safe Bulkers, which ordered in China, and low-profile privatelyheld operator Plutofylax Shipping, which contacted two from Hyundai Mipo Dockyard. Owners linked to kamsarmax orders in recent days include Daifas family-controlled Silver Lake Shipping, reported to have ordered one unit at STX Shipbuilding, and Clemko Shipmanagement, said to have ordered at Hyundai Mipo. It is a very popular type of ship at the moment and you could say there is a spree of orders, said George Banos, senior newbuilding consultant for George Moundreas and Company, a leading Piraeus newbuilding brokerage. According to Mr Banos, at least another 10 kamsarmax newbuildings are already foreseen under letters of intent by various other Greek owners. He would not be drawn on the identity of some of the other owners. Typical prices being negotiated with second-tier Korean builders were still about $35m per ship but were forecast to rise, he said. SPP acquires SHMS & EMS SPP Shipbuilding's Gosung yard in Korea acquired KOSHA (SHMS: safety & health management system) from Korea Occupational Safety & Health Agency, and OHSAS18001 (SHMS) and ISO14001 (EMS: environmental management system) from a Norwegian international certification organization, Det Norket Veritas (DNV) on Apr. 22nd. With this Gosung yard's acquisition of certifications, which began its production activities in May, 2008, after Tongyoung yard and Sacheon yard each had received OHSAS18001 and ISO14001 from DNV in Aug, 2007 and Feb, 2009 respectively, all SPP Shipbuilding's yards have been approved as yards with international environmental and safety and health management system. Giants help suppliers South Gyeongsang Province, Korea and shipbuilding giants in the region threw themselves with enthusiasm to support shipbuilding related small and medium-sized companies suffering from orders drought recently. South Gyeongsang Province, and three shipbuilding giants and representatives of small and medium-sized subcontractors including Small and Medium Business Corporation (SBC), Daewoo Shipbuilding & Marine Engineering (DSME), STX Offshore & Shipbuilding (STX O&S), and Sungdong Shipbuilding & Marine Engineering (SSME) signed 'Win-win cooperation of large-small and medium shipbuilding businesses agreement' at provincial government building on Apr. 22nd. South Gyeongsang Province and shipbuilding giants will provide substantial help by supporting part of interests of small and medium-sized shipbuilders' loans under the winwin cooperation agreement. The three shipbuilding giants pick small and medium-sized subcontractors of high growth potential on technologies and profitability basis first, then SBC finances the companies for facilities and working capital with KRW 40bn (USD 36.06m) policy fund, and South Gyeongsang Province and three shipbuilders support part of the interests of the financing. Shipping & Business News Insolvent shipping firms, 'kicked out' Korean government decided to liquidate about ten insolvent shipping companies below standards. The Ministry of Land, Transport, and Maritime Affairs (MLTM) of Korea announced on Apr. 25th that it will deregister insolvent shipping companies after making a close investigation on 180 shipping companies of operation status by early May. Companies who do not meet shipping business registration requirements to own 5,000DWT by 2009 and 10,000DWT by 2010 or those who owns ships on hand but do not have operating outcomes are subjected to liquidation. An official from the MLTM said, "Shipping industry is gradually recovering as sea traffic increases and freight rate stabilizes, but there are still some negative factors inside including rising oil prices. Accordingly, we are to improve structures of shipping companies by sorting out insolvent companies beforehand through regular restructuring." "We are examining managemental and operational performances of shipping companies currently, and about

3 10 to 12 companies are estimated to be liquidated," added the official. Greek bailout has little impact to Korea Financial Supervisory Service (FSS) of Korea expected that Greece's bailout request to International Monetary Fund (IMF) will have a limited impact on Korean financial industry. As stock exchange markets of US and major European nations went bullish and European currency strengthens since Greece's bailout request, FSS expected the influence on Korean stock exchange market to be limited, too. FSS announced at the end of last year that deb exposure to Greece is USD 380m, which is only 0.72% of Korea's entire USD 52.8bn extended to foreign borrowers. The whole amount is ship fund comprised of USD 360m of loan and USD 20m of loan guarantees to Greece. In case of ship fund, loans are relatively safe from defaults thanks to vessels taken as collateral, explained FSS. Meanwhile, borrowing from Greece by Korean financial firms totalled USD 25m. Since Korea's exposure to and foreign debts from Greece is not big, Greece's bailout request will have limited impact on the health of Korean financial industry even if Greece's financial problems are not resolved soon. "We will keep a close eye on in and outside financial market including foreign exchange supply-demand condition, only, in preparation of case that international financial market goes unstable following expansion of Greece's financial crisis to other countries," said an official from FSS. Greece formally asked for bailout loans to EU and IMF on Apr. 23rd, and the 15 other euro-zone governments and the IMF are expected provide up to EUR 30bn and EUR 15bn respectively. Ship financing, key to invigoration It is wide-spreading in the industry that business initiative acquisition war has begun since the global economic crisis and newbuilding prices already hit the bottom, amid shipping industry is signaling a huge scale of newbuilding orders recently. According to an industry source, a move of power shift among leading companies with relatively less deficit last year to take initiative in global shipping market is in the air, while world's third largest shipping company of France, CMA CGM is still going through tough times under restructuring. It is pointed out that Korea will have to invigorate ship financing to foster shipping and shipbuilding industry because ship finance capacity of each country is expected to have great influence on business initiative acquisition war. According to Clarkson Research Services, newbuilding price per DWT dropped by 1.4% to USD 1,074.3 from last year's USD 1, Shipping and shipbuilding industry estimates newbuilding price fall as of Mar, 2010, compared to the 2007 high in the most booming days of shipping and shipbuilding industry, to be 20%-30%. Greek shipping companies are reportedly making quick movements to place newbuilding orders recently concluding that newbuilding price will not drop further due to raw materials price increment including iron ore. It also seems that the largest shipping company in Taiwan, Evergreen's recent huge fleet expansion project was largely backed by the strategy of acquisition at lower price. Ship financing is the key to vitalize shipping and shipbuilding industry. An official from the industry said, "South Korea is in desperate need for expansion of ship financing to foster shipping and shipbuilding industry." POSCO raises steel plate prices Shipbuilding industry will have to take the burden of cost increment as POSCO of Korea announced on Apr. 23rd that it will raise the price of steel plates including hot-rolled and cold-rolled steel plates, and Hyundai Steel announces further price increment of rebar. After POSCO made it clear that it will raise steel products prices by up to 25% and Hyundai Steel to further raise rebar price, it is said in the industry that price increment was somewhat expected but the amount increased is larger than expected. POSCO said it will lift steel plates price to KRW 900,000 ($815.4) per ton for the contracted amount from May 3rd, and a newcomer in the sector Hyundai Steel suggested the same price for the steel plates. The huge price hike of steel products originated from international raw materials market, and POSCO will have to accept almost doubled price of importing iron ore at the negotiation table. Even though POSCO finalize the negotiation in the future, payment is applied retroactively as of Apr, 1st. POSCO announced that it minimized the steel plates price increment considering slumped shipbuilding industry and competition among steel suppliers. An industry official said, "Steel plates take about 20% of shipbuilding costs. POSCO says they applied relatively less increment to steel plates, but worsening operating margin is inevitable for shipbuilders this year." Chinese hit by steel price hike The new round of steel plate price rising severely hit Chinese shipbuilders. As part of shipbuilding cost, the stable steel price is usually the main weapon for shipyards to deal with ship price diving in the past. As CANSI s fresh statistics, the steel occupies 35% of the whole cost for shipbuilding. The 15% rising of steel means 3.5% cost up for ship builders, which may trigger great pressure on Chinese shipyards. It s really a disaster, said Pan Xuejun who is Vice manager of Jiangsu New Hantong Ship Heavy Industry,

4 the steel plate price surging began from late Currently it has climbed from CNY4,000($588) per ton in February to around CNY5,500 per ton, namely increasing by 25%. Considering transportation, the cost may reach CNY5,400 to CNY5,500 per ton. Larger jumping is potential in case of stocking up. As is introduced, the large shipyards can reach price agreement with steel suppliers to fix the price for a period. But the medium-small shipyards are regarded as small potatoes, who might be requested to pay 30% to 50% deposit. For example, a 175,000-dwt newly-built ship will need 22,000 tons steel. Nowadays, most shipbuilders don t dare to fix the steel price in advance which means more risks. At present the ship price is becoming closer to cost level. Meanwhile, Korean builders caught huge number of global orders in 1st quarter by price strategy. Chinese yards are facing dilemma situation. As is reported earlier, more and more Chinese large shipyards are rushing into offshore plant market. Chen Qiang, President of Rongsheng Heavy Industries Group, said the offshore plants had high added value. So, the expansion to offshore market can avoid the risk of steel price rising to some extent. Chen also expressed the small shipyards would struggle for survival continuously. Wärtsilä orderbook picks up Finnish engine maker Wärtsilä has described a pick up in its ship power orderbook as a shy improvement. The Helsinki-listed company said in its first quarter results announcement that there have been some small signs of recovery, with newbuilding ordering volumes at the highest since late It said it had received 95 orders for ship power systems, the majority being in March. However it said the market is characterised by relatively small players placing orders for only a few vessels at a time. Newbuilding prices are at 2004 levels according to the company, with the most interesting developments occurring in specialised tonnage, especially in the cruise and ferry, salvage and construction vessel markets. It also believes there will be a pick up in the offshore market later this year. The current ship power orderbook for the engineering company currently stands at 2.2bn ($2.9bn), a similar level to the previous three months, but down 46% from one year ago. A quarter of the existing orderbook is for offshore vessels and 12% for bulk vessels. Cancellations amounting to 82m were removed from the orderbook during the quarter and the company said that 400m of the current orderbook remains at risk. Despite the modest improvements chief executive Ole Johanson said income from the services division of the group remained stagnant as shipowners were deferring large non-essential maintenance or conversion projects. A spike in service income during the end of last year was primarily due to owners keen to use up what budgets they had, and this has had some impact on income during the first quarter results for Wärtsilä. Mr Johanson said customers were more focused on necessary repairs rather than upgrades due to the weak markets, but added that there had been a trend to look for innovative service arrangements by some owners looking to find further cost savings in their fleet operations. There was also an indication that the trend towards slow steaming had also affected Wärtsilä s income for its services division. As owners turn to slow steaming to conserve fuel, Mr Johanson alluded to the influence this was having on maintenance costs. But the lay-up or idling situation of excess tonnage had eased a little during March with about 15,000 vessels over 299gt currently idle and 25,000 vessels at anchor, he said. For the first quarter Wärtsilä reported net sales down by 26% year on year to 922m, with pre-tax earnings of 94m. In its outlook for 2010 the company is expecting net sales to decline by 10% to 20% for the year with profitability of up to 10%. Banks should be allowed to offer loans to foreign shipowners: CSBC Kaohsiung, April 26 (CNA) Taiwan's government should create an environment favorable for local shipbuilding companies to compete with their foreign rivals, the head of the country's largest shipbuilder urged Monday. CSBC Corporation, Taiwan Chairman Cheng Wen-lon made the appeal in an interview with the Central News Agency on the sidelines of a ceremony celebrating the delivery of three CSBC-built container vessels to German shipping company Peter Dohle Schiffahrts-KG. One of the most effective steps the government could take to boost the competitiveness of local shipbuilders would be to permit Taiwanese banks to offer financing to potential foreign buyers, Cheng said. Insisting that CSBC can compete technologically with Japanese, Korean and Chinese shipbuilders, Cheng said it would gain more leverage in pursuing foreign orders if local banks were allowed to provide financing to its potential customers. China, Japan and South Korea jointly control 90 percent of the world's total commercial shipbuilding market, while Taiwan only has a 0.8 percent share, Cheng said. "What we rely on in competing with foreign shipbuilders is our technical expertise and our fine workmanship and quality, " Cheng said proudly. But the company would do better if the government could create a business environment on a par with the major shipbuilding countries, he said. Noting that China has done much to prop up its shipbuilding industry, Cheng said Japan, South Korea and other powers in the industry have all offered financing on attractive terms to help attract foreign customers for their shipbuilders.

5 As for its delivery of the three container vessels Monday, Cheng said it was fortunate that Peter Dohle only asked for a four-month delay in the delivery of its ships, considering that the global container shipping industry was hard hit by the global financial crisis. One of CSBC's customers, an Israeli company, actually canceled its orders because of the downturn, Cheng said. The German company placed orders for 12 container vessels with CSBC in After Monday's delivery of two vessels capable of carrying 6, foot containers and a vessel that can accommodate 4, foot containers, six more vessels are still to be delivered. "German shippers are known to be demanding of high quality. Our technology has helped us secure orders from Peter Dohle, " Cheng said. 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.