“Big Three” Korean Shipbuilders & Their Huge Shipyards in a World of Overcapacity and Collapsed Orders

Years of “growth at any cost” led to accounting fraud, huge government bailouts, and murky restructuring plans.

By MC01, a frequent commenter on WOLF STREET:

Worldwide orders for newly built commercial vessels peaked in 2007 at 85.3 million Compensated Gross Tonnage (CGT) and have never recovered, despite the boom in the intercontinental maritime trade, especially with East Asia. After a historic collapse in 2016, orders ticked up in 2017, but to a still desperately low 20.2 million CGT (new shipbuilding orders via Sea Europe):

Three countries came to completely dominate this market as of 2017: China (34%), Korea (31%), and Japan (19%), according to Japan’s Ministry of Land, Infrastructure, Transport and Tourism (MLIT), which also points at a major issue: overcapacity.

The shipbuilding industry has been plagued by overcapacity since 2010 and, with new competitors emerging in cheap-labor countries such as India and Vietnam, it seems oversupply will get worse over the next few years.

Nowhere is overcapacity more evident than in Korea, where shipbuilding alone accounts for 6.5% of the GDP and where the Big Three shipbuilders alone directly employ over 200,000 workers: Samsung Heavy Industries (SHI), Daewoo Shipbuilding and Marine Engineering (DSME), and Hyundai Heavy Industries (HHI).

To understand how important shipbuilding is for the Korean economy as whole, one only needs to look at Geoje Island, near the port city of Busan. Both DSME and SHI have their main shipyards on the island, in Okpo and Gohyeon respectively, and especially at Ulsan, where HHI’s main shipyard, the world’s largest by capacity, is located. Ulsan is also home to the largest car factory in the world by potential output, owned and operated by Hyundai Motor Company, a company belonging to the same chaebol as HHI.

The Hyundai Shipbuilding Division, as the Ulsan shipyard is officially known, can be considered the true poster child for the Korean shipbuilding industry: it represents its ambitions, successes, and now the many challenges facing it.

This shipyard looks like a cross between a sprawling state-of-the-art-manufacturing facility and a futuristic nightmare, stretching as it does over a massive four kilometers of coast, At the heart of this industrial conglomeration are nine dry docks and what once was the world’s first H-dock.

The H-Dock is used to build specialized vessels and floating structures, from Tension Leg Platforms (floating platforms for oil and natural gas exploration) to pipe-laying ships. The dock is 490 meters long, 115 meters wide, and 13.5 meters deep (1 meter = 3.28 feet) and is advertised as being able to build any kind of vessel customers may conceivable want.

HHI boasts that Dry Dock #3, the world’s largest at 672 meters long and 80 meters wide, a product of the unbridled economic expansion of the 1990s, can be used to build vessels up to one million DWT (Deadweight Tonnage is a measure of how much a ship can carry, including paying cargo, ballast, fuel, provisions, and crew and passengers).

All vessels over 400,000 DWT ever built proved to be unsatisfactory in service and, despite the present trend towards larger and larger ships to increase efficiency, it’s highly likely no more will be built in the foreseeable future: even the Valemax bulk carriers, which are certified for 400,000 DWT are rarely over 270,000 DWT these days. This means Dry Dock #3 is used to build two or occasionally three ships at the same time.

The Ulsan Shipyard also boasts ten “Goliath” gantry cranes; while Goliath is a trademark of Kone Cranes of Finland for their family of ultra-large gantry cranes, it has come to indicate any oversized and extremely powerful gantry crane, all the way up to the Taisun, owned and operated by Yantai Raffles Shipyards of China, which has been certified for up to 20,000 metric tons of lifting capacity, the most powerful crane in the world (image via CIMC Raffles):

On top of this, like all their competitors, the Ulsan shipyards sport state-of-the-art metal works and steel cutting lines, and one of the only four facilities in the world that can manufacture the enormous crankshafts used in the huge slow-speed two-stroke diesel engines that propel the largest commercial ships.

The cost of labor, however – though it originally propelled Korea to the forefront of the shipbuilding industry in the 1970s and 1980s when wages in Japan were growing too rapidly for shipowners’ liking – has been a major concern for Korean shipbuilders since the 1990s.

This means all Korean shipbuilders have invested heavily into automation, both to increase worker productivity and to cut the labor input needed to manufacture a ship. These technologies include:

  • Trackless crawling all position arc-welding robots, highly sophisticated industrial robots that use magnets to move on the sheets of metal they are working on, laser beams to control the welding process, and carefully controlled streams of ultra-cold pressurized nitrogen to control welding shapes.
  • Crawler robots to lay the miles of wiring any commercial vessel possesses nowadays.
  • Fully automated paint cycles, a sorely needed process as the anti-foul paints used on keels contain biocides such as oxine-copper, a toxic and carcinogenic compound.

The commercial policies of these Korean mega-shipyards have long been driven by one simple principle modern stock market aficionados will easily recognize: growth at any cost.

Starting in the 1980s, many European and Japanese shipyards, driven ironically by competition from Korea, decided to specialize in one or a few types of ships.

For example, Norwegian and Dutch shipyards specialized in offshore vessels used to support the oil and natural gas industries, such as seismic vessels (ships used solely to conduct seismic surveys in the high seas to pinpoint the best locations to sink drilling shafts), drill ships, and increasingly ships to install offshore wind turbines.

These are highly specialized ship types, built in very small numbers or one-of-a-kind, which require very specific design and manufacturing capabilities.

Korean shipyards happily filled the gap as their old competitors retrenched. But starting in the aftermath of the 1997 Asian Crisis, they found that China was starting to eat into their order books, especially when it came to low-tech vessels such as bulk carriers, which do not require advanced design and manufacturing capabilities.

In 1999, the EU Trade Commission concluded the Big Three were selling ships “up to 40%” below production cost in an aggressive bid to both undercut their European competitors and to keep the new and aggressive Chinese shipbuilders at bay in the midst of a global order glut. This led to a nasty spat between the EU and the Korean government that ended with a complete victory for the latter.

This proved to be a victory of the Pyrrhic kind however.

In June 2016, Clarksons Research released an alarming report: in the midst of a protracted glut for new ship orders, the Big Three of Korea had for the first time in modern history failed to secure a single commercial order in Q1 2016. It was but the first sign of the incoming storm.

WOLF STREET reported on the “death spiral” of orders at the shipyards in Korea, Japan, and China in May 2016 and again in November 2016.

On June 7, 2016, the Korean police raided the DSME headquarters in Okpo. Eight days later it was revealed this raid had been ordered by Korean authorities following the discovery by the Board of Audit, a government body, of a massive accounting fraud at DSME.

At 1.5 trillion Korean won ($1.28 billion), it was the largest financial scandal in the country’s history and it led to a spate of high-profile arrests, including the former head of audit firm Deloitte’s operations in Korea, accused of having misled investors by helping DSME executives to paper over huge losses. It couldn’t have happened at a worse time.

At the time of the police raid, the Big Three were in the final stages of a long and difficult negotiation with their creditors, orchestrated by Korea’s Ministry of Strategy and Finance. The final combined renegotiation and restructuring deal (officially labelled “self-help plan”), worth a staggering US $8.8 billion, was announced on June 11, 2016, while most of the senior DMSE executives were either in jail or handing in their resignation letters.

On 31 October, 2016, the Korean government announced with fanfare a grandiose scheme to “help shipbuilders win over 250 firm orders for ships over 100GT” by the end of 2020. It is effectively a plan of massive subsidies to delay as much as possible the sorely needed downsizing and reorganization of the Korean shipbuilding industry.

The scheme, which will run to the end of 2020, comprises (all values are in 2016 US dollars) $9.5 billion in tax breaks and assorted fiscal benefits for all shipbuilders which will take part in a hazy “government directed restructuring plan,” $5.5 billion in direct subsidies to buy new equipment, “improve efficiency,” and set up new production lines “to provide high value-added services,” and finally $1.4 billion in direct subsidies for small, mostly family-owned shipyards to be distributed through city governments.

To help DSME get through this rough patch of its own making, the Korea Development Bank (KDB) and Export-Import Bank of Korea (KEXIM) have also agreed to provide 2.9 trillion won in fresh funds: both banks are wholly owned by the Korean government.

At the end of 2017, the financial media breathlessly reported that Korean shipyards saw their order jump by a “miraculous” 187% year-over-year. Very few outside the maritime industry bothered reporting that this came hot on the heels of the worst year for the Korean shipbuilding industry in the modern era and that heavy government subsidies had been a deciding factor.

Yet it’s still not clear exactly what shape the “government directed restructuring plan” will take: everybody in Corporate Korea remembers very well the serious labor unrest in 2010, when perpetually troubled Hanjin Heavy Industries was forced to fire several hundred workers. Nobody wants to see a repeat of that.

In a way, this whole fiasco is representative of many industries: Overcapacity and growth at any cost need to be tackled, but what is lacking is the political will and the support from a public that has been kept in the dark or lied to for so long that it now struggles to tell truth from fantasy. By MC01, a frequent commenter on WOLF STREET.

The crankshafts may set the limits. Read…  The Engines of the Largest Container Ships in the World, and Challenges their Manufacturers Face

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  55 comments for ““Big Three” Korean Shipbuilders & Their Huge Shipyards in a World of Overcapacity and Collapsed Orders

  1. John says:

    Swings of Baltic Dry Index (the pulse of world trade) are insane.

    May 2008:11793
    February 2012:290
    July 2018:1603



    No one can predict anything.And in capital-intensive manufacturing it makes more sense to operate at a loss than to shut down production.

    • MC01 says:

      The Baltic Dry Index measures a very specific kind of shipping rates: those for dry bulk goods. This means stuff like iron ore, coal, grains and even sugar. Hugely important rates such as those for containers, live cattle and crude oil are not included.

      A big part of the collapse the Baltic dry Index suffered after 2011 has been due to the arrival on the scene of the Valemax ore carriers I mentioned in the piece. Not only these ships have a truly enormous carrying capacity (400,000DWT) but they are literally flooding the market. Up to date 41 Valemax have been built, with 27 more under construction or ordered.
      After Vale SA, the Brazilian mining conglomerate which conceived them, decided to get out of the shipping business altogether in 2015 the Valemax were sold to a number of Chinese shipping companies, including COSCO. Not only that, but Vale also decided to make the ship design available to any shipping company which can afford to pay the royalties.

      The Valemax is a relatively simple, straightforward design and the company which designed them, Shanghai Merchant Ship Design and Research Institute (SDARI), has been authorized by Vale to make limited alterations to suit the customers’ needs, such as using several different engines and propellers.

      The Valemax are creating a massive glut in the ore carrier market: Maersk noted, with what I can only call concern, that the Valemax built so far have added about 15% ore carrying capacity in an already oversupplied market.
      This means that ore carrier rates are getting wacked over the head with a Chinamax-sized mallet, meaning the Baltic Dry Index responds far more to what I call background noise (rates for grain ships for example) which once would have been drowned among the all important ore carrier rates.

      I hope this helped you understand why the Baltic Dry Index has become a mere shadow of what it once was.

      • John says:

        Thank you,Mr.MC01

        =Hugely important rates such as those for containers=

        Container rates fluctuate just as wildly as BDI.I am not sure whether they are somehow correlated.

        I recently read one forgotten book about the economy of railroads in the late 19 century (from archive.org-courtesy of Google scanning project).

        Railroad rates fluctuated even more wildly than BDI.There was a time when 5 competing railroads transported passengers from NYC to Chicago.The price of a ticket fell from $12 to $1.

        John D Rockefeller said “Competition is sin”.

        I wholeheartedly agree.

        Adam Smith’s small merchant economics principles do not apply to large capital-intensive businesses like railriads and shipbuilding.

        Damn Ida Tarbell and her present reincarnations.

        • Robert says:

          “John D Rockefeller said “Competition is sin”. I wholeheartedly agree.
          Surely you jest. The sins of competition are nothing compared to the sins of monopoly, which is why the Clayton Anti-Trust Act was passed. Teddy Roosevelt was swept into office largely due to his reputation of protecting the consumer through his vigorous trust-busting and prosecution of Robber Barons (would that we had a few with his guts today. The lack of competition in the banking industry, for example, with Big Pharma and Big Telecom fighting for their place at the trough, among others, is why the taxpayers have been blackmailed into paying trillions to bail out the “too-big-to-fail” banks, which use their oligopoly status to pay savers virtually nothing while charging card-holders 20% APR or more)

        • John says:


          My opinion of John David Rockefeller improved mightily after reading “Titan” by Ron Chernow.I considered myself a hard-working blue collar guy.It turned out that compared to JDR I am just a lazy and not very motivated bum.

          Monopolies do not intend to kill their customers by setting sky-high prices.They try to stabilize markets to keep the production going because too much is invested.And if the music stops everything falls apart pretty quickly.

          Look at Camden,New Jersey.They used to build aircraft carriers there like “Kitty Hawk”.Now that the manufacturing is gone it is block after block after block of squalor populated with lower forms of human life “Man,gimme a dollar”.

          And,btw,when Standard Oil cornered the market the price of the gallon of oil went down from $1 to 13 cents per gallon.

          Who lost ? Pathetic clowns aka independent oil men who transported oil in wooden barrels driven by horses (setting rivers and forests on fire in the process).

        • John says:

          ===price of the gallon of oil went down from $1 to 13 cents per gallon.===

          Sorry,it was kerosene.

  2. Paulo says:

    What a terrific and well written article. Not only informative, it was a plain old great read to boot. Thank you.

    A little ship building anecdote from BC. We operate the largest pax and 2nd largest ferry service in existence, or so I have read. They run between the Lower Mainland and Vancouver Island, and all over the more remote BC coast. We used to build the ferries here, but for a marginal savings in construction costs our last ideaologically driven right wing Govt contracted several vessels out to Germany (Flensburger). Now, the Govt has changed and they are trying to revive the ship building industry that once thrived here, the same industry that used to build our ferries. Apparently, for every dollar spent building the ships at home it produces 2.6 dollars in economic activity thus negating the supposed savings in foreign fleet construction.

    The point is this. I would imagine that there is a vast subsidized and under-the-table bunch of reasons why countries promote this industry and that the public is not aware of those secrets. One of our ex-Prime Ministers, Mulroney…(another right winger) was accused of taking bribes from an intermediary to purchase a few new Airbus 300s. He was also caught with $200,000 dollars in a secret NYC bank safe deposit box. He escaped jail and big fines by confessing ahead of the inevitable investigation and was only forced to pay tax on 1/2 the cash. If this happens for a couple of jets, think what skulduggery goes on about building shipping fleets? Maybe that is why these mega industries exist in these few countries, for it might not be about what they earn…it’s the side benefits for people behind the scenes.

    Maybe that’s why our ferries were built overseas instead of in our own yards?

    By the way, Mulroney is still practicing law for a big shot eastern firm. (must be nice, eh?) He even avoided a Club Fed sentence.

    Imagine, crooked politicians and secret payments.

    This is a pretty interesting read and an embarrassment for our country. https://www.theglobeandmail.com/news/national/brian-mulroney-the-payments-and-the-taxman/article1085673/

    I cannot even imagine what goes on in this mega shipping industry and what is hidden within the shadows?

    (Probably cash and Canadian RE)

    • nick kelly says:

      IF it can be done here at good price, fine. But one BIG item to consider: the contract with the German yard was at fixed price with us providing the money and the yard providing the ship at fixed time. I.e., any cost overruns were their problem, not ours.

      Anyone can open an office, form a company etc. and submit a bid. But do they have the resources to do this: are they a qualified bidder?
      If this outfit is being created just to bid the contract, the real employer is the province. What happens then if the contracted money runs out and the thing is only 70 % ready?

      This idea of ‘we use them so we should build them’ is not enough to give the go ahead. A real ongoing shipyard can’t rely on just the orders from a province of 4.5 million people. The test of whether it’s viable: is it getting orders from other places?

      The abuse of the small Canadian military has been so extreme by this ‘build local’ political idea that I think there should be a law prohibiting preference to domestic suppliers.
      One example: decades ago the Canadian Army needed jeeps.
      The chosen vehicle was the Iltis, a small budget jeep built in Germany.

      But politics raised its head: they must be built in Quebec. So a whole new production line was set up here for an absurdly low number of jeeps. Final cost to the army’s budget: over 200 thousand per unit.

      Note the gist of the main piece: ship construction is a lousy business that gets bounced further and further down the ladder as developed countries give up on it. Before we subsidize it, maybe we should look at subsidizing something with better prospects.

      • backwardsevolution says:

        nick kelly – “Before we subsidize it, maybe we should look at subsidizing something with better prospects.”

        We did. We decided to subsidize the banks, developers and realtors, and then proceeded to sell out the country.

    • RagnarD says:

      Seconding Paulo. Great piece.
      Keep me coming

  3. J.M.Keynes says:

    – The japanese, the south korean and the chinese shipyards were/are (heavily) subsidized. And how much subsidy do indian and vietnamese shipyards receive from their governments ?

    • MC01 says:

      According to the data I have available, the Vietnamese government directly controls or owns outright 70% of the shipbuilding capacity in that country. The remaining 30% are either small local shipyards or wholly owned by foreign companies such as Amanda Group (China) and Damen (The Netherlands).
      The Vietnamese shipbuilding industry still reverberates from echoes of the Vinashin fiasco. The Vietnam Shipbuilding Industry Group (Vinashin for short) was a wholly State-owned shipbuilders which collapsed in 2010 due to gross mismanagement and what I can only call carefree accounting. It has since been reorganized as the Shibuilding Industry Corporation (SBIC) with help from the Kongsberg Group of Norway.

      India… where to start? The Indian shipbuilding industry is basically split in three.
      There are two categories of State-owned shipyards: those owned by the Ministry of Defense and those owned by the Ministry of Shipping. The former, despite their name, split their operations between naval and commercial ships. For example the Mazagon Docks mostly build tugboats for the commercial market.
      As one can well imagine these shipyards are notorious for their high cost structure and, to win orders from abroad, they often operate at cost or even at a loss.
      In the past there have been serious quality control issues in these shipyards which were addressed by the Ministry of Shipping by setting up a collaboration with the Japan International Cooperation Agency, which have resulted in the Cochin Shipyard being the “most Japanese shipyards outside of Japan”.
      Private companies are another matter completely, and their success comes from specialization: Indian private shipyards, led by ABG and Bharati, have become the world’s largest manufacturers of offshore vessels, beating both Norway and The Netherlands.
      The Indian government has put in place two different fiscal schemes to help their private shipyards winning orders from abroad. The first are tax breaks and direct subsidies for equipment. The second is a scheme that designates shipyards as “strategic infrastructures” and allows them to access long-term loans at well below market rates.

      • J.M.Keynes says:

        – Interesting.
        – In other words: Vietnam & India also can look forward to one or more government bail outs of their shipbuilders.
        – I assume that the Han-Jin debacle also has to do with (heavy) government susidies.
        – The previous south korean government was also known to be “in bed” with one or more socalled “Chaebols” in South Korea.

      • Ragamanof says:

        Thumbs up to MC01. Excellent article and comments!!!

        Sadly, nobody seems to be building anything (Ships) in India. The Defence Public Sector Units (DPSUs) are building vessels for the Navy only. Cochin Shipyard Ltd (CSL) is building vessels for Navy as well as Commercial Markets. However, CSL has little or no orders for commercial orders other than some ferries. They have been building the Indigenous Aircraft Carrier for the last twenty years!!!!!

        ABG Shipyard and Bharati Shipyard, now Bharati Defence and Infrastructure, are both undergoing the ‘Corporate Insolvency Resolution Process’. They are more or less washed out.

        Reliance Naval and Engineering Ltd (RNEL) and Larsen & Toubro Shipbuilding (LTSB) are the other two private players. Their speed of execution has been terrible due to various reasons. They are racking up huge losses. In fact RNEL has been declared a Non-Performing Asset (NPA) by two of the twenty two banks since the company is unable to service the loans.

        There’s just one reason for this fiasco – EXTREME CORRUPTION in the Government as well as well as by Promoters of Private Yards.

  4. HowNow says:

    I agree with Paulo: excellent, well-written article. For a pretty arcane subject, it was fascinating.

    • Glen says:

      Great Article! Thank you!

      Best commentators on articles, as well!

      Thanks Wolf

  5. Sneaky Pete says:

    I agree. An excellent read! It was like reading a crime novel. Who knew shipbuilding could be such a diverting topic.

    And, fwiw, it’s good to see that things are quite normal around the world, with government interference ,corruption and financial impropriety being the order of the day. I’ll sleep well tonight.

  6. Tang says:

    Yeah, but nothing beats Malaysia 1MDB. Seeming huge projects which would benefit the country and her people were initiated by a SWF and large sums of money were siphon off through the years.

    First record. Money belonging to Malaysia were discovered in at least 6 countries. Years of publicity were in the media on the fraud. Yet seemingly the countries can only jail their own wrong doers citizens but nothing done to those responsible for the fraud.

    Second record. Seemingly the embezzlement start as early as 2009. Key leaders involved were the then PM, who were also the Finance Minister, and also the Chairman of the SWF. Billions of dollars were involved.
    Over 408 bank accounts were now frozen. There were proxies everywhere including companies and shell companies. Proxies used to award projects. Proxies used to transact. Proxies employed to receive, distribute money all over the world.

    Third Record. It takes the people of Malaysia at a General Election with the help of the previous PM(22 years) and now 92 years of age to overturn the then ruling party UMNO which governed the country for over 60 years.
    The country cleaning will take years. There were even people murdered just to cover up.

    Like all big projects, shipyard, building of ships , railway systems etc etc these are very fertile grounds for corruption. Who is able to precisely give a total cost of the project? Who can prevent a cost overrun in a project?
    Who can control material and commodity costsnfor a project? And many other shady ways of costs hiding and overbilling. Auditors so good?
    But the best loved meat is the Financing part of deal. This is where SWF loves to get their hands-on. Big investment banks and financial institutions loves a good story. Why ? Such projects seemingly good revenue stream collection during operations throughout the years. Payment is over years and in the case of bonds you service only the interest for a start. But you get the big amount of money to kick off your project. Also the man in charge gets the fee payment upfront.

    Someone will pay for all the so call mistakes in time.
    Those dining at the table happily walks off.

  7. Ambrose Bierce says:

    But wait, truck orders in the US are off the charts! I can drive my rig to China, pick up a load and be home in time for breakfast…

  8. raxadian says:

    So at least a few shipbuilder will end closing down? Or they have rope for a few years more?

  9. Petunia says:

    With the new silk road now open from China to Europe surely this will be a huge dent in oversea shipping. I understand the time frame on the trains is 18 days to Europe as opposed to much longer at sea. This is bound to affect traffic from China into Europe permanently, off of ships onto trains and may even redirect traffic from other Asian countries thru China.

    • MC01 says:

      I suspect you people are seeing too much into this initiative.
      Leaving Russian motivations aside (Winston Churchill was right in calling that nation “a riddle wrapped in a mystery inside an enigma”), it smells to me of yet another scheme by China’s central planners to add infinite economic growth and down with the consequences. Such as gluts of epic proportions.

      To get back to the first comment I made above, apart from four ships ordered by NS United Kaiun Kaisha, a Japanese shipping company, from Japan Marine United, all the Valemax are either owned by Chinese shipping companies or have been ordered by Chinese shipping companies to Chinese shipyards.
      Considering China’s runaway steel production sparked the present trade wars (the EU slapped a 72% tariff on cold rolled steel from China a year before the US introduced their own tariffs) and all efforts by the central planners in Beijing to curtail steel production have been either a colossal failure or nothing more than a very poor smokescreen, one has to wonder exactly how much more iron ore and met coal China’s steel mills really need.

      The same applies to everything: China is causing gluts, sometimes of epic proportions, in pretty much any sector I can think of, either directly or indirectly, at a time when both inflation and interest rates are starting to bite. Something will have to give.
      If China replies to any economic hiccup like they have done so far this century (more capacity, more credit, more distortions) I literally have no idea what other demon they may set free upon this world.

    • nick kelly says:

      If time is the main concern is time, go rail, but long haul, nothing can compete with ships on cost. When a car is shipped from Japan to Calgary, Alberta, it costs more to road or rail the 700 miles from Vancouver to Calgary than the 3000 or so from Japan to Vancouver.
      A medium size freighter can carry the weight of a train load.

  10. Olivier says:

    “All vessels over 400,000 DWT ever built proved to be unsatisfactory in service”. And why is that?

    Also, a follow-up question on your post on LNG tankers that I didn’t get to submit in time before comments were closed: which design did Shell pick for its mammoth Prelude? Just curious. And is the Prelude a one-off or the start of a (small) trend?

    Lastly, I wish you would do a post someday about autonomous ships: this seems quite far along already (see for instance the presentations on the RR web site) but I don’t really know what to make of it: there is clearly a big element of boosterism on the part of RR.

    • MC01 says:

      The reasons why vessels over 400,000DWT haven’t proven successful are chiefly two: one technical and the other practical/economic.
      The technical reason is that ships over a certain size exhibit a tendency for excessive vibrations which may result in premature structural failure, especially during loading operations. I’d have to ask if progresses have been made in coming up with satisfactory predictive models but so far so few ships this size have been built they have been dealt with on a case-by-case basis. All I know is fixing these vibrations has proven neither easy nor cheap to fix but I am chemist, not a structural engineer.
      The practical reason is ships so big are very limited both in the routes they can use and where they can load and unload their cargoes.
      I am pretty sure anyboy who reads the news has seen terms such as “Malaccamax” or “Suezmax”: these terms indicate ships that can use certain waterways (IE Strait of Malacca and Suez Canal) or ports in laden conditions. For example “Chinamax” ships must have less than 24m draft when laden, 65m beam and 360m length to use several Chinese ports.
      Being offsize limits a ships’ flexibility, meaning she cannot be put on other revenue generating routes if business dries up or freight rates become too low to operate at a profit.

      Now the Prelude… she’s one-of-a-kind, partly because Floating Liquefied Natural Gas (FLNG) is still in its infancy and partly because she has been so expensive so far: the three partners (Shell, KOGAS of Korea and Inpex of Japan) have so far poured about US $12 billion into her. That’s a lot of money for what’s basically unproven technology.
      On top of that the Prelude needed to be tugged and anchored into place, connected to the drilling platforms and injection lines (lines used to pump part of the natural gas back into the wells to help regulate their pressure)… again, not cheap and it comes at a time when big natural gas producers such as Algeria, Russia and Qatar are really stepping on the gas. My gas bill never goes down, but commodity prices tell another story. ;-)

      To get back to the Prelude, she was designed by Technip of France and Samsung Heavy Industries and built by the latter. It was a mammoth endeavor which I think will not fail or succeed based on technical merits.
      Petronas already has one FLNG in operation (Satu, off the shore of Sarawak) and has two more on orders.
      I know there are several others supposedly under development but it seems ENGIE, ExxonMobil and ConoPhillips are either sitting on the fence or have lost their original enthusiasm for FLNG.

      • Dan Romig says:

        Thank you MC01 for another interesting and thought-provoking read!

        When a guitar string oscillates it plays a note, but it also has second, third and higher order harmonic frequencies. This gives it its signature sound that we hear.

        The hull of a cargo ship that’s football fields long is subject to Hull Girder Vibrations – amongst other stresses. The size of a ship with 400,000 deadweight tons is mind boggling. Think of a cargo ship’s hull as a guitar string with forces acting upon it ….


        But that’s not all the engineers have to deal with. Electric propulsion systems used for variable speed drives have their own box of gremlins of current and voltage harmonics.


        Thanks again MC01. I get learn something new from your contributions to WolfStreet.

      • baldski says:

        Large ships bring their own problems with them. Take VLCC’s for instance. The fully laden draft maybe 64 ft. but the tanks are full to 84 ft. So, on a loaded voyage say in 10 ft. seas, there is cyclic loading on the hull from the head of oil pushing outward and varying from 10 ft. head to 30 ft. of head. This caused cracking of the hull at the web frames as it was cyclically pushed out and in. Big repair problem.

      • Olivier says:

        Thanks for the detailed answer! Just one precision: do FLNG and FPSO refer to the same kind of ships?

        • MC01 says:

          FLNG’s are a subcategory of Floating Production Storage and offloading (FPSO).
          Basically an FPSO is used to store hydrocarbons (which may be either oil or natural gas), process it, store it onboard and then offload it on a ship.
          FPSO have been used in oil drilling since the 70’s but their use for the LNG market is a development of the past decade.

    • walter map says:

      ‘“All vessels over 400,000 DWT ever built proved to be unsatisfactory in service”. And why is that?’

      Think about it.

      It’s because an Economy of Scale is not an unmitigated good. Sometimes it can backfire on you. With a ship it should be easy to see why: a large ship is more unwieldy to steer, takes longer to load and unload, and requires more expensive everything, especially docking facilities. Ships can’t be larger than the waterway locks can accomodate, big Maersk container ships cannot use the Corinthian Canal, and Meyer-Werft has a terrible time getting new cruise liners to the North Sea from Papenburg.

      Bigger is not always better: agility and speed can be decisive, which is why many perishables are shipped by air and not by sea. And it’s not just business logistics: the Spanish Armada was defeated by the British in large part because smaller, nimbler British warships were able to sail under the cannon fire of the larger Spanish galleons – many of which were converted heavy cargo ships not designed for war – and attack from close range. And an IV drip can be effective when a bolus would be fatal. There are many examples.

  11. Rates says:

    A totally informative article. Corruption is definitely a serious issue in South Korea. Transparency International’s 2016 Corruption Perception Index ranks the country 52nd place out of 176 countries.

    So I am not surprised by these companies trying to hide their shenanigans.

    In the next crisis, all sorts of unpleasantness is going to come out of the South Korean economy for sure. Going to be another 1998 Redux. Heck, Kim Jong Un might be President and Overlord of a United Korea 10 years from now.

  12. nick kelly says:

    Oh God

    • walter map says:


    • MD says:

      Oh God what? Walter makes some very good points.

      In case it passed you by, the current system we have of viewing corporate profits as the apogee of human achievement has already destroyed the global economy – it happened in 2008, and the repair process is still ongoing in the form of inconceivable amounts of social capital having to be created and handed to the people who caused the chaos.

      Without these actions, we would have had complete societal breakdown, due to the ‘mistakes’ (ha!) of those who buy into infantile winner/loser values systems wherein human beings are measured only by the ‘stuff’ they have.

      To roll your eyes and say ‘Oh God’ when someone suggests an alternative life view to the ridiculous greed-driven system the human race organizes itself by currently – which guranatees constant war and strife – is asinine, TBH.

      • nick kelly says:

        Maybe he shouldn’t sully his fingers using a creation of capitalism to comment. Maybe computer companies shouldn’t exist, etc., etc. etc.

        I have studied the parameters of the topics presented on WS, and try to stay inside them.

        The heading on the blog’s masthead reads: ‘The stories behind business, finance and money.’

        The specific article above is about building large ships and their economics.

        I do not see how that topic is an appropriate venue for a sermon on why ‘Business, Finance and Money’ should not exist.

  13. John Monson says:


    “All vessels over 400,000 DWT ever built proved to be unsatisfactory in service”. And why is that?

    Structual strength of the material they are built from, steel. Build them much over 1300-1400 feet in length and they tend to flex sufficiently in storm conditions to crack in half.

    Sailing ships of wood construction have a similar length limitation, on the order of 400 feet.

    • MC01 says:

      The problem of structural strength is far more complicated than mere size.
      One only needs to look at the Bridge-class combination carriers: six were built. One (MV Derbyshire) was lost with all hands during a typhoon near Okinawa and another (MV Kowloon Bridge) developed hull cracks just before being lost in what I can only call a nigh-on-unbelievable series of events. And the remaining four? They all served for twenty years as per original design, before being scrapped.

      While the MV Derbyshire did indeed broke up during a typhoon, the discovery of the wreck on the ocean floor in 1994, 14 years after her loss, allowed to piece together how she came to grief.
      The waves she encountered tore the cover of the ventilation pipes near the prow. As the typhoon did not abate, the ship took in water through the ventilation pipes for at least 24 hours, causing the prow to ride lower and lower. Finally the ship was riding so low into the water the waves started battering the #1 cargo hatch. As the old saying goes water always finds a way, and this was no exception: the cargo hatch was blown open and the ocean started pouring in. #2 cargo hatch followed in a matter of one minute or two. The ship probably sunk in less than five minutes, and the hull was torn apart by water pressure as she descended to the bottom.
      Had the cover of the ventilation pipes held or had the pipes themselves been located amidship, such it’s done nowadays, the ship would have ridden through the typhoon as the skipper was following the proper procedures for dealing with it.
      The only mystery is why the Derbyshire never sent a distress signal as it’s beyond doubt the experienced crew knew something was going spectacularly wrong.

      That’s the reason why, when a ship or an aircraft disappears, no expenses are spared to find her: lives depend on discovering if there’s even one little detail that was overseen.

      • Juanfo says:

        Another fascinating article MC01 thank you. One question: do you believe the Kowloon was sunk intentionally? Just curious why you would describe as an “unbelievable” series of events surrounding the wreck.

        • MC01 says:

          I don’t think the Kowloon Bridge was intentionally wrecked to claim the insurance prize, if this is what you mean.
          It was just a case of everything could go wrong (snapped anchor cable, steering gear failure, another storm etc) coupled with a green/unprofessional crew, the same lethal combination which caused the Piper Alpha catastrophe.

  14. Sadasivan says:

    One of the reasons for the collapse of Shipping [transport and building] is the huge reduction in Commodities purchase by China which in turn caused a reduction in Global Trade resulting in a vicious circle.And the 2008 Global Crash adversely affected Liquidity and hence the two above.

  15. Bin says:

    I’ve heard people blaming capitalism for destroying the environment, but if you look at all the wastelands in the former USSR it’s arguably worse. Maybe we need to give National Socialism another run, I’ve read they had a huge respect for nature. :)

    • nick kelly says:

      You will notice that the screed to which you are replying is very long on what’s wrong and has pretty much nothing on what system would be better.

      As you notice, it reads much like the Communist Manifesto, the latter at least containing a course of action ( seizing all property and means of production)

      None of the various varieties of Communism (e.g. Hungary’s ‘goulash’ communism) have improved on quality of life, let alone standard of living. As for the environment….

      Of course, one could take 10, 000 words to elaborate but there are other forums for that discussion.

      As for Denmark ‘and a few others’ (Sweden, Norway?) which is trying to make capitalism work but will be overwhelmed by the forces of Gollum…

      These three have favorable business environments with active stock markets but are high tax (sales tax over 20%) high public service economies. The threat to them, such as it is, does not originate in the capitalist West.

  16. mick says:

    George Soros candidly stated that the US economy fell in 2008 and will never return. China was the planned replacement, with the understanding it could never filll USA’s shoes, and so there must be a major contraction worldwide.
    All pretense of a recovery is just that.

  17. backwardsevolution says:

    walter map – great post.

  18. backwardsevolution says:

    MC01 – intelligent, fascinating post. Thanks for the great job!

  19. Ambrose Bierce says:

    Capitalism is derived from Darwin, Social Darwinism, what does a mayfly care about this future? After the hatch, the trout get their fill, then comes winter…

  20. J.M.Keynes says:

    – Talking about South Korea: According to australian economist Steve Keen South Korea also has a housing bubble (like the US had between 1995 and 2006).
    – And if people want to know why South Korea has a housing bubble: demographics !!!! Read the work of one Harry S. Dent.

  21. WSKJ says:

    Ditto all the praise. This was another great episode in your tales of shipping, MC01 . The praise of course extends to follow-up commentary, and for that matter, Captain Wolf’s bringing you on board (sorry- I just had to).

    Will admit that I am keeping fingers crossed that you will do an episode on ore carriers and ore carrying. Ore shipping would be a large part of China’s commodities imports (Sadasivan’s remarks above), I would think. The story was that China was stockpiling copper- importing the metal proper, in addition to and apart from, copper ores- but I haven’t kept up on that, and as Mongolian production comes online, it would not require shipping in the maritime sense. And at some point, one expects China’s infrastructure build-up to slow down: lesser demand for metals.

    Any idea to what extent ore shipments are driven by anti-smelter policies in the countries where the ore is mined ? Seems like there have in the past been remarks from Oz re sending their BIF iron ores off to China….

    • MC01 says:

      The problem with bulk carriers (the ships carrying around dry bulk cargo such as iron ore) is they are low-tech and unglamorous.
      This however also means any shipyard can build them and any shipping company can operate them which translates into a glut of epic proportions. See my comment on the Baltic Dry Index above.

      For one of the next pieces I had a half idea to write an introduction on the big ports that drive commercial trade… the three big iron ore exporting ports of Pilbara would obviously be heavily featured.

      I hope to develop this a bit more in depth, but the reason for these massive iron ore exports is one and one only: China.
      China accounts for 66% of the global iron ore trade, and that’s on top of what they mine locally. It’s beyond crazy, especially considering Japan and Korea, both of which with no domestic iron ore production and have long been mired in steel overcapacity (like everybody else), are worth 13.1% of the global iron trade when put together.
      Such figures do not merely drive iron ore exports: they create them.

      There’s also the issue of iron ore quality, but I hope to cover that in-depth at some time in future.

  22. Wobulator says:

    The 3 Korean shipyards were also simultaneously affected by the downturn in the offshore oil & gas fabrication business. Several offshore drilling companies cancelled deepwater drill ships which were close to delivery, leaving very expensive specialist vessels in the yards. DSME also suffered from the Dong Energy Herje ´too heavy´ topsides debacle.

  23. MC01 says:

    Before comments for this piece are locked, allow me to thank everybody for their kind words.

    • WSKJ says:

      You deserve every kind word

      Will continue to keep fingers crossed for episode re old-tech maritime transport- ore carrying, etc.- it’s all part of the big story, and helps readers appreciate just how high-tech the vanguard of shipping (as you have been chronicling) has become. THX

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