Korean Shipyard Industry Update 2nd Annual Korea Ship Finance Forum Korean Shipyard Industry Update 2008. 11. 18 Korea Eximbank

Contents I. World Contracts Trend II. Korean Shipbuilding Industry Trend III. What Happens in Shipyards in the Financial Crisis IV. Finance for the Shipyards V. Perspectives

I. World Contracts Trend World contracts have been decreasing this year Source : Clarkson Key Issues : - Decreasing investment in ship finance - Concerns of global economic recession - The financial crisis

I. World Contracts Trend Newbuilding price is still high, But…….. Source : Clarkson Newly invested and established ship builders will try to cut down the order price Major ship builders will resist against the lower order price requests Major shipbuilders position will limit the price cut on new orders

II. Korean Shipbuilding Industry Trend Contracts have been following the downward world market trend Source : Clarkson Market share : 36~42% Since 2003, Delivery < New building contracts Increase in the order book quantity

II. Korean Shipbuilding Industry Trend Delivery quantity is continuously increasing by new….. Source : Clarkson Increasing around 15% annually (since 2003) Mainly contributed by New construction methods - Mega block, building on dry land, and floating docks

II. Korean Shipbuilding Industry Trend The orderbook started to decrease, but it is still sufficient Source : Clarkson Note : As at the start of period specified Korean ship builders have more than 4years worth on their orderbooks

III. What Happens in Shipyards in the Financial Crisis Possibilities of order cancellations due to the shrinking ship finance market “The maritime sector needs about $300 billion over the next three to four years to fund construction of vessels that are already on order, according to Nordea Bank Finland Plc. At least a quarter of container ships, dry-bulk vessels and oil tankers on order are not financed, according to Seaspan Corp., the Hong Kong-based ship lessor.” Bloomberg.com (Oct 15.), Is there a possibility that around 30% of orders could be canceled ?

III. What Happens in Shipyards in the Financial Crisis A Certain amount of order cancellation will be positive to the shipping market Cancellations under 30% (In the long-term perspective) Can be a positive impact to the shipping industry Eventually, can be beneficial for the shipbuilding industry World container roll-on/roll-off volume/World containership fleet Source : Containerisation International Yearbook, Clarkson, estimated by Korea Eximbank

III. What Happens in Shipyards in the Financial Crisis But the cancellation could bring about a critical impact in newly established shipyards Order cancellations for Shipyards Rearrangement of construction schedules Monetary loss Opportunity cost And…………. If it becomes concentrated on S&M or newly established shipyards Could be CRITICAL !!!

III. What Happens in Shipyards in the Financial Crisis The expected actual order cancellation occurrences will be limited In the 2008 stock market, it was confirmed by public announcement 20 ships and about 1.2 b$ worth of orders were canceled They were mostly due to non-payment Currently inquiries on order cancellation or schedule delay have been increasing in the shipyards But it is difficult to cancel once the first payment has paid. Owner’s Penalty : Engine order cost, design cost, opportunity cost of shipyard, and indemnity Owner’s credit declines Delivery schedule delay is not easy Shipyards are reluctant to rearrange the construction schedule Chartering Schedule by contract Risks such as owner’s default and failure in acquiring finance still remain Order cancellations will have a limited effect in the next 3 years than expected

IV. Finance for the Shipyards In 2008, there was not a big trouble in Korean RG market Forecasted : 2nd half of 2008, the RG market will reach its exposure limit By suddenly increased contracts In 2007 But due to the decline in the orders this problem did not occur Korea Shipbuilding Industry’s Contracts and RG (estimated) (million Dollars) 2004 2005 2006 2007 2008P Contracts Big7 29,643 27,654 46,185 73,344 51,000 S&M 1,817 2,944 9,311 24,551 10,500 Total 31,460 30,598 55,496 97,895 61,500 Issued RG 20,009 20,745 28,858 61,478 37,331 Estimated by Korea Eximbank

IV. Finance for the Shipyards The 2009 RG market will not be in difficulties Expectation : There will be no problem in the RG issuing limit in 2009 Possibility : New orders < Delivery Amount Possibility : Banks avoid RG issuing to newly established S&M shipyards In 2007~08 some insurance companies took high risks for newly established S&M shipyards But 2009 ?

IV. Finance for the Shipyards In 2009 the demand for shipyard construction finance will increase and commercial banks will need to prepare Expectation : Increased amount of construction finance will be needed In 2006~2008, shipyard enjoyed abundant liquidity Next year, the decrease in contracts ⇒ insufficient liquidity Estimation : The demand for construction finance will be around 5~7 trillion Won 38~54 billion dollars (1$ ≒1,300 Won) This is around 10~14% of the total construction cost For commercial banks, New RG demand ↓ Construction finance demand ↑

V. Perspectives 1. In the next 3 years new shipbuilding orders are expected to be sluggish - The aftereffect of global recession and oversupply of ships; shipping market situation can become worse 2. Competition among shipping companies will create a burden and demolition of old ships will increase 3. The Korean shipbuilding industries will overcome the crisis with their sufficient orderbooks

Research Fellow / Ph.D in MoT (+822-3779-6679, jongseo.yang@gmail.com) Thank You !! Jongseo Yang Research Fellow / Ph.D in MoT Korea Eximbank (+822-3779-6679, jongseo.yang@gmail.com)