1998 ended much better than it began. The Korean yards have again increased their orderbook in absolute value and maintained their market share. 

In November 1997 the country was literally in shock. Bankruptcies threw about 10,000 people a day onto the streets. The paralysis that blocked the Korean economy and doubt about the magnitude of the crisis at first rendered the yards incapable of taking new orders. No order was recorded in January 1998. 

This period of uncertainty did not last long, because the Koreans reacted very quickly under the impetus of their new president. Workers, managers and directors agreed to make enormous sacrifices in the form of overtime and large salary reductions. 

An equilibrium, still fragile, was achieved in the Spring. Whereas the exchange rate had increased from about 900 won/$ in November 1997 to almost 2,000 at the end of 1997, the won stabilized at the end of March and the beginning of April at about 1,400. 

With the notable exception of the Halla yards, the large Korean yards such as Hyundai HI, Daewoo and Samsung did not stop taking orders from that point on, with Hanjin following them a few months later. It is interesting to note in this context that the country's orderbook has increased. In 1998 Korea's nominal capacity was thus reduced for the first time, because of the absence of Halla, without diminishing or affecting the actual national production capacity, in fact just the contrary. 

While prices have already dropped by 15 to 30%, some are wondering about how important it is for the country to maintain this status quo, insofar as the reactivation of the Halla yards could contribute to a further fall in prices, to the detriment of the other yards and the national interest. Time will tell. 

The main difficulty has been in setting up down-payment refund guarantees acceptable to the shipowners and their banks. The bank guarantees issued by Kexim, the Korean import-export bank, have had to be counter-guaranteed by Western banks or insured by first-rank insurance companies. 

However, this has not always been the case, and some Middle East shipowners were satisfied with Kexim guarantees. Others found their own financing. 

The Korean yards got around the difficulty by, for the first time, applying payment terms shifted toward delivery, thus facilitating the setting-up of these counter-guarantees because of the smaller amounts, whereas previously the yards had always favored installment payments during construction, such as 5 x 20%. This resulted in additional costs for the yards, as interest rates in Korea were also higher (up to 17%). At the same time the face value expressed in dollars decreased. 

It appeared that a certain level of confidence had been restored in the Spring, and payments, cash or brought forward towards the signing of the contract, could be negotiated in order to give the shipowners additional discounts, calculated on the cash advances thus agreed at very high interest rates. This no doubt once again altered the market's perception of the prices obtained. Overseas Shipholding Group (OSG) concluded a contract with Hyundai HI for a VLCC at approximately $65 million on the basis of payments shifted towards delivery. 

The Korean yards thus recorded many more orders than they had initially estimated. 

However, in 1998 they had to face up to the disappearance of their domestic market. Shipowners such as Hanjin Shipping and Hyundai Merchant Marine, which in previous years had contributed about one third of the orders placed with the Hanjin and Hyundai HI yards, were no longer present and all the orders taken were for export. 

It is interesting to note that the Korean yards also contributed to their own success. They did so by deliberately and continuously improving their productivity. For example, the Daewoo yards announced productivity gains of 24% in 1997. However, as Daewoo did not set up new production capacity, its productivity gains can be estimated by the number of ships or the tonnage delivered in recent years: in 1990 Daewoo delivered 13 ships totaling 1 million gt, while in 1996 it delivered 30 ships totaling 2.25 million gt. Over the same period the number of employees decreased. 

The Korean shipbuilders also showed great flexibility in understanding and implementing shipowner demands, resulting in better quality and greater recognition by the international community. 

There has been much speculation about the future of the Halla and Daedong shipbuilding yards. Daedong continued to take orders. Two thirds of Halla's debt was cleared. But the situation of this yard is still blocked and will probably remain so until complete settlement of its debt. 

Despite the drop in prices, the main shipbuilders Hyundai HI, Daewoo, Samsung, Hanjin and Daedong will post profits for 1998. The South Korean government, under pressure from the IMF, is pushing the chaebols to reorganize themselves. This reorganization is already under way in the automotive and electronic industries, but no movement has yet been observed in shipbuilding. 

Although prospects for 1999 are still somber, 1998 finished better than it began: 

• Korea was to repay part of its debt to the IMF in Dec 1998. The Yonhap agency recently quoted a government source stating that Korea was going to buy dollars because the won was at about 1,200, judged too high. 
• The balance of payments turned around from a deficit of $8.2 billion at the end of 1997 to a surplus of $40 billion. 
• The Seoul stock market rose by 50%. 

Moreover, according to the latest estimates, orders in 1998 should exceed 10 million gt, while the Korean orderbook broke the 20 million gt barrier at the end of the year. The Hyundai Economic Research Institute forecasts more than 10.5 million gt of orders for the Korean shipyards in 1999

The big surprise in 1998 came from China. The shipyards were not able to maintain their orderbooks, which fell from 3.2 million gt at the end of 1997 (2.9 million gt in the third quarter 1997) to about 2.6 million gt in the third quarter of 1998. 

Their market share also decreased. This reduction is in clear contradiction with the objectives and development prospects of Chinese shipbuilding. 

The main reason for this situation was the relative appreciation of the yuan against the other currencies of the region (Korea and Japan), leading to increased competi tion, mainly from Korea, on the export market, and lower reactivity of these yards to the crisis and to the fall in prices. 

It should not be forgotten, either, that the orderbook of the Chinese yards had benefited in 1994 from the 30% devaluation of the yuan and the increase in demand for newbuilding bulk carriers. 

The Chinese yards have always positioned themselves with respect to their closest competitors by quoting at very similar levels, which was more difficult this year in a very changeable market. 

Another explanation is that a tanker cycle has started and only the Japanese and Korean yards build VLCCs and Suezmax today. The only VLCC construction dock in China is at the Dalian New Shipyard, which up to now has never built tankers of this size. 

Furthermore, it should also be noted that many shipowners continue to prefer the Japanese and Korean yards, more experienced particularly in the building of ships demanding more know-how such as these tankers or very large containerships. 

The Chinese authorities have decided to react to improve the competitiveness of their yards and accelerate their reorganization. The commercial structure, China Shipbuilding Trading Co Ltd, which includes 25 yards, is to be split up into three regions around Dalian in the North, Shanghai in the center and Guangzhou in the South. VAT, levied on ships intended for the domestic market, is to be abandoned to promote the domestic market, in a context where the Chinese shipowners Cosco, China Shipping and Sinotrans placed major orders for Capesize and Panamax bulk carriers with Korean and Japanese yards in 1998. 

China still wants to occupy a first-rank position in the near future, as shown by the projects to build VLCC construction docks. At present there are seven such projects. Some have slowed down because of financing difficulties, but all these docks will probably be completed soon. The fact that these construction docks will be operational at the end of the tanker cycle does not bode well for the shipbuilding market. 

Finally, the stock exchange listing of the Guangzhou yard should be highlighted, illustrating as it does a very capitalist manner for the state to divest itself of its most profitable enterprises.