Major Deal Falls Through? North Korea's Nuclear Test Strikes South Korean Shipbuilding Industry

2017-09-08 08:00

Mediterranean Shipping Company's 11 ultra-large container ships The order may be cancelled due to North Korea's sixth nuclear test. The North Korean nuclear test has a huge impact, not only threatening peace and stability in East Asia, but also dealing a blow to the South Korean shipbuilding industry.

According to South Korean media reports, Samsung Heavy Industries and Daewoo Shipbuilding were originally expected to receive an order for 11 ultra-large container ships from Mediterranean Shipping Company (MSC). However, MSC delayed the signing of the contract citing the North Korean issue.

On September 5, an official from the South Korean shipbuilding industry revealed that Mediterranean Shipping Company believes that the advance payment guarantee for this order of ultra-large container ships is issued by the Korea Development Bank (KDB), which is essentially guaranteed by the South Korean government. However, the North Korean nuclear test has made the South Korean government's "endorsement" no longer as secure as before.

Previously, there were reports that Mediterranean Shipping Company planned to order 11 22,000TEU container ships in South Korea, with a total value of approximately US$1.5 billion. Samsung Heavy Industries was to receive 6 ships, and Daewoo Shipbuilding the remaining 5. For the South Korean shipbuilding industry, this contract was of great significance, as it would have erased the shame of losing to China in the competition for an order of 9 ultra-large container ships from CMA CGM last month.

However, after North Korea conducted its sixth nuclear test on September 3, military and geopolitical tensions on the Korean Peninsula intensified. Mediterranean Shipping Company therefore worried that if a military conflict broke out in North Korea, the credit rating of the Korea Development Bank, a state-owned bank, might decline.

Some South Korean observers believe that Mediterranean Shipping Company is using the North Korean issue to gain more benefits for itself. Mediterranean Shipping Company emphasized the North Korean issue in order to reduce the contract price or change some details. Analysts at Meritz Securities pointed out that Mediterranean Shipping Company's move means that shipyards should obtain advance payment guarantees issued by major international banks with higher credit ratings; another possibility is that Mediterranean Shipping Company is trying to use the North Korean issue to lower prices or adjust the number of ships.

However, some domestic industry insiders said that if North Korea's nuclear tests become more frequent, military conflicts could erupt at any time. Currently, no one can predict the changes in the situation. Therefore, Mediterranean Shipping Company's concerns are normal, and the possibility of placing a new order with Chinese shipyards in the future cannot be ruled out, because the shipbuilding industry with the "endorsement" of the Chinese government is obviously safer than that of the South Korean government.

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