South Korean shipbuilders and steelmakers are increasingly facing risks from China’s recent restructuring in its ailing shipbuilding sector.

Beijing on Monday announced a large-scale restructuring in the industry as part of efforts to shift away from its investment-driven economic growth model and concentrate on boosting domestic consumption.

Market watchers said the escalating crisis in China could take a huge toll on local shipbuilders as well as steelmakers, should they try to push ahead with strategies like lowering costs and raising the export volume.

 “How Korean shipbuilders would try to maintain profit amid China’s threat is a question. As an internal plan, the top three companies said they will undergo restructuring. It’s the external factors, such as cost reduction of materials like steel and exchange rates, that could have a ripple effect in the steel industry,” Hyundai Steel spokesman Yoo Hyun-ki said.

“Korean steelmakers already have very little margin selling thick steel plates (used for building vessels),” he said.

Chinese steel companies are the linchpin of the global industry, accounting for about 50 percent of worldwide production with prices as much as 25 percent lower than global competitors. It is estimated that thick plates produced in Korea cost between 500,000 won ($430) and 600,000 won per ton, while Chinese products are priced up to 25 percent cheaper at about 450,000 won per ton.

According to Chinese media, Beijing decided to shut down 2,700 of 3,000 shipyards. Only 51 companies were deemed worthy of support and were whitelisted by the government.

Nantong Mingde Industry, a private shipyard in Nantong, Jiangsu Province, entered bankruptcy in late July, the latest following Beijing’s decision to crack down on industrial overcapacity in the country.

Local shipbuilders, like Daewoo Shipbuilding & Marine Engineering and Samsung Heavy Industries, have been hit by a double whammy of industry downturn and prolonged deficit from offshore businesses.

“I call this a crisis. The Korean shipbuilding industry has lost track and it may sink if it doesn’t find its advantage over price-competitive Chinese rivals,” a Korea Development Bank analyst said, wishing to stay anonymous.

Steel companies like POSCO and Hyundai Steel are also threatened by China’s move, as the price of Chinese thick plates has dropped even more following a string of shut downs.

“Should the leftover stock pour into Korea and other countries, it could deal a significant blow to POSCO and Hyundai’s sales,” she said. 

“Chinese rivals are catching up very fast. What we can do, instead of joining their price competition, is to develop special steel products that require decades of research and experience,” Kim Sung-joo, director at Hyundai Steel’s research and development center said in a recent interview with The Korea Herald.

By Suk Gee-hyun (monicasuk@heraldcorp.com)