The Decisive | Season 4 Ep.13 - Charting a New Course for Asia's Shipbuilding Powerhouses

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Kristen Hallam   00:00:16

Welcome to the Decisive podcast brought to you by S&P Global Market Intelligence. I'm your host, Kristen Hallam. In this episode, we explore the intricate dynamics of global trade and shipping. In recent weeks, the shipping industry has faced a seismic shift following the U.S. Trade Representative's finalization of port fees targeting Chinese-built, operated and owned vessels. We'll also examine how changes in trade and tariff policy are reshaping order books for bulk carriers and specialized cargo vessels and the competitive landscape of Asian shipbuilding. We'll look at the ongoing physical disruptions affecting global shipping routes and discuss how shipowners are balancing the urgent need for fleet renewal with the long-term imperative of adhering to tightening environmental regulations, a full agenda indeed. To help us unpack these developments, we have two distinguished guests from S&P Global Market Intelligence joining us today on the podcast. Ashima Tyagi, Economics Associate Director, Pricing and Purchasing, who is based in Singapore; and Keyla Goodno, Senior Economist, Pricing and Purchasing based in New York. It's a real pleasure to have you both on The Decisive today.

Keyla Goodno   00:01:36

Yes. Thanks for having us.

Ashima Tyagi   00:01:38

Fantastic to be here.

Kristen Hallam   00:01:40

So one note I want to make for our listeners is that we are recording this on October 27th. There are news reports today that the U.S. and Mainland China negotiators have reached preliminary consensus on shipping levies, among other issues, at the ASEAN Summit. However, there is no confirmation as yet. Therefore, by the time this episode airs, some things may have shifted and changed, but we do still expect to have a high degree of freshness to our discussion. So as I alluded to in the intro, in April 2025, the U.S. Trade Representative finalized its Section 301 investigation, imposing a complex phased-in set of port fees on Chinese built and operated and owned vessels with fees that would start at $50 per net ton effective October 14, 2025. However, on October 10, there was a modification by the USTR to the April action. At the same time, Mainland China has also responded and started charging new port fees on U.S.-linked vessels as well as imposing sanctions on U.S. subsidiaries of a South Korean shipbuilder. Keyla, can you elaborate for our listeners on how the scenario for shipping has changed from April versus now?

Speaker 3   00:03:06

Well, yes, that's a great place to start, Kristen. So to set the scene really for those who may not know what April's addition had looked like, I will discuss that first, and then I can explain the most recent changes that the United States Trade Representative came out with a few days prior to October 14 implementation day. But in April, the 2 specific categories outlined in Annex 1 and 2 were service fees to both Mainland Chinese operators and to operators on a Mainland Chinese-built vessel, where Annex 1 included a service fee he actually mentioned that would start at $50 per net ton effective October 14 of this year would be applied to ships operated and or owned by Mainland Chinese entities calling at a U.S. port up to 5x per year. Now on the other hand, Annex 2 highlighted another set of fees for vessels built in Mainland China and operated by a Mainland non-Chinese entities that would start also on October 14 with either a $18 per net ton or $120 per container, whichever happened to be the higher of the 2. Now it is important to note that both Annex 1 and 2 are set to increase incrementally until 2028. Now there were highlighted exemptions to these fees that included being either a U.S. flagship, things like a short distance voyage and or smaller capacity vessels that were either under 4,000 TEUs or 55,000 deadweight tons or less. But for the October 10 release, there were no changes directly to container vessels, but the container shipping sector will face 100% additional duties on ship-to-shore cranes as well as intermodal chassis, chassis parts that go into effect of November 9, 2025. There were also changes in the fee structure for vehicle carriers and an elimination clause, which allowed for the suspension of licensing of LNG shipments. So as of now, Annex 1 and 2 fees are live and active and have impacted some container lines more than others, but have also prompted for Mainland China to respond in a similar vein where they have implemented a similar structure of fees against U.S. flagged built, owned and operated vessels coming into Mainland China. And these fees will start at USD 56 per net ton, also with a very similar structure as USTRs, increasing incrementally over the next 3 years, which had also started on October 14. They also included a set of exemptions, particularly the U.S. flagships can avoid the fees if they are a Mainland Chinese-built vessel. But again, all of these are live and active at the moment.

Kristen Hallam   00:06:07

All right. Thank you, Keyla, for walking us through that. So given the details of this policy, what would you say would be the biggest impact to the ocean market or ocean logistics?

Speaker 3   00:06:23

Yes, that's a great question. So the implications of this policy has started to affect some carriers more than others. And what we have seen over the last few months for trade coming into the U.S. is that we've seen a lot of reshuffling of ships to phase out of the Mainland Chinese build ships out of U.S. trade lanes and then also announcing that the carriers would not pass this fee down to shippers for at least the first year. Now what is really helping the shipping industry in this near term, so during immediate implementation and leading up to it is that the -- there is an excess amount of tonnage in the market. That and lower demand -- the lower demand environment where the market can actually afford to rearrange ships without being severely disruptive to deliveries. But now forward-looking past year with these fees, we may see things develop where either carriers begin to start passing down the fees or shipping routes into the United States either change or even omitted because of the hefty fees. The only real main offset to the trade disruption would be the overall lower trade outlook according to S&P Global's trade forecasters, which will give carriers room to adjust and give the market time to prepare in advance.

Kristen Hallam   00:07:44

All right. So Ashima, I understand the latest U.S. Trade Representative action targets all foreign built vessels. However, the main target will continue to be Mainland China. a nation that, according to 2024 data accounted for over 55% of the world's shipbuilding completion volume. I'm going to repeat that for our audience, over 55% of the world's shipbuilding completion volume according to China's Ministry of Industry and Information Technology. So Ashima, can you explain the competitive landscape of Asian shipbuilding as it stands currently for our listeners?

Ashima Tyagi   00:08:28

Absolutely. The story of Asian shipbuilding isn't just about welding steel. It's about national ambition. It's about technological revolution and of course, government strategy. And to really understand the landscape, you have to think of it as a 3-way competition between Mainland China, South Korea and Japan. For decades, these 3 nations have been the titans of the industry. But as per the latest figures, this is no longer a race of equals, and you've said it in your question as well. And I'll explain why. I'm afraid this is going to be a long answer, but let's start with the Mainland China. The numbers are simply staggering, as you just mentioned. The completion volume is 55%. The more telling figure is their grip on new orders. Data from several industry sources show that in 2024, Mainland Chinese shipyards captured 71% to 75% of all global shipbuilding orders. To put that in perspective, for every 4 ships ordered anywhere in the world, 3 of them are set to be built in a Mainland Chinese yard. While tonnage is the main metric reported, the annual number of ships constructed by Mainland China is estimated to be over 1,000 vessels per year, and that includes cargo ships, tankers and container ships. Now this development obviously didn't happen overnight. Mainland China's rise has been a deliberate 2-decade-long strategy that accelerated after they joined the WTO. But of course, we can talk more about China later. Turning to South Korea. It is the world's second largest shipbuilder. And while Mainland China has overtaken them in sheer volume, the Koreans have strategically pivoted to where they still hold an edge, high-value, technologically complex vessels. They approximately hold 20% to 25% of the global shipbuilding market. And you'd ask where do they excel? -- think of the most advanced and complex ships such as LNG carriers, large container ships and oil tankers. For example, in the case of iron ore, the commodity that I forecast in the pricing and purchasing team, we have these bulk carriers called very large ore carriers or VLOCs, most notably called the Valley Max class. These were developed specifically to transport iron ore from Brazil to Mainland China. And these ships were commissioned by Brazilian mining company, Vale, and adhering to China Max standards. Basically, China Max standards defines the maximum size vessel, which can be used at various Mainland Chinese ports. Interestingly, it's the Korean shipyards, which were responsible for producing 80% of the world's VLOCs at one point, given the staggering capacity of the ship and the design, which allowed for, for example, 35% reduction in carbon emissions. So essentially, what I'm trying to say is that their strategy is very clear, compete on technology and quality and not just the price. And that brings me to the third player, which is Japan. It was obviously the main player in the 1980s and the 1990s when I was very young, but now a distant third. Japanese shipyards really caught in a difficult position. They are squeezed by Mainland China scale and South Korea's high-tech focus. They, of course, still produce excellent high-quality ships, but they are kind of struggling to compete on the global stage. So their share is approximately, say, 5% of the new orders. Now coming back to your original question of the U.S. trade representative investigation and what Kela has mentioned, of course, everyone thinks that Mainland China's dominance stems from unfair subsidies, and that's why these tariffs are warranted. But even as this battle rate is on, there's an even bigger transformation underway, which is the green transition. And now the competition is really to be active there because there is a pressure to decarbonize. And alongside South Korea's technological strength, Mainland China is also investing heavily there. Of course, we can talk more about it later. But yes, this essentially is the landscape of Asian shipbuilding.

Kristen Hallam   00:13:05

All right. Thank you, Asha. And yes, I definitely would like to talk more about the green transition later on. But first, given what Kela has mentioned and all the significant policy shocks on both sides of the world, how do you see the competitive landscape of Asian shipbuilding realign over the next 3 to 5 years?

Ashima Tyagi   00:13:30

Yes. So I mean, obviously, there are a lot of changes happening right now. But over the short to medium term, we think Asian shipbuilding will realign around technology, green shipping and geopolitical risk. I'd say 3 key trends. Number one, we will most definitely see an erosion in Mainland China's market share for new building contracts. especially for shipowners whose vessels are intended to serve U.S. trade routes. Even before the fees took over in October, industry groups like the Baltic and International Maritime Council or BIMCO, which is the world's largest shipping association, they've reported that Mainland China's share of new contracts has fallen from 72% to 52% in the first half of 2025. So this suggests that the market is already in motion. But again, at the same time, I wouldn't say Mainland China shipbuilding prowess will diminish substantially also. The #2 trend would be the fact that naturally, Mainland China's loss will be South Korea's gain largely and to a lesser extent, Japan. Again, but these ships will now come with higher newbuilding prices. prices are expected to be, say, 30% higher than the 10-year average, if most of these ships will now be built in South Korea. And again, it will also depend how much extra capacity there is in South Korea and Japan to make these ships that were being made in Mainland China. And finally, the last trend is the fact that the entire port logistics system will be affected because the U.S. trade representative actions, they extend beyond vessel fleet, which Kela has very nicely mentioned at the start. You have tariffs ranging from 20% to 100% on cargo handling equipment. So that means the entire port logistics ecosystems will be affected. unless, of course, we have a deal coming up or something happens. But then these are 3 main broad trends, I would say, in the next 3 to 5 years, I would say.

Kristen Hallam   00:15:45

Very interesting. Thank you for that, Asha. So Kaila, we've seen tariffs reshape markets for a wide array of goods such as U.S. tariffs on shrimp favoring Ecuador over India or duties on aluminum and copper, altering global metal flows. How do these micro level commodity-specific trade diversions aggregate up to influence the order books for bulk carriers and specialized cargo vessels? And are shipowners ordering with this new fragmented trade reality in mind?

Speaker 3   00:16:24

Yes. There are definite pros and cons to ordering ships at this time of high uncertainty, but essentially, shipowners are not really placing massive speculative orders based on tariffs alone. Instead, the mindset is dominated by the traditional strategy of gradual fleet renewal, -- and alongside like you had said, Ashma, but higher priority of fuel-efficient designs and versatile vessel sizes that can adapt to a variety of potential trade routes. But it's really important to keep in mind that putting in ship orders is a multiyear investment that is based on things like demand, carbon emission regulation and overall gradual fleet renewals. So when we enter into a fragmented trade reality, we might see instead of ship orders, we'll see ship retainment. As an example, because there is a lag in building and when you build a ship to when it can officially hit the water, what we're seeing now are carriers are holding on to older ships and recycling them at an alarmingly low rate. And this has been a trend over the last 2 years. Ships are already coming online from prior year orders. And in order to monopolize on the more profitable environment of uncertainty, carriers are willing to hold on to older ships, all the while taking on newer ships and can -- this can even make carriers more profit. Because of the older ships being retained, another likely outcome of this fragmented trade reality is that with a strong availability of ships, more lanes and routes can be added/spared because the ocean market has a strong capacity profile and can spare ships to expand the coverage. But in general, this trade environment has proven to change so rapidly, we would more likely see people retain older ships than making orders based on this ever-evolving political whims.

Kristen Hallam   00:18:24

All right. Thank you, Kaila. Ashima, you mentioned earlier that Mainland China's role in shipbuilding may not drastically reduce even in the face of headwinds, the headwinds that currently prevail. Can you explain your thinking there?

Ashima Tyagi   00:18:42

Yes, absolutely. I think I totally agree with Kela that there will be a tendency of older ships being retained much more compared to newer ships being ordered. But nonetheless, Mainland China's role in both of these departments is far from crumbling. The simple answer to why that is the case is the fact that there is structural inertia. Mainland China's dominance is not just about having the most amount of -- sorry, I'll start again. Mainland China's dominance is not just about having the most number of shipyards, it's about an entire deeply integrated national ecosystem that is incredibly difficult to replicate. Now there are 4 main reasons that stand out. Number one, there's, of course, the unmatched scale, specialization and price competitiveness. For standard vessels like bulk carriers and conventional tankers, Chinese yards retain a significant cost advantage that will continue to attract budget-conscious owners, especially those operating on trade routes with no U.S. exposure. Number two, the integrated ecosystem advantage that I was just saying. Mainland China's true strength lies in its vertical and horizontal integration. The government doesn't just subsidize shipyards, it controls the entire value chain. Most of Mainland China's shipbuilding capacity is also consolidated under the state-owned behemoth, the China State Shipbuilding Company, CSSC. And that really allows for immense coordination, resource allocation and subsidies that private firms will find it hard to match. Number three, there's, of course, the massive domestic demand. Now Mainland China's own state-owned shipping lines are amongst the largest in the world and will continue to provide a steady stream of orders to domestic yards, insulating them somewhat to the international market volatility. Number four, again, geopolitical alignments will also contribute because shipowners from nations aligned with Mainland China's Belt and Road initiative or those seeking to avoid reliance on Western aligned supply chains, they preferentially continue to order from Chinese yards. And then the fifth and a very important point, again, there are limits to diversification. We have countries like Vietnam, the Philippines and even India having these shipbuilding ambitions, but they still lack the scale and the infrastructure to absorb a significant chunk of Mainland China's output quickly. They can, of course, pick up orders for smaller, less complex vessels, but they cannot as yet compete on the massive container ships or highly specialized LNG carriers that are Mainland China's bread and butter. So yes, these are the 5 main reasons why I think it won't be that easy to really erode the market share of Mainland China. They'll continue to play a very important role in the shipping world.

Kristen Hallam   00:21:59

Thank you, Asha. That's really helpful context to have there. The United States implementation of Section 301 port fees targeting Mainland China's maritime, logistics and shipbuilding sectors represents far more than a simple tariff. It's designed to counteract its state-supported dominance in shipbuilding and shipping. How might the Section 301 port fees reshape not just ship order flows, but also the broader supply chain such as marine engine and component sourcing across traditional and emerging shipbuilding hubs?

Ashima Tyagi   00:22:43

Yes. That's a very important question that you raised, Kristen, because component sourcing is very critical. But this is the second order effect that most people miss. Nobody seems to talk about that. Of course, in our pricing and purchasing team, we regularly build cost models that provide a detailed breakdown of industry average product cost for any good and service, including those in the shipping industry. This allows us as analysts and even our clients to see a transparent and complete picture of where the dominant pricing pressure originates in terms of input cost. Now this is relevant because a ship is a complex machine in that sense, and its hull is just the beginning. The most valuable parts are often the engine, the navigation systems, the scrubbers and the power generators and each of these component sourcing is extremely technical. Even if a ship is assembled, say, in a South Korean yard, many of its critical components may be sourced from Mainland China due to cost advantages or maybe the electronics are sourced from Malaysia. So there's obviously a wide variety of sourcing that happens. And the Section 301 action really creates a country of origin risk premium on these components. Again, shipyards in South Korea and Japan wanting to offer their clients a U.S. trade compliant vessel, so to speak, will be pressured to diversify their own supply chains. So again, this is a huge opportunity for engine makers as well as component suppliers across Europe and other parts of Asia. So yes, we are going to see a scramble by procurement teams to resource everything from pounds and walls to digital control systems, and that will also create their own winners and losers apart from the shipyards themselves. So yes, absolutely. I think we need to look a little bit on the component sourcing as well and not just on the shipping side.

Kristen Hallam   00:24:53

Sounds like a very dynamic situation there. Thank you for that, Ashima. And Keyla, there's a powerful dual engine driving fleet renewal, an aging fleet which we've mentioned with over 27% of vessels built before 1990 and tightening environmental regulations like fuel EU, how are shipowners and shipyards balancing the immediate need to respond to shifting trade patterns with the long-term capital-intensive necessity of ordering greener, more efficient vessels?

Speaker 3   00:25:30

Yes. I really wanted to make a note. I completely agree with you, Ashima. I think supply chain diversification really is everything during these times. And it is -- I know it's part of conversations to be very dynamic and very flexible during these times. And so to answer your question, what you might see is the emergence of delayed scrapping during periods of uncertainty. I know I alluded to this before. All the while ordering of greener and more efficient vessels and this will unfold itself over time as the market gains more clarity and direction on the regulation requirements from institutions like the IMO or the EU. But to explain why we may see carriers hold on to older ships is mainly because in these short-term disruptions, it really creates a paradoxal situation. But by absorbing so much fleet capacity, these disruptions artificially tighten the market, driving up freight rates, which are reflected by the freight rates we forecast in pricing and purchasing. This makes it profitable to continue operating older, fully depreciated vessels that would otherwise be scrapped. Now this dynamic was a key reason for the subdued demolition activity in 2023, 2024 and even projected for 2025. which in turn contributed to the rising average age of the fleet. Shipowners are thus caught in a difficult balancing act of maximizing short-term profits from their existing assets while knowing these same assets will soon become liabilities, all while trying to make a multibillion-dollar investment in new builds during technological uncertainty and even shipyard backlogs. But eventually, scrapping activity will accelerate significantly as just we see massive order book beginning to deliver over time, ships hitting the water. But the full transition to alternative fuels will remain fairly fragmented, especially given the delayed decision of the IMO for a specific time line on alternative fuel implementation. In the meantime, we will see alternative fuels like LNG and methanol leading in the near term. But overall, no single solution will dominate globally during this time period of transition.

Kristen Hallam   00:27:58

All right. Thank you, Kayla. Lots to balance there. So beyond tariffs, we're seeing acute physical disruptions from congestion and drought at the Panama Canal to security threats in the Red Sea and the Dardnell Strait. How are these persistent chokepoint vulnerabilities influencing not just operational routing, but also strategic decisions around new build orders. Are we seeing demand for smaller, more versatile vessels that can adapt to these unpredictable disruptions?

Speaker 3   00:28:37

Well, this is an interesting question. In general, just over this last year, we are seeing an interesting shift towards that small- to medium-sized ships and away from large container ships. Smaller to medium-sized ships are able to not only adapt to more rapid change in service lanes, but also simply just cost less to operate. And if you look at the composition of the global order book, you see this trend where the order for smaller vessels labeled as Panamax sizes has increased to about almost 100,000 more TEU capacity being delivered in 2025 compared with 2024's order levels. Whereas we're seeing orders for ultra-large shipping containers has slightly declined and medium-sized vessels have dropped to about less than half in 2025 compared with 2024. But especially now we are given Section 301's exemptions of any ship coming into the U.S. under 4,000 TEU, this can be another driver for smaller vessels. But essentially, yes, we -- there is an interesting trend where we are seeing that small to medium-sized ship being -- taking up a larger share composition of order books, whereas the ultra-large ships maybe are taking a little less of a priority at this time. But...

Kristen Hallam   00:29:58

So that brings us to the end of our episode. Thank you so much, Ashima and Keyla, for taking the time to share your insights with us on this very interesting topic. And that wraps up this episode of the Decisive podcast -- until next time. Thank you for listening to The Decisive Podcast from S&P Global. Please subscribe and join us for next week's episode. Until then, stay curious and stay informed.