The current year has not been smooth sailing for Singapore's two largest offshore rig builders as new players from China and South Korea enter the market seeking to diversify from their mainstay shipbuilding business amid a global slump in new ship orders.
The two Singaporean rig builders - Keppel Corporation Limited's subsidiary Keppel FELS and Sembcorp Marine Ltd.'s units PPL Shipyard and Jurong Shipyard - now control the global jackup construction market with a 70-percent share since 2000. That dominance could be undermined as the Singaporean pair not only have to deal with existing competition from established Chinese yards such as Cosco Corporation, but also from new players who have moved into the sector due to a glut in yard capacity in East Asia.
While competition has always been present between Singapore yards and their Chinese and South Korean rivals, the availability of excess yard capacity caused by the current global shipbuilding slump exacerbated their business rivalry. Chinese yards have gained momentum in snaring contracts for the newbuild jackup sector, bagging deals worth $2.73 billion as of mid-April compared to the $1.97 billion for Singapore, according to Religare Capital as reported in the April 17 edition of the Singapore Business Times.
"There's a substantial glut in shipbuilding capacity in China and the yards aren't getting orders so they're making a push into offshore rig markets," Religare Capital analyst Vincent Fernando was quoted in the report, which noted that China may rival Singapore in terms of rig production capacity by 2015.
With little signs of a recovery in the global shipbuilding sector, Chinese and South Korean yards are incentivized to win contracts in the offshore construction markets - including rigs - to compensate for the dip in new ship orders. Yards struggling to stay afloat in China - the world's largest shipbuilder according to Clarkson Research - are tempted to undercut market prices for newbuild rigs in order to win contracts.
In addition, Chinese yards offered attractive payment terms to lure customers compared to Singapore yards, which based their contracts on milestone payment structure. Analysts noted that Chinese yards have cut down payment requirements to as low as 2.5 percent of contract value compared with 20 percent before 2010.
"Chinese yards were desperate because they ran out of conventional ships to build … they were offering crazy terms to attract customers," Keppel's CEO Choo Chiau Beng, who best summed up the challenge posed by the new competitors from China, told Bloomberg News.
While the entry of new Chinese yards may offer customers greater choice, Singapore rig builders are learning to cope with a more crowded field. After all, they have seen the end of an old rig building "club" - confined to the top five yards in Singapore and South Korea - when Chinese yards like Cosco, CIMC Raffles and Dalian Shipbuilding gained a foothold in the last decade. The emergence of these Chinese yards will account for the delivery of 21 percent of the world's newbuild rigs in 2013, compared to 64 percent for Singapore yards, estimates from China-based market research and advisory firm GCis showed.
The rivalry between Singapore rig builders and Chinese yards - perceived to be equipped to build less complex jackups - have moved to the deepwater segment. In January, Cyprus-registered Frigstad Offshore Ltd's subsidiaries ordered two ultra deepwater semisubmersible drilling units from CIMC Raffles, with options for four more units.
"We have seen considerable improvements to infrastructure and execution skills at the (CIMC Raffles) yard, which provides us with confidence in their ability to deliver a successful project," Simen Skaare Eriksen, CEO of Frigstad Offshore and director of the Frigstad Deepwater Ltd said in a press release on the contract.
Further away from China, Singapore rig builders are looking anxiously over their shoulders at the competition posed by the technologically-superior South Korean shipyards. In June, Samsung Heavy Industries (SHI) ventured into newbuild jackup market with a $1.3 billion order from Statoil ASA to construct two large jackup units.
"This is the first jackup that SHI has won an order for, and it is significant that the company has won the contract for the world's largest jack-up rig as a newcomer to the market," SHI said in a company release.
"Dire market conditions have forced Korean shipbuilders to seek out business opportunities they once shunned … turned their interest to jackups as they scrambled to stay afloat," the Korea Jooang Daily said June 16, adding that Hyundai Heavy Industries and Daewoo Shipbuilding and Marine Engineering are interested in the jackup market.
Competition from its rivals hit the profitability of Keppel's offshore and marine division, including Keppel FELS, with net profit down 8 percent in the first half of 2013 from a year ago to $351 million, while revenue fell 13 percent to $2.78 billion from $3.178 billion.
"Mounting competition from Korean and Chinese yards continues to suppress prices and margins for newbuild rigs," Keppel's CEO Choo said July 18 in a company release.
Coping with Competition
Singapore rig builders appeared unfazed by the competition from East Asia as the flow of new orders continues. Keppel won nine KFELS B Class jackups orders in the first six months, while Sembcorp Marine's units received orders for seven jackups. Keppel FELS also secured an order from Caspian Drilling Company Ltd. - a unit of State Oil Company of Azerbaijan Republic - to build a DSSTM 38M design semisubmersible. Keppel FELS is on track to deliver a record 22 rigs this year, exceeding the previous high of 13 in 2009, which it has already achieved.
"Look at our orders. The Chinese story has been there for at least two years now, but today, we are still getting our B class orders ... It sends a clear message," Wong Kok Seng, managing director of Keppel FELS told the Straits Times July 8.
Keppel FELS is also moving up the technological ladder to tap the more lucrative segment of the rig market. Earlier this year, the company delivered its first KFELS Super A Class jackup, which is designed for the United Kingdom sector of the North Sea. Work on an ice-class jackup design with ConocoPhillips is expected to complete by year end, while a drillship solution has been developed and the company is now working to commercialize the new design.
"The venture into the drillship market reflects the strong market demand for such units and Keppel is stepping up in order to remain competitive. We believe that confidence in its design would be helped by its established rig building track records and strong customer relationships," Yeak Chee Keong, Maybank Kim Eng analyst said in a research note on Keppel's financial results.
Over at Sembcorp Marine, PPL Shipyard added two more jackups to its order book in early July following the latest contract from Mexico's Integradora de Servicious Petroleros Oro Negro, SAPI de CV (Oro Negro), which brought the number of PPL Shipyard proprietary Pacific Class 400 design jackups it ordered to six.
"This could benefit Sembcorp Marine as repeated orders (for Pacific Class 400 jackups) could lead to higher operating efficiencies, hence supporting margins (for Sembcorp Marine)," Phillip Securities analyst Nicholas Ong said when commenting on the Oro Negro contract.
Respite from Chinese Competition
Singapore yards may get some relief from the Chinese competition as rationalization of the bloated shipbuilding industry - resulting from government measures - is expected to reduce overcapacity. Chinese yards not receiving financial assistance from the Chinese government are therefore not likely to stay in business, especially in the absence of new orders.
As banks tighten lending to Chinese yards, the latter have asked customers to make upfront payment of 15 percent for loan eligibility - compared to 1 percent previously, Reuters reported. That could improve the bargaining power of Singapore yards seeking newbuild rig contracts as the requirement will make Chinese yards less attractive for potential customers.
While rationalization of the Chinese shipbuilding sector may reduce the players in the newbuild rig market, Singapore yards are not expecting a rise in orders given the caution they have exercised in bidding for contracts. This is unlike some Chinese yards which have been secured speculative newbuild rig orders.
Sticking to a Proven Approach
Competition from East Asia yards, especially China, has severely tested the ability of Singapore rig builders to fend off the challenge to their dominance. For now, the Singapore duo seems to retain their lead by focusing on a proven strategy - the quality of their product and timely delivery. It remains to be seen how the newbuild rig markets will pan out once the global shipping slump is over, when the competition will perhaps focus more on product quality than price - which is what is happening now.
Singapore rig builders are not standing still. Companies like Keppel FELS seek to offer more technologically advanced products like drillship and ice-class jackup, while ensuring that its KFELS B Class jackups remain in demand. Whether that is enough to help Singapore yards maintain their dominance of the newbuild rig market will depend on how yards in China and South Korea take to the challenge.