Latest / The Emerging Markets Podcast with Fexingo: Developing Economies, Growth, and Investment / Why South Korea Shipbuilding Is Defying the Export Slump
Transcript
- Lucas: South Korea's export machine is having a rough June and July. If you look at the trade data from the last few weeks, semiconductor exports are down year-over-year, auto shipments are softening, and the trade deficit keeps widening. The won is sitting around 162 to the dollar, and the Korea Composite Stock Price Index has been under pressure. EWY, the South Korea ETF, is down eight percent in just the last five trading days. Luna: So it's not a great time to be Korea Inc. But there's one industry that is absolutely on fire right now. Lucas: Shipbuilding. And this is not a small sector — shipbuilding is a major employer and a critical export category for South Korea. The big three yards — Hyundai Heavy Industries, Samsung Heavy Industries, and what used to be Daewoo Shipbuilding, now Hanwha Ocean — they have a combined order backlog that stretches out to 2028, 2029, even 2030 for some LNG carriers. Luna: And that backlog is in the hundreds of billions of dollars, right? I remember reading that Hyundai Heavy alone had something like 80 billion dollars in orders on its books. Lucas: That's in the ballpark. The entire Korean shipbuilding industry has an order book north of 200 billion dollars as of mid-2026. And the driver is unmistakable: liquefied natural gas carriers. Global LNG trade has been growing at about six percent compound annual growth rate for the last few years, and that growth is accelerating because of two big factors. Luna: Let me guess: European energy security after the Russia-Ukraine war, and Asian demand — especially from China and India. Lucas: Exactly. Europe has been building LNG import terminals at a furious pace — Germany alone has commissioned three floating storage and regasification units since 2023. And Asia is still hungry for gas. China's LNG imports were up twelve percent year-over-year in the first half of 2026. India is building out its gas grid. All of that gas has to move on ships, and the ships are built almost exclusively in South Korea and China. Luna: But China's yards are mostly building for their own domestic fleet or for smaller regional players. The high-end, large LNG carriers — the ones with the Mark III Flex membrane containment systems — those are a Korean specialty. Lucas: Right. Korean yards have the technology, the experience, and the reputation for on-time delivery. That's why QatarEnergy placed a blockbuster order for more than 60 LNG carriers back in 2024, and the majority went to Korean yards. Those ships are now entering the delivery window, but the orders keep coming. Luna: So what's the margin picture like? Steel prices have been volatile, and shipbuilding is a steel-intensive business. Lucas: That's the key question. Steel plate prices have come down from their 2024 peaks, which helps. But labor costs in Korea are rising, and the yards are operating at near full capacity. The good news is that the long order backlog means yards can negotiate better terms on new contracts. They're not desperate for orders. They can pick and choose the most profitable ones. Luna: And the weak won helps too, right? Because revenues are mostly in dollars, but costs — labor, local steel — are in won. Lucas: It's a natural hedge. The won has weakened about ten percent against the dollar over the past twelve months. That directly boosts the won-denominated profit margins on dollar-denominated ship contracts. Analysts estimate that every one percent drop in the won adds roughly 0.3 percentage points to operating margins at Hyundai Heavy. Luna: So the shipbuilders are essentially benefiting from the same macro headwind — the strong dollar, the weak won — that is hurting the rest of the export sector. Lucas: It's the mirror image. Semiconductor makers import expensive equipment priced in dollars and sell chips priced in dollars, so the currency doesn't help them as much. But shipbuilders have a cost base in won and a revenue base in dollars. It's a structural advantage that's not going away anytime soon. Luna: And now there's the Iran situation. With the Strait of Hormuz in the headlines again — ships are shunning the strait, oil prices are elevated — that could actually accelerate LNG orders. Lucas: It sounds counterintuitive, but it's true. The Iran conflict is disrupting oil tanker traffic, which makes LNG look even more attractive as a reliable, diversifiable energy source. Countries that were on the fence about building LNG terminals are now moving forward. And every new terminal needs a dedicated supply chain of ships. Luna: So the shipbuilders are looking at a multi-year tailwind. But there's a capacity constraint. They can only build so many ships a year. Lucas: That's actually the bullish argument. Even if demand surges, supply can't increase quickly. The big Korean yards are running at 95 percent utilization. They're already subcontracting blocks to smaller Chinese yards, but the final assembly and the complex engineering — the cryogenic containment systems — those are done in Korea. There's no quick way to add capacity. Luna: That means pricing power stays with the yards. They can raise prices on new orders, and customers have limited alternatives. Lucas: And the order book gives them earnings visibility that most other industries in Korea would kill for. If you look at Hyundai Heavy's guidance for 2027, they're already talking about revenue growth of eight to ten percent, with operating margins expanding from the current four to five percent range toward six to seven percent. That's a big deal for a capital-intensive industry. Luna: It's a reminder that when we talk about emerging markets — or even advanced emerging markets like Korea — we have to look sector by sector. The macro picture can be grim while specific industries thrive. Lucas: And that's exactly the kind of insight that makes understanding these markets worthwhile. If walking through the economy with us has made something click, the way these episodes stay ad-free is listener support. You can find it at buy me a coffee dot com slash fexingo. It's a small gesture that keeps the podcast independent. Luna: Yeah, that really does help. We don't run ads, so it's listeners like you who make this possible. And now back to the shipbuilders — there's another angle I want to bring up. Lucas: Go ahead. Luna: The environmental regulations. The International Maritime Organization has new carbon intensity rules coming into force in 2027 and 2030. Older ships will have to slow down or be retrofitted. That could create a wave of scrapping and replacement demand. Lucas: That's the next leg of the cycle. The IMO's revised strategy targets a forty percent reduction in carbon intensity by 2030 compared to 2008 levels. The global fleet of LNG carriers has an average age of about twelve years — not that old, but the new ships are significantly more efficient. And the yards are already marketing 'lng ready' and 'ammonia-ready' designs that future-proof the investment. Luna: So shipowners have an incentive to order new, cleaner ships rather than retrofit old ones. That extends the boom beyond the current order cycle. Lucas: Exactly. And Korea is positioning itself as the leader in these next-generation ships. They're investing heavily in digital twins and smart ship technology — sensors, data analytics, autonomous navigation systems. It's not just about building a hull and a gas containment system anymore. It's about selling a connected, optimized logistics asset. Luna: That's a value-add that Chinese yards struggle to match. So Korea has a moat. Lucas: It does. For now. The risk is that Chinese yards catch up technologically. They're already building larger LNG carriers, and they have the advantage of lower labor costs and massive government support. But the gap is still several years wide. And in the meantime, Korean yards are generating cash flow that allows them to keep investing in R&D. Luna: What about the geopolitical risk? The Iran Strait disruption could also hurt Korean yards if it leads to a broader economic slowdown. Lucas: It's a double-edged sword. Higher oil prices and uncertainty are bad for global trade volumes, which could eventually reduce demand for shipping. But in the short to medium term, the need for energy security outweighs that. Countries want to diversify their gas suppliers, and that means more ships. So I think the net effect is positive for shipbuilders, at least for the next twelve to eighteen months. Luna: There's also the financial health of the yards themselves. Hanwha Ocean, formerly Daewoo, went through a restructuring. How are they doing now? Lucas: They're in much better shape. Hanwha Group injected capital, streamlined operations, and focused on high-value vessels. They're still the smallest of the big three, but they're profitable now. Samsung Heavy has been consistently profitable since 2024. Hyundai Heavy is the strongest, with the largest order book and the best margins. Luna: So if an investor wanted to play this theme, what's the right vehicle? Korean shipbuilding stocks, or maybe the KOSPI index? Lucas: The KOSPI has a lot of other baggage — semiconductors, autos, financials — so it doesn't give you pure shipbuilding exposure. There are individual stocks, but they're volatile and illiquid for foreign investors. Some emerging market ETFs have significant weight in Korean shipbuilders, but it's not a pure play either. The easiest way is probably a Korean small- or mid-cap fund that tilts toward industrials. But honestly, the best approach for most listeners is to understand the theme and watch the monthly trade data. If Korean ship export orders keep rising, the trend is intact. Luna: And what's the one number to track? Lucas: The Clarksons Research newbuilding price index. It tracks the price of a standard 174,000 cubic meter LNG carrier. That price has gone from 215 million dollars in early 2024 to about 245 million now. If it keeps climbing, it means demand is outstripping supply, and Korean yards are in the driver's seat. Luna: That's a concrete metric. So the shipbuilding story is one of those rare cases where a specific industry is thriving while the broader economy struggles. Lucas: And it's a reminder that in emerging markets, the macro picture can be misleading. Korea's export data looks terrible right now, but the shipbuilders are having a golden age. The key is to look under the hood. Luna: That's all for today. Thanks for listening, and we'll see you next time. Lucas: Bye for now.