Korean Shipbuilders: Anatomy of a long cycle

We forecast solid new ships demand globally in the next decade with TAM of 599m dwt (6.3 years of work, US$563bn) until 2030E, and a larger 954m dwt (10 years of work, US$781bn) in 2031-35E before entering a decade-long downturn. The UBS Evidence Lab survey of shipping executives supports this strength. Granted, orders are capped by capacity and may face a downturn in 2027-28E given new capacity adds, but we expect yards to enjoy rare pricing power given the longevity of the cycle.

We expect new ship prices to rise by +10% CAGR until 2026E as record backlog, geopolitics-driven high freight rates, stricter rules and competition provide the means and the reasons to order ships early and bid prices up. We anticipate OPM to reach previous super-cycle peak by 2028E given rising ship prices and China-driven cost deflation. Considering the decade-long strength, we expect the sector to post above-normal ROE of 20% in 2027-29E, exceeding COE and 2014-23 ROE of -16%. We expect the cycle's longevity, upcoming IMO rules and value-up strategy to re-rate the sector.

Possibly given price discipline by the yards, backlog in excess of 3 years until 2026E and cost deflation, including steel price. But we anticipate Korean yards average shipbuilding and offshore OPM to rise to a peak of 13.7% in 2028E vs 14.1% in 2010. We view material yard capacity adds as the key risk to ship prices and future margins.

Yes, especially in H1 when order intake is more active. But even if orders plateau, we view strong underlying demand to keep backlog full (>3 years) as a prerequisite for share prices to perform. In addition, we believe rising new ship prices and earnings surprises are needed to drive share prices.

This article leverages the following UBS Evidence Lab asset: Global Shipping Company Purchase Intentions Business Survey.