Japanese Firms Prohibited from Shipping South Korea-Bound Coal

Hanjin Dampier, a Capesize Bulk Carrier owned by South Korean Shipper, Hanjin Shipping. Image courtesy Hanjin

South Korea’s government is moving to bar foreign shipping lines from contracts in the state-run energy sector as it supports domestic companies struggling to recover from the global downturn.

State-controlled Korea Electric Power Corp. on Dec. 21 held an auction for its five units that effectively restricted participants to domestic shipping lines for the first time. The contracts, worth about $2 billion, require bidders to partner with another South Korean company and build nine ships in local shipyards that will carry coal from such countries as Australia.

South Korea’s biggest shipping lines may be set to benefit from the restrictions after Hanjin Shipping Co., Hyundai Merchant Marine Co. and STX Pan Ocean Co. posted losses in the first nine months of 2012. The move also threatens to further heighten economic tensions with Japan, whose carriers hauled about 25 percent of South Korea’s coal shipments in 2011.

“State generators are making these restrictions for the first time upon demand from domestic shipping companies,” said Yun Hee Do, a shipping and utility analyst at Korea Investment & Securities Co. in Seoul. “Domestic shipping companies are very desperate, and state firms have given in as talk of the country giving away its wealth is gaining momentum.”

The Dec. 21 bid, which involves delivering coal to electricity producers over 18 years, also comes as South Korea’s transportation ministry says it’s looking into whether Japanese companies in general have excluded South Korean shipping lines from contracts to haul coal and other materials. The ministry is considering formally asking South Korean power companies to exclude Japanese shipping firms in reciprocity, said Jung Kyu Sam, a deputy director of the ministry’s shipping division.

Unfavorable Treatment?

“There’s suspicion that our shipping companies are treated unfavorably in Japan, and we are checking the facts through our embassy in Japan and the Korea Shipping Association,” Jung said in a telephone interview. “We are mapping out related enforcements, and we will request that our power generators apply restrictions if the suspicion is true.”

A shipping spat would follow flaring diplomatic tensions between Asia’s second- and fourth-largest economies. The two sides failed to renew a currency swap deal after Lee Myung Bak in August became the first South Korean president to visit an island chain claimed by both nations.

Japan’s new Prime Minister, Shinzo Abe, has vowed to secure sufficient funds for the armed forces and coast guard to defend Japan’s territory.
South Korea’s parliament in November approved a revised law for the shipping industry that says authorities can ban South Korea units of foreign firms from bids if their countries violate reciprocity in dealings with South Korean shipping lines. The new guidelines take effect in March.

Japanese Shipping

Japanese shipping lines such as Nippon Yusen K.K., Kawasaki Kisen Kaisha Ltd., and Mitsui O.S.K. Lines Ltd. could bid for long-term contracts with Korea Electric in international auctions until 2009, when the utility required foreign participants to have an offshore business license registered in South Korea.

No locally registered unit of a shipping company outside of South Korea participated in the Dec. 21 bid, which collapsed because one of the two South Korean consortiums didn’t meet requirements, said Kim Heo Jin, the senior manager of fuel procurement at Korea Southern Power Co. It is in charge of the auction process for Korea Electric’s power generators.

The auction will be held again on Jan. 9. STX Pan Ocean and Hanjin Shipping are reviewing whether to participate, according to e-mailed responses to a Bloomberg News query.

‘Thin Orders’

“We hope that the contract helps the country’s shipping and shipbuilding industries, which are facing thin orders,” Kim said.

Hyundai Merchant and Hanjin Shipping, which have Japanese units, declined to comment on auction practices in Japan.

Korea Electric’s five power generators have picked Japanese shipping companies to build 18 vessels so far since 2007, according to data from the Korea Shippers Association. Japanese shipping lines shipped 16.54 million metric tons, or 25 percent of Korea’s thermal coal imports, in 2011, and the fares paid to Japanese shippers have totaled $2.26 billion since 2007, according to the association.

Tokyo Electric Power Co., Japan’s biggest power operator, doesn’t have rules in place that restrict the participation of South Korean shipping lines, spokesman Masateru Araki said by telephone.

‘Doesn’t Matter’

“When we seek companies for fuel transportation, we take into consideration conditions such as securing safety in transportation, the company’s financial stability and possibility of long-term relationship with the contractor,” Araki said. “If those conditions are satisfied, it doesn’t matter for us whether the company is from Japan or not.”

Tepco doesn’t disclose which shipping lines are used for fuel transportation, Araki said. The company uses both public and private tenders, he said.
The Japanese Shipowners’ Association will consider taking action if Korea Electric officially bans Japanese shipping lines from contracts, said Takashi Ishikawa, a general manager in the planning division of the organization, by phone in Tokyo.

South Korean shipping companies such as STX Pan Ocean and Hanjin Shipping, as well as shipbuilders including Hyundai Heavy Industries Co., stand to benefit from the new restrictions, said Um Kyung A, an analyst at Shinyoung Securities Co. in Seoul.

Securing Business

“In a tough environment, securing business that assures earnings for several years is good,” said Um, who has a buy recommendation on Hanjin Shipping and a neutral recommendation on Hyundai Merchant.

Shares of Hanjin Shipping rose 5.3 percent in 2012 in Seoul trading and those of Hyundai Merchant dropped 4.5 percent during the year. Korea’s benchmark Kospi index climbed 9.4 percent.

Japanese state companies have excluded Korean shipping companies from auctions, raising questions of fairness, Kwon Eun Hee, a lawmaker from South Korea’s ruling New Frontier Party, told Korea Electric executives during an Oct. 17 parliamentary audit, according to a statement distributed to reporters.

Japanese units of Korean shipping companies have never received an order from a Japanese electricity company, the Korea Shipowners Association, which has more than 190 members, said in an e-mailed response to questions from Bloomberg.

“There’s no regulatory barrier in Japan, but it’s true there are invisible barriers,” said Lim Jae Kook, director of the Institute of Distribution & Logistics with the Korea Chamber of Commerce & Industry, one of the country’s top business lobby groups. “In contrast, many of our consignors are selecting shipping companies, driven by cost factors. This allows non- Korean shipping companies to take orders.”