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Trapped in the lion's den

The Naval Architect: October 2015

Crisis is perhaps too weak a word to describe the situation currently being experienced by the three major South Korean shipyards, Daewoo Shipbuilding and Marine Engineering (DSME), Hyundai Heavy Industries (HHI) and Samsung Heavy Industries (SHI) which, along with some other large yards, have been bailed out to the tune of US$42 billion so far.

The Yonhap News Agency reported: “Market leader Hyundai Heavy Industries received the largest amount of 16.4 trillion won (US$14.08 billion) worth of credit, followed by Daewoo Shipbuilding & Marine Engineering with 15.48 trillion won (US$13.3 billion) and Samsung Heavy Industries with 10.44 trillion won (US$8.96 billion).”

Having survived the global economic crisis in 2008 through a shift into the offshore business South Korean shipyards had hoped that they would survive this economic downturn and ride out the storm until calmer waters returned.

Instead, the yards have found that one storm has been followed hot-foot by another with the failure of the commercial shipbuilding market followed by the collapse of the oil price and consequent failure of the offshore marine market. In addition the sector has had to contend with chronic over-capacity in the number of ships currently operating and overcapacity in the shipbuilding market.

This latest challenge may force a more fundamental change to South Korea’s shipbuilding industry as yards battle to survive. In the past the battle for survival has mainly been fought by the small to medium sized yards, with the exception of STX. Now, the larger yards are also being dragged into the battle as Daewoo Shipbuilding and Marine Engineering (DSME), once the world’s biggest yard, has now come under bank control following last year’s US$3 billion loss and Hyundai Heavy Industries has laid off 6,000 staff, according to senior Korean sources.

The Korean Development Bank (KDB) is mulling over whether to sell its, 34% stake in DSME following significant cash injections from the bank. KDB was a state-owned entity until 2009 when it was privatised, but the bank does still operate as a safety valve for much of South Korea’s major manufacturing industry, including holding a 40% stake in the ailing shipbuilding giant STX and the Hanjin chaebol which includes the troubled national carrier Korean Air Lines.

Should the decline of new orders for commercial ships continue, allied with the decline in the price of crude oil, which has applied the brakes to the offshore market, a very different Korean shipbuilding industry may be forced to emerge.

Current expectations are that shipbuilding orders and the price of new ships will not recover to sustainable levels until 2020. Overcapacity in most ship operating sectors and the chronic failure of the global economy to recover its growth trajectory will severely hamper shipbuilders.

Overcapacity in the shipbuilding sector has started to be addressed in China which has seen some 50% of yards either close or merged with similar entities. However, current estimates are that shipbuilding capacity stands at more than 50 million CGT while new orders at the time of writing stand at less than 45 million CGT, suggesting a 10% overcapacity.

These figures remain fluid with overall capacity declining as some yard space is closed down and the dearth of new building orders in both the commercial vessel and offshore sectors are also declining, probably indicating a shipbuilding overcapacity significantly higher than current estimates.

One of the most notable casualties has been Rongsheng in China, but there have been several mergers in Japan and a number of yards in South Korea have faced difficulties, including the 21st Century Shipbuilding Company failing, Sungdong now under the control of Korea Eximbank, and the Shina SB shipyard which is in receivership after having spent five years under bank control. Add to this the once proud tanker builder at SPP, which is now also under the control of several banks, and the picture looks very bleak.

Meanwhile the Korea Eximbank agreed with SHI to cooperate in helping keep the debt-ridden Sungdong yard, which is based in Tongyeong, afloat. Korea Eximbank is the main creditor of Sungdong with US$1.7 billion of loans and refund guarantees.

According to local reports SHI will be in charge of Sungdong’s sales, procurement, production and technology sectors. Eximbank will manage the yard’s human resources, labour issues and financial matters. The agreement will be effective for four years with an option of three more years.

Crisis management can, however, only serve to delay the downward spiral in the hope that better times will come around the corner. However, only an upturn in vessel orders can help save some of the yards now most at risk. But that eventuality appears to be hopeless. Estimates from Clarksons shipbrokers suggests that just 800 ships will be delivered this year, while other industry observers of the Korean shipbuilding market say that the South Korean shipbuilding industry will be particularly vulnerable to the decline in orders.

Much of the recent pain experienced by the Korean yards has been caused by the collapse of the crude oil price. It is understood that the baseline for crude oil prices, in order for the offshore industry to maintain orders and development, is over US$80/barrel, with current oil prices hovering at around the US$45-48/barrel mark. Oil analysts expect prices to have reached just US$51/barrel by this time next year, offering little hope for a revival any time soon.

One expert told The Naval Architect, “If oil prices were to recover to US$80/barrel there would still be a lag of about a year before investment in the offshore industry was returned, because investors would wait to see if the oil price was sustainable over the long term.”

For Korea the downturn in the offshore market has come at the wrong time as the yards were building a significant niche in the market, with China lagging in technological knowhow. However, Chinese company Wison has won an order for an FLNG vessel to the surprise of some in Korea.

One senior shipbuilding analyst said: “We didn’t expect China to win such a complicated order, we are not sure if Wison has the technological knowhow to build such a vessel, they will be dependent on European companies offering the basic design.”

The analyst also added that, “China has very rapidly caught Korea up technologically,” and this will mean that when the upturn in the offshore business finally does come there will be a significant new clutch of competitors eating away at the Koreans’ market share.

Meanwhile, the shipbuilding crises in the shipyards has had a knock-on effect in that the country’s marine equipment suppliers are also now in crises as their source of income has been reduced to a trickle.

Sales, according to local equipment manufacturing sources are down by up to 20% in 2015 compared to 2014 levels, and with ship and offshore sales in the major yards reduced by 30%, “we cannot expect any improvement next year,” the source bemoaned.

One equipment manufacturing source said that many companies are trying to diversify by looking for markets abroad. This tactic is not having any significant success as most of the other major shipbuilding regions, China, Japan and Europe have their equipment manufacturing industries, that they will support where possible within the local shipbuilding communities.

However, there is some scope to sell to the secondary nations such as Singapore, Malaysia and Indonesia, though these are comparatively small markets.

Overall the market in South Korea is under-going a seismic shift and it is likely that it will emerge from this latest crisis a leaner and more focused industry as a result.

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