Can the surge in orders for South Korean shipbuilders thaw the shipbuilding industry?

      Against the backdrop of a market recovery this year, the South Korean shipbuilding industry has shown a clear upward trend. Korean companies have made achievements in areas such as VLCCs, VLOCs, FSRUs, ultra-large container ships, and gas carriers. The three major shipbuilders have also returned to profitability. It remains to be seen whether this favorable turn can thaw the shipbuilding industry's "winter."

Strong Momentum Sets New Order Records

According to Clarkson Research Services data, the global newbuilding market saw a small peak in new orders in September 2017, with China, Japan, and South Korea all experiencing varying degrees of growth. By the end of September, a total of 573 vessels (15.935 million CGT) had been contracted globally this year, exceeding more than 20% of the total volume for 2016 in terms of CGT. South Korea's performance was particularly eye-catching, with a total of 133 vessels (5.039 million CGT) contracted, accounting for 31.6% of the global market share. In September alone, South Korean shipbuilders contracted 1.455 million CGT, setting a new monthly record since May 2015.

South Korea's three major shipbuilders played a significant role, with a combined total of 123 vessels (4.926 million CGT), accounting for 97.8% of the total orders for South Korean shipbuilders. Among them, Hyundai Heavy Industries Group (including Hyundai Mipo Dockyard and Hyundai Samho Heavy Industries) showed the most impressive performance, with 83 vessels (2.764 million CGT) contracted, including VLOCs, VLCCs, FSRUs, and a small number of bulk carriers and gas carriers, etc. Oil tankers accounted for over half; Samsung Heavy Industries contracted 19 vessels (920,000 CGT), including ultra-large container ships, oil tankers, and gas carriers, with container ships accounting for nearly half; Daewoo Shipbuilding & Marine Engineering contracted 21 vessels (1.242 million CGT), mainly VLCCs, container ships, and gas carriers, with VLCCs accounting for over 40%.

A Warm Breeze, But Not Strong Enough

Profitability Still Relies on "Old Capital"

Without the release of third-quarter data, it is predicted that Hyundai Heavy Industries' third-quarter sales will be 4.34 trillion won (approximately US\$3.51 billion), and operating profit will be 945 billion won. Samsung Heavy Industries' third-quarter sales and operating profit are estimated at 1.81 trillion won (approximately US\$1.46 billion) and 318 billion won, respectively. The improvement in the operating conditions of these two companies still stems from cost-reduction and efficiency-enhancing measures such as the sale of non-core assets. It is expected that the sales of Hyundai Heavy Industries and Samsung Heavy Industries will decrease by 54.4% and 34.7% year-on-year in the third quarter, and operating profits will decrease by 70.6% and 62.2% year-on-year, respectively. In addition, Daewoo Shipbuilding & Marine Engineering, which is still operating abnormally, is expected to have operating profits of several hundred billion won in the third quarter due to the delivery of high value-added LNG carriers However, year-on-year sales and operating profit are still predicted to decrease.

Difficulties in Overcoming Insufficient Operation Rates

South Korea's three major shipbuilding companies have seen improvements in their operating performance through a period of intensive restructuring and cost-cutting. However, insufficient operation rates have led to a serious problem of idle manpower, and sales and net profits have significantly decreased compared to previous years. In this situation, due to the increasing burden of fixed costs, the continued low operation of new ship prices has made it difficult to improve profitability. Hyundai Heavy Industries is facing increasingly severe problems with insufficient backlog orders. More than 600 employees in the shipbuilding department have begun a five-week rotating leave, and three of the eleven docks are idle. It is expected that more than 5,000 workers (including subcontractors) will be unemployed in the second half of the year. Samsung Heavy Industries, with two docks already closed, is discussing cyclical leave with the union, while Daewoo Shipbuilding & Marine Engineering has been implementing unpaid leave since the beginning of the year. This shows that the situation for South Korea's small and medium-sized shipbuilders will be even more severe.

A Distant Solution Cannot Solve Immediate Problems

According to Clarkson Research Services data, the ship price index in September was 124. Since May last year, it has remained at a low level of around 120 points for 16 consecutive months. At the same time, a decrease in new orders has led to a decline in sales, while insufficient operation rates have increased fixed costs and low new ship prices have negatively impacted profitability. Unless shipyards can secure a large number of new orders, this low-profit or even loss-making situation will continue into the fourth quarter. The three major shipbuilders have a large amount of debt maturing at the end of this year and the beginning of next year. Although they have large-scale order revenue, due to the special nature of the shipbuilding industry, it generally takes one to two years after receiving an order for it to be reflected in net profit. Therefore, financial problems remain a major unavoidable issue for shipyards.

Thawing Requires "Persistence" + "External Support"

Companies themselves continue to implement cost-reduction and efficiency-enhancing measures, while small and medium-sized shipbuilders urgently need government order assistance.

Financial Support as a "Lifeline"

Let's talk more about financial support. After years of market downturn, both shipbuilders and shipping companies have encountered difficulties with "money." When facing the limited number of new ship orders in the market, whether shipyards can "find money" (provide financing solutions) for shipowners has become an important factor in whether they will place orders at that shipyard.