Increased revenue, but not profits! South Korea's three major shipbuilders all suffer losses in the second quarter

Daewoo Shipbuilding reported a US$76 million loss in the second quarter, resulting in all three major South Korean shipbuilders experiencing losses for the quarter. Despite a significant increase in order intake since last year, none of the three major South Korean shipbuilders have returned to profitability and remain mired in debt.

On August 16, Daewoo Shipbuilding announced that its operating revenue for the second quarter of this year reached 1.1841 trillion won (approximately US$900 million), with an operating loss of 99.5 billion won (approximately US$76 million) and a net loss of 176.1 billion won (approximately US$134 million). In the first half of this year, Daewoo Shipbuilding achieved operating revenue of 2.4295 trillion won (approximately US$1.852 billion), a year-on-year increase of approximately 12%; the operating loss was 569.6 billion won (approximately US$434 million), a year-on-year decrease of approximately 650 billion won (approximately US$495 million), indicating gradual improvement in performance.

In the first quarter of this year, Daewoo Shipbuilding achieved operating revenue of 1.2455 trillion won (approximately US$975 million), a year-on-year increase of 13%; the operating loss was 470.1 billion won (approximately US$368 million), more than double the operating loss of 212.9 billion won in the same period last year; the net loss for the period was 491.8 billion won (approximately US$385 million), more than double the net loss of 234.7 billion won in the same period last year.

Daewoo Shipbuilding stated that the main reasons for the company's losses in the first half of this year were the increased fixed costs of products under construction and the sharp rise in raw material prices, including steel, and the company booked approximately 350 billion won (approximately US$267 million) in engineering loss reserves.

Daewoo Shipbuilding stated that although the loss in the second quarter had significantly decreased compared to the first quarter, losses continued due to factors such as order cancellations resulting from Western sanctions on Russia due to the Russo-Ukrainian conflict, and a 51-day strike by subcontractors occupying the dockyard, resulting in a reduction of 816.5 billion won (approximately US$620 million) in company sales.

A Daewoo Shipbuilding representative said: “To cope with various potential risks in the future, the company has set aside reserves. In the future, the company will make every effort to improve profitability through measures such as expanding orders for high value-added vessels, reducing costs, and improving production efficiency.”

To date, Daewoo Shipbuilding has received new ship orders totaling US$6.67 billion this year, reaching 75% of its annual order target of US$8.9 billion; as of the end of July, Daewoo Shipbuilding had new ship orders totaling US$29.1 billion, which is typically enough to keep the shipyard operating normally for three years. In particular, 46 of the 109 outstanding orders are LNG carriers, accounting for over 42%. Therefore, the industry is also looking forward to the improvement of Daewoo Shipbuilding's future profitability.

Previously, on July 29, Hyundai Heavy Industries Group's shipbuilding business holding company, Korea Shipbuilding & Offshore Engineering, released its second-quarter earnings report for this year, showing that the company achieved consolidated operating revenue of 418.86 billion won (approximately US$32.34 billion), a year-on-year increase of 10.3%; consolidated operating losses were 265.1 billion won (approximately US$205 million), indicating continued losses. In the first quarter of this year, Korea Shipbuilding & Offshore Engineering achieved consolidated operating revenue of 390.77 billion won (approximately US$30.86 billion), a year-on-year increase of 6.1%; consolidated operating losses were 396.4 billion won (approximately US$313 million), turning to a deficit year-on-year. Therefore, Korea Shipbuilding & Offshore Engineering's operating losses in the first half of this year exceeded US$500 million.

Samsung Heavy Industries also released its second-quarter earnings report on the same day, showing that the company's operating revenue for the second quarter was 142.62 billion won (approximately US$1.1 billion), a year-on-year decrease of 16.9% and a quarter-on-quarter decrease of 3.9%; operating losses were 255.8 billion won (approximately US$197 million), a decrease of 41.6% compared to the operating loss of 437.9 billion won (approximately US$346 million) in the first quarter of last year, but an increase of 169.5% compared to the operating loss of 94.9 billion won (approximately US$75 million) in the first quarter of this year. In the first quarter of this year, Samsung Heavy Industries achieved operating revenue of 148.38 billion won (approximately US$1.17 billion), a year-on-year decrease of 5.8%; operating losses were 94.9 billion won. Although it continued to lose money in the first quarter, the loss was significantly reduced, decreasing by 81.3% compared to the operating loss of 506.8 billion won (approximately US$400 million) in the first quarter of last year; and decreasing by 63.1% compared to the operating loss of 257.1 billion won (approximately US$200 million) in the fourth quarter of last year.

The South Korean industry stated that the increase in revenue without an increase in profit for the three major shipbuilders is mainly due to the impact of low-priced orders from the long-term downturn in the shipbuilding industry in the past. In addition, the sharp rise in the prices of raw materials such as thick steel plates for ships has also negatively impacted the profitability of shipbuilding companies.

In the first seven months of this year, the three major South Korean shipbuilders have received new ship orders totaling approximately US$31.6 billion, which is 90% of the annual order target (US$35.14 billion). This also means that the three major shipbuilders have basically secured two and a half to three years' worth of work.

However, it will still take a considerable amount of time for these orders to be reflected in the performance. This is because it takes about two years for a ship to go from contract signing to design, construction, and delivery. During this period, shipbuilding companies receive installment payments from the ship owner according to the construction progress of the ship, and the revenue for the entire ship will be calculated after final delivery. South Korean industry insiders said that orders received by the three major shipbuilders in the second half of 2020 will begin to be officially reflected in their performance in the second half of this year.

The South Korean industry also pointed out that state-owned policy banks such as the Korea Development Bank (KDB) and the Export-Import Bank of Korea (KEXIM) should increase the credit limit for advance payment guarantees (RG) for shipyards and promote special measures to prevent the recurrence of "bleeding" low-price competition.

It is understood that the Korea Development Bank has discussed a plan to suspend RG issuance for new ship orders whose profitability is below a certain level, starting with the former chairman Lee Dong-geol, but the specific plan has not yet been determined. (Wang Chu)