South Korean shipyards face choppy waters

South Korea leading shipbuilders are beginning to suffer the effects of the protracted slump across most shipping sectors, with figures from the country three leading yards showing significant jumps in net debt. Hyundai Heavy Industries and Samsung, neither of which had net debts in 2008, saw them increase to Won148bn ($130m) and Won1,600bn respectively in 2009, according to recent figures. Daewoo saw its net debt jump from Won220bn in 2008 to Won2,103bn last year.
The figures underline how a lack of fresh orders and demands from financially troubled shipowners for delays or cancellations of orders placed during the sector 2001 to 2008 boom are hitting even the largest yards finances. Previously, only the smallest yards in Korea - the world largest shipbuilder, ahead of China and Japan - had shown obvious effects of the crisis. A number of small Korean yards went into administration during 2008 and 2009.
heir financial status is worsening rapidly as their backlogs drop with few new orders, Yoon Pil-joong, at Samsung Securities, said of the large yards. If this drought of new orders continues, their net borrowings will increase sharply, increasing financial costs and hurting profitability. Korean yards are heavily exposed to container shipping, the segment worst hit by the world economic downturn, and the oil tanker sector, where earnings are poor because of lacklustre demand and oversupply of ships.
Chinese yards have more orders for dry bulk carriers, a segment currently enjoying relatively strong rates. Korean yards insist that they are not in dire financial straits because they have backlogs of orders that stretch into 2012 and are winning new orders.
Big Korean shipbuilders remain reluctant to take low-margin orders and try to make up for falling orders for ships with other businesses, such as building energy platforms and other offshore rigs. They are also trying to diversify their business, expanding into renewable energy wind turbines.
Hyundai Heavy failed to win a single order for ships last year, but it recently received a $1.16bn deal to build an oil production vessel for Norway. It hopes to receive $4bn worth of orders for ships this year. Daewoo Shipbuilding aims to win $10bn this year and has so far won $1.2bn worth of orders. Samsung Heavy recently received an order to build a floating natural gas facility for Royal Dutch Shell. It is planning for $8bn worth of new orders this year and has $750m of orders so far.
However, analysts caution that shipbuilders face another tough year in 2010 as shipowners suffering from weak demand are not only placing few new orders but also asking for delay or cancellation in existing ones. Hyundai Heavy said earlier this month that Won480.2bn worth of orders to build five tankers for a European company had been cancelled.
Industry officials worry that more cancellations could come as the industry grapples with overcapacity after years of over-ordering. Analysts predict that it would take several more quarters before new orders start rolling in, although the industry cycle seems to have hit the bottom. A slower recovery is expected for container ships and other high-value ships than for low-cost bulk carriers. Rising prices of ship plates is another concern that is likely to hurt shipbuilders profitability.
Analysts caution that even big players can be forced to compete for low-margin orders if the current slump persists through this year and next. ore adjustment in supply and demand is needed to see a strong recovery in orders, said Lee Jae-kyu. at NH Investment Securities, in a report. If the price war to increase volume intensifies, shipbuilders profitability will be eroded further after 2011."