Shipbuilder profits deceptive

In the first quarter, Korea’s major shipbuilders pulled in orders worth five times those signed a year earlier. That may seem like a rebound for shipbuilding industry. But actually over 60 percent of the Q1 orders were for plant facilities, not ships, and the base effect also comes into play - local firms won almost no orders in the first half of last year, at the peak of trade fallout from the global economic crisis. Industry observers say it is still far too early to talk of a recovery in the ship market.
According to the industry, Korea’s big four shipbuilders - Hyundai Heavy Industries Co., Samsung Heavy Industries Co., Daewoo Shipbuilding and Marine Engineering Co. and STX Offshore and Shipbuilding Co. - won a total of $5.49 billion in orders in the first quarter, compared to $962 million a year earlier.
Hyundai, the world’s biggest shipbuilder, won a deal in Norway to build the world’s largest floating production storage and off-loading facility, used to process and store oil and gas, for $1 billion. It was also commissioned to build a gas production facility and terminal in Myanmar for $1.4 billion. But Hyundai has not won any ship orders since October 2008 - and it’s stopped trying. Analysts and Hyundai spokespersons alike say Hyundai is not going after ship orders because prices are still too low and adding to its backlog now could hurt its bottom line in the long run.
Daewoo won a deal to build a maritime plant for $450 million, but it also won orders for 15 ships for $1 billion.
“We believe the ship market has bottomed out. Ship prices are no longer stagnating and shipping rates are on the rise,” said Lee Sang-gyu, a Daewoo employee, showing a different attitude from Hyundai. “It is much better than last year, but we still need to see whether the market has fully recovered.”
Samsung won a package deal to produce nine oil tankers and a maritime plant for $750 million in the first quarter. It agreed on a long-term deal last year with Royal Dutch Shell to build oil production facilities, and it plans to sign the deal later this year.
STX also won $460 million worth of orders to build 15 ships in the same period. Taking a closer look at that number, however, it soon becomes apparent that over 60 percent of the new orders were for plants, not ships.
“Large shipbuilders have strategically diversified their business into plants,” said Song Jae-hak, a senior analyst at Woori Investment and Securities Co. “Moreover, the ship market has not fully recovered yet. The orders are only one-tenth of the amount during their heyday in 2007.”
Despite the improved performance by the industry compared to a year ago, the figure does not reflect reality, analysts said.
“There were almost no orders in the first half of last year, so of course comparing now to last year is going to produce an increase,” said Jeon Jae-cheon, an analyst at Daishin Securities Co. “The absolute number of orders is still very small.”