S. Korea’s Big 3 Shipbuilders Move into Upswing Phase

So-called ‘Big 3’ shipbuilders in South Korea, Hyundai Heavy Industries (HHI), Samsung Heavy Industries (SHI) and Daewoo Shipbuilding & Marine Engineering (DSME),

announced that they achieved greater orders in the first quarter (Q1) this year than they did in Q1 2007 when the shipbuilding industry was at its peak time.
The growth in shipbuilding orders is attributable to the rising demand for special ships for resource development, which is a specialty of Korean shipbuilders, as the global economy is on the recovery path and oil prices keep increasing.
According to the shipbuilding industry on Tuesday, the big 3 shipbuilders won a total of $12.84 billion in orders in Q1 2011. The figure is $2.83 billion higher than the record of $10.1 billion in Q1 2007. It is also 2.1 times larger than what the shipbuilders earned in the same quarter last year.
Domestic shipbuilders say that the period from 2003 through 2007 was the best time for the global shipbuilding industry. In this sense, the fact that this year’s Q1 revenues exceeded the 2007 record raises expectations on whether another boom time is coming for shipbuilders.
By company, HHI won the largest orders of building 12 container carriers, five drillships, one FPSO (floating production, storage and offloading) and 22 offshore facility carriers, equivalent to $7.1 billion in total.
In Q1 2007, HHI had received $4.2 billion worth orders only for two types of ships: 14 units of oil tankers and 16 units of container carriers. However, in this quarter of 2011, the company received orders for more various types of ships, with decreases in regular ship orders, but with increases in orders for ships for special use.
“This year’s commissions for high value-added offshore resource development vessels made a huge leap from 2007,” said an official from HHI.
Likewise, DSME was commissioned orders worth $3.4 billion this quarter, which is $1.1 billion higher than 2007 ($2.3 billion). The company had also won three orders for special offshore ships this year, compared to the single order in Q1 of 2007.
“As oil prices surge, oil companies are even going after projects with lower profitability. This is causing orders for offshore resource equipments to soar, and we will be outdoing our annual target for this year,” explained a DSME official.
SHI had received $2.3 billion worth of orders this year, which is a $1.2 billion fall from 2007. Nonetheless, it succeeded in winning large orders for LNG (liquefied natural gas) carriers and drill ships worth $4.7 billion as of April 12th.
Yet, closer analysis shows that the shipbuilding industry has been suffering from lower profitability despite busy orders. DSME has received 10 orders for containerships and other regular vessels, the same number as 2007, but received only $1.80 billion for the order in contrast to the $1.83 billion in 2007. This shows that prices for ships are not yet fully recovered from the oversupply sparked by the global financial crisis.
To make matters worse, POSCO is expected to raise the price of steel plates used in shipbuilding, which will further squeeze profitability.
“A 10% jump in steel plate prices will lower operating profits for shipbuilding companies by 1%,” said a research analyst at Mirae Asset Securities.