For South Korean Shipbuilders, the Risks Grow

China’s economic turmoil poses another headwind for the three South Korean shipbuilders that dominate their industry, already reeling from a glut of vessels and slumping freight rates.

The industry’s top three companies by revenue— Hyundai Heavy Industries Co., Daewoo Shipbuilding & Marine Engineering Co. and Samsung Heavy Industries Co., which together sit atop South Korea’s $85 billion shipbuilding sector—have borne the brunt of a slump in recent years.

Meanwhile, the won has strengthened against the yen and yuan, making South Korean ships pricier than those of their rivals in Japan and China.

Analysts say China’s devaluation of the yuan this month will further raise the pressure on South Korean shipbuilders. “Chinese companies, armed with lower labor costs, have always had an edge over Korean rivals, and the yuan’s weakness will only help raise their bargaining power,” said Samsung Securities analyst Han Young-soo.
An official at the Shipbuilders’ Association of Japan said that while Japanese companies have benefited from a weaker yen and a stronger won, they have nonetheless suffered as China’s economic slowdown has cut demand for new ships across the industry. Declining oil prices also have affected the Japanese companies, the person added, because higher prices led to greater demand for Japan’s more fuel-efficient ships.

New ship orders have plunged as trade has slowed globally, with China’s shipbuilders alone reporting a nearly 70% drop in orders during the first seven months of the year compared with the year-earlier period, according to the China Association of the National Shipbuilding Industry. South Korea is the market leader as of March this year, with a share of 44.1% in terms of new orders by shipping capacity, followed by Japan’s 30.4% and China’s 24.4%.

Tokyo-based Mitsubishi Heavy Industries Ltd., in its fiscal first-quarter results July 31, cited the weaker yen as a reason for a general increase in orders for commercial ships.

“For the past few years, Korean companies have had a tough battle with Japanese rivals benefiting from a weaker yen,” said Lee Hang-koo, a senior researcher at the state-run Korea Institute for Industrial Economics & Trade. “Now they have another neighbor, which is set to gain market share with a weakening currency.”

Shipbuilding, which has been central to South Korea’s economy since the 1970s, accounted for 6.9% of the country’s total exports last year, compared with 6.6% a year earlier. The Big Three’s profits began sliding after the 2008 global economic slump damped orders from shipping companies and lower-cost Chinese rivals made market inroads.

To avoid direct competition with Chinese rivals, the South Korean shipbuilders ventured into offshore oil rigs, banking on expanded deep-sea drilling by oil companies as oil prices soared. But a sharp fall in crude prices has prompted international oil companies to reduce their capital expenditures, resulting in fewer offshore and other projects for shipbuilders.

Weighed down by delayed offshore projects, South Korea’s Big Three shipyards racked up a combined operating loss of 4.75 trillion won ($4 billion) in the April-June period—their worst-ever quarterly shortfall.

Analysts expect South Korean shipbuilders to miss this year’s order goals, with their year-to-date orders less than half of their annual targets.

Daewoo, which reflected years of losses from its offshore projects in its latest quarterly results, is particularly vulnerable as it faces order cancellations amid renewed investor concerns about its ballooning losses. Its shares have fallen by two-thirds this year, underperforming the broader market’s 4.5% decline.With worsening business conditions, the company said it will sell all of its noncore assets, trim unprofitable business operations and cut executive jobs by one-third in the coming months.

Hyundai, which ranked far ahead of its competitors with 52.58 trillion won in revenue for 2014, implemented rigorous restructuring, including deep job cuts, last year after a record loss.

A spokesman for Hyundai said the weaker yuan will boost Chinese shipbuilders’ price competitiveness, but added the company aimed to limit the impact of the disadvantage by focusing on high-end ships such as liquid-natural-gas carriers, rather than the small and midsize tankers being built by Chinese companies.

The South Korean shipbuilders’ efforts to restore their profitability are also facing a hurdle from their shipyard workers.

Labor unions at the Big Three said last week they plan to stage a joint strike next month to demand a pay rise as the companies move to freeze wages this year amid a global industry slump.

“The management is going to pass the responsibility for the industry’s poor performance to workers. The current crisis isn’t our fault,” said a Hyundai Heavy Industries union official.
Source: Wall Street Journal