No recovery for sinking shipyards
The shipbuilding industry accounts for 1.7 percent of the Korean GDP and a whopping 13 percent of its exports - yet since the economic crisis began in 2008 it ¡s been sinking into the murky depths. Not only have new orders continued to decline, but existing orders in Korean shipbuilders¡ once-endless backlogs have been cancelled as shipping lines find themselves frantically struggling with a plunge in demand.
Analysts say the industry still has a tough path ahead.
Most recently, Hyundai Heavy Industries said in a regulatory filing on March 17 that Quest Maritime, a Greek shipping company, had canceled five oil tankers out of a total of nine ordered. The ships were originally scheduled to be delivered by March 2012. Hyundai had not started building the ships yet, but already received a 20 percent prepayment. Our company has been compensated for the loss from the cancellation,¡± said Hyundai spokesman Kim Kwang-guk.
According to Kim Hong-gyun, an analyst at Hanwha Securities, Hyundai is playing down the impact of the cancellation. This shows how bad the situation is for shipping industry, he said. If it does not win new orders at a faster pace, the company ¡s backlog will decline.
The Hyundai cancellation is the tip of a dangerous iceberg. In February, Germany-based KG financier Lloyd Fond said he had canceled construction of two of the eight 12,800-TEU vessels it ordered in 2007 from Hanjin Heavy Industries and Construction ¡s Subic shipyard in the Philippines. In January, Hanjin resold one of the four container ships that CMA CGM had ordered in 2007 to another owner when the French carrier failed to pay for it.
In the year 2010, the shipbuilding industry will undergo great danger, said Lee Eun-chang, a researcher at the Hana Institute of Finance. The amount of new orders is minimal compared to capacity, while existing orders are being cancelled or delayed. Above all, the situation is likely to continue.
According to data from Clarkson Research Services as of March, the amount of new orders at local shipbuilders fell 81 percent to 3.35 million compensated gross tons in 2009. New orders in January 2010 totaled 350,000 CGT and 16 vessels, up from 110,000 CGT and four vessels in January 2009 but still negligible when compared to the 15 million CGT capacity of domestic shipbuilders.
Even worse, no rescue is forthcoming. Korean shipbuilders customers, shipping lines, are even deeper underwater due to the drop in the amount of seabound cargo. The largest shipping companies in France and Germany - CMA CGM, Claus-Peter Offen, Peter Dohle Schiffahrts and Hapag-Lloyd - are undergoing a financial crunch, resorting to aids from their respective governments. These firms alone have 75 ships on order from Korean shipbuilders.
Hapag-Lloyd has succeeded in procuring government aid, and CMA CGM is in the midst of receiving emergency funds, but things may not be so easy for C.P. Offen and Peter Dohle. If those two companies fail to secure help, Daewoo Shipbuilding and Marine Engineering and Samsung Heavy Industries are expected to face huge losses, according to the Hana Institute.
There is a high chance of more cancellations, or postponements, of ship orders this year, Lee at Hana said. The biggest difficulty the shipbuilders face is the lack of new orders. Shipping companies in France and Germany are seeking financial aid, but some of them have not been very successful.
The peak before the fall came in 2007, when booming trade led to a slew of new ship orders. But with freight rates stagnant amid the current economic slump, the bottom has dropped out.
It ¡s an issue with supply and demand of new ships, said Choi Kwang-shik, an analyst at Kyobo Securities, who believes the market was oversaturated in recent years.
A side effect of the excess capacity is that prices have plummeted, which ironically makes it an excellent time for shipping lines to buy new vessels, Choi said. But most suffer from insufficient liquidity. Even if shipping companies want to buy ships, banks are not lending any money, he said.
The good news is that large shipbuilders¡ reliance on cargo vessels is decreasing. Since the slump began, they have been diversifying into new ventures such as renewable energy and marine engineering. Now over half of Hyundai Heavy Industries revenue is coming from marine engineering, plants and advanced equipment. Samsung and Daewoo also report over 30 percent of their sales coming from other areas.
This year and last year will end up being the worst for shipbuilders, Choi said. To weather the slump, shipbuilders should focus on high-end, faster ships with low emissions. And this just so happens to be local shipbuilders¡ strength.
By Limb Jae-un