South Korean shipbuildersâ€™ heyday has gone, and they are now bearing the brunt of order cancellations and increased costs, with tough restructuring for the sector in store in the coming years, analysts said Monday.
In the third quarter of the year, the countryâ€™s major shipbuilders, led by Hyundai Heavy Industries Co., logged massive losses, largely due to a series of order cancellations and a delay in the construction of offshore facilities.
The countryâ€™s big three shipyards â€” Hyundai Heavy, Samsung Heavy Industries Co. and Daewoo Shipbuilding & Marine Engineering Co. â€” racked up a combined operating loss of 2.1 trillion won (US$1.85 billion) during the July-September period.
The combined operating loss by the countryâ€™s big three shipyards is estimated at 7.8 trillion won for the year, marking the first time the top three shipyards have suffered operating losses on an annual basis.
In the current quarter, the shipyards are expected to suffer additional losses as the industry faces a protracted slump.
Creditors of the state-run Korea Development Bank (KDB) are set to inject 4.2 trillion won in financial aid to Daewoo Shipbuilding in their latest bid to salvage it.
Daewoo Shipbuilding has suffered a more than 4 trillion-won loss in the first three quarters, largely due to a delay in the construction of offshore facilities and a series of order cancellations.
With its loss ballooning, the creditors have been working on a rescue plan for the shipbuilder. In return, the shipyardâ€™s labor union agreed not to seek pay hikes or go on strike in return for the massive rescue plan.
Creditors are also considering massive cash injections into another shipyard, STX Offshore & Shipbuilding Co., and other smaller shipyards, which are teetering on the brink of collapse.
Analysts said the sobering reality is that they are facing a protracted slump down the road with their new orders likely to plunge 27 percent this year.
According to the report compiled by the KEXIM Overseas Economic Research Institute, local shipbuilders received a combined US$19.05 billion in the first nine months of the year, down 19.4 percent from a year earlier.
In terms of volume, their new orders also declined 2.5 percent on-year to 8.77 million compensated gross tons (CGTs) in the January-September period, it said.
The report estimated this yearâ€™s orders at $24 billion, compared with last yearâ€™s $32.71 billion. In terms of volume, new orders are also expected to decline 13 percent to 10.9 million CGTs.
Their combined order backlog is forecast to dip 9 percent on-year to 32.4 million CGTs this year, the report said.
In the first three quarters of the year, new orders placed around the globe dropped 42 percent on-year to $53.76 billion. In terms of volume, the corresponding figure was 23.34 million CGTs, down 33 percent over the cited period.
The report said the shipbuilding industry will continue to face a slump into next year on a contraction in demand for offshore facilities and a slump in the global shipping industry.
â€œDue to a severe slump in the offshore facility segment, the shipbuilding industry will continue to trend lower down the road,â€ the report said. â€œDemand for LNG carriers, one of South Korean shipbuildersâ€™ cash cows, is also likely to contract for the time being.â€
Adding to woes are their worsening business conditions. Oil prices do not have signs of a sharp recovery, reducing demand for oil drilling rigs and other offshore facilities.
â€œIt is hard to predict a rapid recovery as a whole for the shipbuilding sector,â€ said Lee Jae-won, an analyst at Yuanta Securities. The analyst said sales will start to decline down the road due to a slump in new shipbuilding orders seen in the past two years.
Kim Hyun, an analyst at Shinhan Investment Corp., said the shipbuilding segment should conduct thorough restructuring efforts to resolve financial risks.
â€œWhatâ€™s most worrisome is that demand for offshore facilities, a key revenue source for local shipyards, is expected to remain low,â€ said Kim.