South Korean shipbuilders fulfill discounted orders to lift earnings

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The three largest shipbuilders in South Korea have reported annual earnings that improved from a year earlier, thanks to the reduction of nonprofitable orders dating back to a leaner period.

Domestic leader HD Korea Shipbuilding & Offshore Engineering notched its first operating profit in three years in 2023, swinging to earnings of 282.3 billion won ($212.6 million) from a 356 billion won loss in 2022.

Sales jumped 23% on the year to 21.2 trillion won. Both sales and operating profit at HD Korea Shipbuilding are projected to grow further this year, indicating the company is out of its rough patch.

Samsung Heavy Industries logged a 233.3 billion won operating profit in 2023, its first black ink in nine years and a significant improvement from a 854.4 billion won operating loss in 2022.

Hanwha Ocean reported an operating loss of 196.5 billion won in 2023, narrowing from the 1.61 trillion won loss suffered in 2022.

The common thread among the three shipbuilders is the progress they made in clearing away unprofitable orders received in the late 2010s, when the market was in a downturn.

Construction of large ships typically takes about three to five years from receiving an order to delivery. During the lean years, shipbuilders were willing to lose money on some orders to maintain utilization rates at building docks. Now the shipbuilders have prospects for digesting discounted orders.

The shift in international affairs has also lifted earnings. Due to souring relations with Russia, Western European nations have increasingly switched to transporting natural gas via sea routes instead of through pipelines.

South Korean shipbuilders experienced a surge in orders for liquefied natural gas tankers, one of their strengths. As a result, containerships and bulk carriers — categories where they face tough competition from Chinese rivals — made up a smaller share of their total orders.

Ammonia carriers have been positioned as the main vessel type for the next generation. Hydrogen, seen as a next-gen clean energy source, can be derived from ammonia.

Orders for ammonia carriers have totaled 130 globally since 2021, according to British market intelligence firm Clarksons Research. HD Korea Shipbuilding captured most of the orders, with the three big South Korean shipbuilders winning about 80% combined, according to Clarksons.

Ammonia can be transported at high capacity across long distances by liquifying the cargo at minus 33 C, which compresses the volume. Demand is growing for specialized carriers that can transport ammonia made in the Middle East or Australia from fossil fuels and destined for markets in northeast Asian and Western nations.

South Korea’s shipbuilders are focused on landing orders for ships that are technically demanding to construct, since Chinese competitors have yet to be proficient in that domain. The shipbuilding business accounts for 80% to 90% of the sales at the three South Korean players, which plan to expand to other fields that promise stable, long-term earnings, such as building offshore plants.

In previous years, South Korea’s shipbuilding industry has tended to prioritize the total value of orders rather than profitability. In the late 2010s, the downturn in the shipbuilding industry overlapped with the rise of Chinese rivals. The South Korean firms took on unprofitable orders to reach numerical goals for purchase orders, squeezing earnings.

In light of that history, Hanwha Ocean decided to stop publicizing annual targets for orders starting this year. Analysts and others from the securities industry objected to the decision, but the company insisted the change was needed to escape from past practices that led to excessive discounted orders.

The labor shortage is another factor driving the strategy of eschewing the pursuit of scale.

The big South Korean shipbuilders have embarked on major restructuring during the down period. The number of workers at those companies shrank to about 90,000 in 2021 from roughly 200,000 in 2014, according to an industry group.

Many facets of shipbuilding, such as installing equipment inside the vessels, are complicated processes that cannot be automated, so a certain number of people are needed to do the work.

South Korean shipyards are concentrated in the southeastern part of the country, far away from the capital of Seoul. A shipyard worker is a relatively low-paying job, which also contributes to the difficulty of finding laborers.

The South Korean government is relaxing work visas to bring in more foreign workers, but the labor crunch has become a hindrance for domestic shipbuilders.

In China, the government has led an industry shakeup, with China State Shipbuilding Corp. becoming the world leader. CSSC is going on the offensive by spending around $2 billion to build an LNG shipyard in Shanghai.

After facing stiff competition from Chinese giants in steel, petrochemicals, batteries and displays, South Korean rivals have shifted toward higher added-value products. Shipbuilders are adopting a similar strategy to stay competitive.