The plunging price of oil is forcing South Korean shipbuilders to take tough restructuring measures as a drop in offshore rig jobs eats into profits and pushes them into uncharted waters.
Hyundai Heavy Industries, Samsung and Daewoo Shipbuilding & Marine Engineering, the world’s biggest shipbuilders by revenues, have been grappling with falling new orders, increasing competition and growing labour unrest amid the industry’s protracted downturn.
They were in relatively good shape until 2013, shielded by revenues from energy-related orders. However, the falling crude price has made the environment tougher as international oil companies reduce their capital expenditure, delaying or cancelling orders for drill ships and offshore production facilities.
“The big three players quickly ramped up offshore project weighting during 2012-13, which reached as high as 62.5 per cent during the period,” says Lee Kyung-ja, an analyst at Korea Investment & Securities. “However, close monitoring is required for offshore projects as working capital and cost overrun concerns may grow in line with construction progress.”
But the oil price slide cannot fully explain their plight, analysts say. The Korean shipyards have bid too aggressively for overseas power plants, oil rigs and energy platforms to fill their order book in the past years, and the low-margin orders are now taking their toll.
Hyundai, the industry leader, is among the hardest hit, posting an estimated $3.2bn operating loss last year, as it set aside provisions against potential losses from such deals. It won $19.8bn of new orders last year, achieving just 67 per cent of its annual target of $29.6bn.
“Hyundai has fast expanded into non-shipbuilding businesses over the past years to get through the industry slump but such reckless expansion has got them into current trouble,” says Angela Hong, an analyst at Nomura.
Hyundai’s peers are not immune to the worsening environment. Samsung’s operating profit plunged 80 per cent to Won183bn last year while Daewoo’s net profit slid almost 60 per cent to Won81bn in the first nine months of last year.
Samsung suffered the weakest new orders last year among its peers at just $7.3bn, falling well short of its $15bn target. Among the three, only Daewoo beat its annual order target of $14.5bn thanks to its strength in liquefied natural gas carriers.
The companies are now shifting their focus back to commercial shipbuilding, especially LNG carriers and large-size container ships, while accelerating cost-cutting plans.
Hyundai replaced its chief executive in September and cut the number of its executives by about 30 per cent. It has consolidated operating divisions and introduced a performance-based salary system to improve profitability.
Last month, it announced a voluntary retirement programme for about 1,500 office workers or about 5 per cent of its workforce. Samsung is also relocating some of its workers and may seek a merger with its engineering affiliate again to boost efficiency, while Daewoo is selling non-core assets to boost liquidity.
Industry observers say restructuring is inevitable as Japanese shipyards and expanding production facilities amid the weaker yen pose a renewed threat to Korean companies. Chinese yards are also continuing to erode Korean market share on the back of cheap labour and government subsidies for the replacement of old vessels.
Global new orders slid 35 per cent to 39.7m compensated gross tonnage last year with Chinese yards capturing the largest number of new orders with 15.3m CGT, compared with Korea’s 11.8m CGT and Japan’s 7.8m CGT, according to Clarkson, the brokerage. Korea’s market share fell to 29.7 per cent last year from 32.1 per cent in 2012 while China’s rose to 38.5 per cent and Japan’s to 19.6 per cent.
“Amid the falling backlog and rising competition with Chinese and Japanese yards, pricing power at Korea’s big three shipbuilders will probably decline and we expect this to force yards to repeat what happened in 2012-13, when they sacrificed margins for orders,” says Ms Hong of Nomura.
The only bright spot has been surging demand for LNG and LPG carriers thanks to the US shale gas boom and Russia’s Yamal LNG project. Korean shipbuilders have taken more than 70 per cent of new LNG orders last year but their dominance is gradually weakening as Chinese and Japanese yards make inroads.
Labour problems at home are causing another problem at Korean yards where restructuring moves are sparking strong resistance from unions. Hyundai’s 18,000 unionised workers staged partial strikes for several days last year for the first time in 18 years and are still at loggerheads with management over wage increases. Labour unions at Samsung and Daewoo last month voted in favour of industrial action over wages and bonuses.
Analysts say labour unrest could test the companies as they face tougher years ahead amid continued oversupply. They say the worst may be behind Korean shipbuilders in terms of earnings but a sustained recovery is unlikely with limited order flows expected this year.
“It will take a few more years until we see a turnround,” says Jeon Dae-chun, an analyst at Daishin Securities. “In the meantime, the companies have no choice but to cut costs and downsize for survival.”
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