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South Korea moves to rescue its shipbuilders with a $9.6 billion package

Posted by PortVision on Jan 4, 2017 6:07:00 AM

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In May 2016 CNBC reported that bankruptcy was near for South Korean shipbuilders. Debt accrued due to the combination of a global trade slowdown, an oversupply of ships, and declining freight rates was threatening to put the world's largest shipbuilding industry out of business.

The top builders, the Big Three – Daewoo Shipbuilding & Marine Engineering, Hyundai Heavy Industries, and Samsung Heavy Industries – held $421 billion in loans and ended the 2015 fiscal year with combined losses of over $6 billion. This sector of South Korea's economy makes up 6.5% of GDP, and accounts for 200,000 jobs. April 2016 marked the 16th straight month of export revenue losses. South Korea leads the global industry with 44.1% of new ship orders, followed by Japan with 30.4% and China with 24.4%, according to the Wall Street Journal.

South Korea's STX Offshore & Shipbuilding – the world's fourth largest shipbuilder – announced in May that is has filed for a court restructuring plan because its major creditor, KDB, no longer considers it credit worthy.

At the time, the South Korean government said that it was unable to help in financing its` shipbuilding industry.

In August, the Wall Street Journal reported that new ship orders have dropped dramatically worldwide. China's shipbuilders reported a 70% drop during 2016 over 2015. South Korean builders' profits have been negatively impacted by China's lower cost competition as well as a global economic softening. To counter these stresses on business, South Korea began to focus on building offshore oil rigs, but the recent fall in crude prices has sidelined this market possibility.

South Korea's Big Three shipyards accumulated a combined operating loss of $4 billion in April through June, their worst ever quarter. South Korean shipbuilders are on track to miss their order goals by 50% for 2016.

Daewoo, facing continued order cancellations and profit losses, said it will sell assets, cut management positions, and slim down unprofitable operations. Hyundai, after a 2015 record loss, has restructured, laid off thousands, and instituted a wage freeze.

Hanjin Shipping, South Korea's largest shipping company and a source of business for the local shipbuilders filed for bankruptcy protection in August.

The South Korean government has now come to the rescue of their shipbuilding industry. Bloomberg reported on October 30, 2016 that $9.6 billion will be invested in the next four years to help the industry. More than 250 vessels will be ordered (including bulk carriers, tankers and container ships) and South Korea is doubling its $2.4 billion fund to aid shipping companies with vessel orders.

Other steps planned in the rescue include: Hyundai Heavy Industries, the world's largest shipbuilder will spin off all of its non-related business (for an expected 8.41 trillion won), Daewoo Shipbuilding & Marine Engineering Company, the second largest shipbuilder in the world, will cut 5,500 jobs by 2018. Overall job cuts for the top three builders will approach 32% of their workforce. The Korea Labor Institute estimates that another 40,000 jobs will be lost by subcontractors.

The Korean government intends to monitor these firms on a continuing basis to assure positive movement in their positions. They also plan to increase incentives to shipping companies to make calls into Busan's port.

Despite these robust government moves, the economic environment remains challenging. World Maritime News reported on December 12 that Chevron North Sea Limited cancelled a 2013 contract with Hyundai Heavy Industries. The order, worth $1.85 billion, was for an FPSO (floating production storage offloading unit). It was originally expected to be delivered by the end of 2016, but was still in the design phase, and would have been used at the Rosebank oil and gas field which is 130 km off the Shetland Islands in the North Sea.

Topics: Shipbuilding