Monday, July 27, 2015

Deep-sea plan fails, leaving Korean shipyards struggling








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Deep-sea plan fails, leaving Korean shipyards struggling


[SEOUL] The deep-ocean strategy is coming back to bite South Korean shipyards.
Hyundai Heavy Industries Co, Daewoo Shipbuilding & Marine Engineering Co and Samsung Heavy Industries Co - South Korea's Big Three shipbuilders - ventured into offshore oil rigs starting around 2010. The goal was to avoid direct competition with China, where inexpensive labor could churn out low-profit tankers at cheaper rates. With oil prices climbing toward US$100 a barrel, offshore rigs seemed like a savvy bet.
Today the strategy seems to have backfired. Struggling with technology and a plunge in oil prices that has discouraged exploration, Korean vessel makers are racking up debt and could show billions of dollars in losses when they report earnings starting Monday. It's the latest example of difficulties for the global shipbuilding industry, after a glut of vessels and low freight rates have spelled financial trouble for Chinese yards in recent years, prompting them to seek government aid.
The Big Three "excessively competed to win offshore plants to make up the gap caused by falling demand for ships," Yang Jong Seo, a research fellow at the Korea Eximbank Overseas Economic Research Institute, a government think-tank, said by telephone. "That excessive competition was their biggest mistake." Shares of Samsung Heavy rose 3 per cent Monday to 13,900 won in Seoul, while Hyundai Heavy gained 1 percent to 100,500 won. Daewoo Shipbuilding shares fell 1.6 per cent to 7,520 won.




Economic Mainstay Shipbuilding has been central to South Korea's economy since the 1970s. Ships accounted for 8.5 per cent of the country's total exports through June 20 of this year, up from 7 per cent for all of 2014, according to the trade ministry.
Worldwide, the shipbuilding industry is seeing fewer orders as a sluggish global economy and low freight rates discourage ship owners from buying new vessels. Last year, China Rongsheng Heavy Industries Group Holdings Ltd, once the nation's biggest shipyard outside government control, was forced to seek financial aid.
This week is a test for the Big Three as they report second-quarter earnings. Analysts forecast the companies will post profits, but shares of the three companies have been plunging on media reports of a challenging quarter.
The move into offshore drilling rigs began in earnest around 2010, as the global slowdown and competition from cheaper Chinese companies challenged the Big Three's traditional business. With oil prices rising and Chinese shipyards unable to build sophisticated rigs, the offshore business seemed to promise higher profits and less competition.
It didn't work out that way. Crude oil prices collapsed 60 per cent from June 2014 to March 2015, damping demand for drilling rigs. What's more, Korean companies used to working on rig projects at depths of 1,000 meters or less found deep-sea construction more complicated and costly.
"It took more effort than they expected," KERI's Yang said. "It turned out to be a bit of a challenge." The timeframe to build a rig - about 40 months, compared to 18 months for a tanker ship - and the common practice of backloading most payment until delivery has left the companies burning through cash.
At Daewoo Shipbuilding, available cash fell to 87.9 billion won in the first quarter of 2015 from 238 billion won a year earlier. Samsung Heavy's cash position fell to 152.2 billion won in the first quarter from 1.1 trillion just six months earlier.
"I think the current situation is the bottom for the shipbuilders," Yang said. "South Korean shipbuilders will be able to recover from this slump. They should learn from their mistakes and focus on increasing their technical competitiveness."
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