After another challenging year, Chinese and South Korean shipbuilding industries try to consolidate amid slowdown. Governmental support is an important part,[ds_preview] reports Zeng Xiaolin
Once considered powerhouses in the shipbuilding industry, South Korean and Chinese players are now scrambling to survive amid a prolonged drought of new orders. The downturn across many shipping segments has deterred ship owners from committing to newbuilding investments, while the oil shock has caused drilling companies to either delay or cancel offshore plant orders. Oil majors have curtailed exploration and production activity, slashing demand for drillship and rigs.
While South Korean heavyweight shipbuilders Hyundai Heavy Industries and Samsung Heavy Industries have seen new orders reduced year-on-year in 2015 and 2016, Daewoo Shipbuilding & Marine Engineering (DSME) has been especially hard-hit because accounting fraud that was allegedly perpetrated by its last two CEOs, Nam Sang-tae and Ko Jae-ho.
The fraud resulted in a massive 2.8 bn $ loss for 2015. Despite this, the government, eager to preserve South Korea as a shipbuilding nation, is doing all it can to help the »Big Three« shipbuilders as what HHI, SHI and DSME are known, to survive.
Financial Services Commission chairman Yim Jong-ryong stressed publicly that there would be no merger of the »Big Three« shipbuilders, at least in the short term, despite persistent rumours. Yim said: »Although DSME is in the midst of a massive restructuring, if its research and development staff, which are the world’s best in their field go to competing nations as a result of the company’s closure, South Korea’s shipbuilding industry will quickly collapse.«
DSME posted yet another quarterly loss on 14 November, with a 238.2 bn KRW net loss for the third quarter of 2016. While the net loss significantly narrowed from the 1.15tn KRW net loss DSME suffered in the third quarter of 2015, the shipbuilder’s financial health remained precarious. DSME had a massive working capital deficit of 5.78tn KRW and its equity worsened to negative 1.06tn KRW.
Nonetheless, Yim tried to sound optimistic, saying: »The Big Three shipbuilders have been implementing self-rescue plans, with DSME’s scheme progressing robustly, to the end that it would survive. Should a merger be pushed, two of them would be destroyed.«
Through layoffs, selling non-core assets and capacity reduction, DSME should recover sufficiently for an expected recovery in ship orders in 2018, due to tightening environmental regulations, said Yim.
Besides a 4.2tn KRW (3.5 bn $) bailout plan launched by its main creditors Korea Development Bank and Export-Import Bank of Korea, DSME is implementing a 5.3tn KRW self-rescue plan that involves job cuts and selling properties and divesting non-core businesses.
As part of the bailout plan, KDB, the state policy lender, has swapped some of DSME’s debt for equity, resulting in the bank raising its stake in the shipbuilder from 49.74% to 79.04%.
HHI and SHI are also implementing self-rescue plans that involve selling non-core assets and layoffs. In HHI’s case, the shipbuilder also plans to temporarily shut its shipyard in Gunsan while concentrating all ship construction work in its main yard in Ulsan. The self-rescue plans of HHI and SHI, which respectively aim to raise 3.5tn KRW and 1.5tn KRW, have been ratified by audit firms Samil PricewaterhouseCoopers and Samjong KPMG.
However, True Friend Korea Investment & Securities analyst Lee Kyung-ja said that 2017 is still expected to be a difficult year for the shipbuilders. The market remains slack despite the expected longer-term boost from mandatory installations of ballast water treatment systems (BWTS) and the implementation of SOx emissions regulation, she said.
»For BWTS, shipowners in this market are waiting because inspection is not needed for five years if their ships are inspected just before September 2017 when the regulations enter force,« said Lee. »Commercial ship orders are expected to begin in earnest in 2018 in preparation for 2020 operations when regulations relating to sulphur oxide emissions take effect.«
This said, South Korea’s smaller shipbuilders have been struggling. STX O&S went into receivership in June 2016, after three years of voluntary restructuring and cash injections from its banks, including KDB, failed to restore profits. The Seoul Central District Court will attempt to sell STX O&S within this year, in hopes of salvaging the business.
Dae Sun Shipbuilding & Engineering, which has been undergoing prolonged debt restructuring since May 2010, has formulated an intensive self-help plan after a high-level government meeting decided that the shipbuilder will face cash flow issues in 2017.
SPP Shipbuilding, which will run out of orders from April this year, will retrench all but ten of its employees as its banks hold out for a market recovery from 2018 onwards.
Chinese yards largely on their own
In China, the right-sizing of the shipbuilding industry has been largely left to market forces. While the large state-owned shipbuilders such as China State Shipbuilding Corporation, China Shipbuilding Industry Corporation and China Merchants Heavy Industry and China Cosco continue to rely on ship orders from affiliated shipping lines, struggling privately-held shipyards have exited the business through natural attrition.
Sainty Marine Corporation, majority owned by the provincial government of Jiangsu, went into bankruptcy restructuring in February 2016 after losing many bulk carrier orders as the Baltic Dry Index collapsed to a historic low. The privately owned Jiangsu Rongsheng Heavy Industries, once China’s busiest shipbuilder, collapsed in March 2015 in the wake of massive debts and allegations of inflated orderbooks.
Sinopacific Offshore & Engineering, another privately held Chinese shipbuilder, hitched itself to the wave of speculative orders of offshore support vessels in the early 2010s, but came undone when oil prices went south in late 2014. In August, the shipbuilder’s creditors applied for it to be wound up.
That is not to say that the Chinese central government has not restructured its own shipbuilding enterprises.
On 16 December 2016, China Cosco announced that its shipyards would be consolidated under the newly created entity of Cosco Shipping Heavy Industry. The latter is an amalgamation of the shipbuilding entities of Cosco Shipyard and Cosco Shipbuilding Industry Company, previously part of the China Cosco Group, and China Shipping Industry Co, part of the China Shipping Group. These shipyards have combined annual construction capacity of 11.55mill. tdw and repair around 1,500 vessels every year.
Amid a prolonged drought of new orders due to the downturn in shipping, Cosco Shipping Heavy Industry aims to reduce its shipbuilding capacity to 10.6mill. tdw by end-2017, and down to 9.6mill. tdw by end-2020.
DBS Research analyst Ho Pei Hwa, who predicted that China Cosco would restructure its shipbuilding business, said: »The contracts in its orderbook are of low value while its offshore segment is still on a steep learning curve. Making things its worse, oil and gas customers are delaying rig deliveries in view of the lacklustre charter market and there could potentially be more cancellations given the prolonged downturn.«