Why you should avoid trading bustling Korean shipyards
Friday, 04 May 2012 | 00:00
South Korea's industrial giants have dominated the global shipbuilding industry for close to a decade, but U.S. traders who want to buy into one of the world's top shipyards may want to think twice.
Korean companies get a staggering 50% of all new orders for seafaring vessels and are now running one of the biggest order backlogs as well.
At first glance, that looks like a lock on an industry that's vital to the international economy. After all, gigantic cargo ships bring tons of iron ore and other metals to Chinese factories and then disgorge container after container of finished goods around the world.
But in practice, there just aren't that many ships being ordered or launched.
Korean shipyards booked $12.5 billion in revenue last quarter, down 25% over last year, when global order volume was close to 60% above where it is now.
And the three biggest shipyards on the planet - Samsung Heavy Industries, Hyundai Heavy Industries and Daewoo Shipbuilding & Marine - barely account for 2% of the Korean economy, as represented by a diversified fund like EWY ( quote ).
Even if you wanted to trade these companies, you can't do it with a plain vanilla U.S. brokerage account. They aren't listed here, even in over-the-counter form.
These aren't gigantic industrial empires, either. Hyundai Heavy might impress the casual observer who discovers that the company is valued at 15 trillion Korean won, but do the math and that's a market cap more like $14 billion - within range of a new-economy stock like LinkedIn ( LNKD , quote ).
But it's a blessing not to be able to trade Hyundai Heavy right now, given the stock's 12% plunge year to date in Seoul.
Those who want a ship stock are probably better served with the once-battered shipping ETF SEA ( quote ), which is now up 17% year to date.
Remember, there's already a glut of cargo tonnage on the water. Shipping companies represented in SEA's portfolio are cutting back on new purchases - as you can see from the plunge in orders year over year - and streamlining their fleets.
That's ultimately good for the shipping companies, which can then charge a fairer price to move cargo and eliminate excess capacity throughout the industry.
Until that happens, the ship builders are facing a deep secular decline. They are unlikely to ever become irrelevant, but they're already small enough as part of the world economy that it's going to be a challenging couple of years.
Meanwhile, SEA will rise and fall, but ship orders will lag the overall industry's fortunes. That means getting into SEA first. The shipyards can wait.
Source: Emerging Money
There are no comments available.