Losses mount for Korean shipbuilders as Russia sanctions prolong
Losses at South Korean companies are increasing as sanctions against Russia after its invasion attempt of Ukraine prolongs with shipbuilders having to cancel ship orders because Russian customers failed to make payments.
Daewoo Shipbuilding & Marine Engineering Co. last week terminated an order from Russian shipping company Sovcomflot to build a liquefied natural gas carrier. The Russian company signed a contract worth $850 million in 2020 for the South Korean shipbuilder to build three ice-breaking LNG carriers and the two ships were canceled in May and June. With the latest termination, there are no more orders outstanding with the Russian shipping company.
Contracts are being terminated due to sanctions imposed on Russia for attacking Ukraine. The former was expelled from the International Association for Interbank Telecommunications, which means Russian companies can’t use banks to make payments. Also, Sovcomflot is on the list of companies subject to international sanctions as it’s a state-owned firm.
“If a shipowner has financial issues, there’s room for adjustment under mutual agreement but in this case the source of getting any funds were blocked so we had to terminate the contract,” a Daewoo Shipbuilding official said. “We are looking for a new owner to take on the vessel.”
Hyundai Samho Heavy Industries Co. terminated a contract with Sovcomflot to build three LNG carriers for $550 million in July and resold these vessels to new owners. An official at Hyundai Heavy Industries Group, which owns Hyundai Samho Heavy, said that the company currently has no outstanding orders with Russian companies.’
Currently, Korean shipyards’ order backlog on orders from Russian companies is estimated at $6 billion. By company, Samsung Heavy Industries Co. has the largest exposure with $5.1 billion, followed by Daewoo Shipbuilding with $770 million.
Samsung Heavy is participating in the “Arctic LNG-2” project, a large-scale LNG development plan by Russia, under a contract to provide ship blocks and equipment. Arctic LNG-2 is the name of a gas field on the Gydan Peninsula in Siberia, and Russia plans to produce 19.8 million tons of LNG annually by 2025. The orders which Daewoo Shipbuilding recently terminate were for this project.
Samsung Heavy has been contemplating whether to cancel the order. But the shipyard is also worried it could ruin relationship with Russia given that state-owned oil company Novatek, shipbuilder Zvezda and Sovcomflot are all involved in the project.
Samsung Heavy is currently working on three out of 20 ships on order related to the Russian project. The contract for the three ships is worth $860 million, of which only $500 million has been paid. However, the initial payment the shipbuilder received for the remaining 17 ships exceeds the balance of the ships that have are under construction, meaning losses from the project may not be big even if trade receivables aren’t collected.
Daewoo Shipbuilding’s efforts to find new owners for the canceled ice-breaking LNG ships, however, hits a snag because not many want special ships with ice breaking capabilities.
The auto industry is another sector facing with challenges due to Russia sanctions. Hyundai Motor Co. has been keeping its Russian plants idle since March. In the first 10 months of last year, the automaker’s Russian plant produced and sold 196,211 units, including 174,251 units for local demand and 21,960 for exports. This year, during the same period, 43,634 units were sold, 78 percent decline from a year ago.
Hyundai Motor and Kia Corp. sold a total of about 370,000 vehicles in Russia last year, ranking second in terms of market share. As global automakers such as Renault SA, Toyota Motor Corp. and Mercedes-Benz decided to withdraw from Russia, media in that country also project that Hyundai Motor Group would do the same, which the South Korean auto group said is groundless. The Korean automaker will continue to keep a close eye on the situation in Russia, an official at the group said.