S. Korean shipbuilding industry struggles despite sales boom
Major South Korean shipbuilders posted more losses than profit in the first quarter of 2021, suggesting the country’s shipbuilding industry hasn’t recovered from a downturn despite an increase in order volume.
This is different from what South Korean President Moon Jae-in said Monday in an address to mark four years in office, in which he said that South Korean shipbuilders had made a comeback after facing a steep drop in orders in the past.
“The [South Korean] shipbuilding industry has climbed back from near collapse to recapture the world’s No. 1 position in a resounding way,” he said.
But the industry mood is quite different from the kind of performance the figures are pointing to. Many on the ground say they have yet to sense an actual turnaround.
In terms of sheer order volume, the claims of a shipping industry revival are plausible.
According to industry statistics shared Tuesday, total orders for South Korean shipbuilding companies during the first quarter (Q1) of 2021 (January to March) amounted to 5.32 million compensated gross tons (CGT), representing a rise of 868% from Q1 in 2020.
Over the same period, new orders also rose 753% to US$11.9 billion. Shipyards were packed with building docks, and individual companies had enough of an order balance to keep them busy for two years.
This was thanks to a boom downstream in the shipping industry. Since the COVID-19 pandemic began, distribution has been increasing and shipping fees have soared, prompting shipping companies to massively increase their previously delayed container vessel orders.
Indeed, Samsung Heavy Industries scored its largest-ever single order of 20 container vessels in March from the Taiwanese shipping company Evergreen.
Ship prices have also climbed. According to figures from the British shipbuilding and shipping market analysis provider Clarksons, the newbuilding price index — reflecting the price of newly built ships in the global market — stood at 134 as of May, its highest level in six years since February 2015. It’s a reflection of disappearing empty dock space at shipyards and the growing bargaining strength of shipbuilding companies.
But the trend in terms of business results has been quite different.
Samsung Heavy Industries, which registered an order bonanza early in the year, showed operating losses upwards of 500 billion won (US$444.67 million) in the first quarter alone. The total reflected 210 billion won (US$186.74 million) in valuation losses on ocean drilling ships taken on as bad stock, as well as 120 billion won (US$106.71 million) in anticipated additional losses of new orders (provisions for construction losses).
“The sharp increase in anticipated construction costs just after the order means they took on low-cost orders simply to fill the docks after the orders dropped off last year,” said a source at one credit rating agency.
The company is predicting it will take another three years or so to begin recording operating profits again. Samsung Heavy Industries share prices nosedived by 19% after the Q1 performance announcement on May 4.
The situation was not much better for Korea Shipbuilding & Offshore Engineering (KSOE) and Daewoo Shipbuilding & Marine Engineering (DSME), the world’s number one and two shipbuilders.
At 67.5 billion won (US$60.02 million), KSOE’s operating profits for Q1 were down 45% from the same quarter in 2020. While DSME has yet to announce its results publicly, the market predicts it may have narrowly managed to register an operating profit in Q1.
This gap between orders and performance has to do with the characteristics of shipbuilding as an order-based industry.
It typically takes one to two years from a shipbuilding order to its design, construction and delivery. For the most part, the sales and profits currently listed for a shipbuilding company reflect contracted volumes from the past, when the industry was suffering an order drought. If the prices of the ships ordered at the time weren’t high, the company is unlikely to see any immediate improvements in its profitability.
While a company is building a ship, it receives portions of its contracted payment from the company that placed the order. In the accounting, sales and profits are separately reflected according to how far along the construction is.
Another troubling trend for the shipbuilders is an ongoing sharp rise in the cost of the thick steel plates used in ship construction due to a shortage of iron ore. That also stands to have a negative impact on profitability.
Profits from high-margin construction orders this year will start to be reflected in one to two years, but rising raw material prices are poised to potentially hurt performance in the short term. Indeed, Samsung Heavy Industries and KSOE each recorded over 100 billion won (US$88.92 million) in additional Q1 costs reflecting the impact of increased prices of the steel used in shipbuilding.
“Internally, the view is that the current boom in orders will need to continue at least through the second half of this year for sales and profits to begin improving from next year,” said an official at one major shipbuilding company.
Yoo Seung-woo, an analyst at SK Securities, said, “The shipbuilding orders that were delayed due to COVID-19 last year came all at once early this year, creating an optical illusion that makes the shipbuilding conditions look like they’re experiencing a V-shaped recovery.”
“In terms of when the shipbuilding industry will see another boom like the one from 2004 to 2008, it looks like it will not be until at least 2024 when the replacement period really gets underway for the ships ordered during the previous boom,” he added.