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S.Korean Shipping Restructuring Degrades into Deals among Insolvent Companies

There is growing concern that the restructuring of the shipbuilding and shipping industry has been transformed into deals among companies controlled by state-run banks as Hyundai Merchant Marine recently decided to buy very large crude oil carriers (VLCCs) and an 11,000 TEUs (one TEU: one six-meter container box) from Daewoo Shipbuilding & Marine Engineering and Hanjin Heavy Industries, respectively.

According to the shipbuilding and shipping industry on September 10, Hyundai Merchant Marine agreed to acquire two 11,000TEU container ships at about 182 billion won (US$163 million) from Hanjin Heavy Industries on August 31 and place an order to buy five new VLCCs worth 470.3 billion won (US$423 million) with Daewoo Shipbuilding and Marine Engineering. Hyundai Merchant Marine invested a total of 650 billion won (US$585 million) in order to expand its size.

These contract seemed to have solved some of the Korean shipbuilding and shipping industry’s old problems as Korean shipping companies gave jobs to domestic shipyards in four years since 2013. Korea’s Big 3 shipbuilders — Hyundai Heavy Industries, Daewoo Shipbuilding & Marine Engineering, Samsung Heavy Industries — have been struggling due to a serious order drought since 2015 and sluggish orders from Korean shipping companies.

On the contrary, Japan and China chose to save both their shipbuilding industries and shipping industries via domestic orders between the industries. China’s Cosco, the world’s sixth-largest shipping company in the shipping industry, rose to fourth place through its merger with CSCL and took Hong Kong’s OOCL this year, jumping to third place in the world.

It is said that the three largest shipping companies of Japan also secured a competitive edge by integrating their container shipping divisions. In the case of the shipbuilding sector, China is trying to reduce its ability to build offshore plants while some privately-owned shipyards are pushing forward with a cut in manpower. High-ranking shipbuilders such as Mitsubishi Heavy Industries and Imabari Shipbuilding agreed to jointly land shipbuilding orders and buy parts through alliance. There are two common points between them. They promoted not only a virtuous cycle system but also strong revamping.

Korea appears to have built win-win partnership between shipbuilding and shipbuilding. However, it is a common evaluation both within and outside the government that it is actually no more than “two industries sharing a common destiny” which are supported by the money from the state-run Korea Development Bank. Korea Development Bank is the largest shareholder of Hyundai Merchant Marine and Daewoo Shipbuilding and Marine Engineering while Hanjin Heavy Industries has been under joint management by creditors led by the Korea Development Bank since last year. Analysis says that Hyundai Merchant Marine decided to buy a ship whose delivery was canceled from Hanjin Heavy Industries instead of placing a new shipbuilding order.

In the same vein, Daewoo Shipbuilding and Marine Engineering neglected in overseas bidding due to its financial soundness already secured the shipbuilding order before its debt ratio shrank. This is the reason why some experts are voicing concern that the industrial restructuring will only lead to extensions of the lives of the insolvent companies thanks to support from the government without a fundamental improvement in their business structures.

Some argue that the KDB, the backbone of restructuring, is neglecting its responsibilities as a government-run bank. “It is ironic that the three troublemakers that sponge off of the state-run bank are regarded as a best practice in win-win partnership between shipbuilding and maritime industries,” a government official said. “The government should keep it mind that if the Hyundai Merchant Marine again suffers a liquidity crisis, the government will have no choice but to inject public funds into the shipping company again even though Korea Ship and Ocean will play its roles as a safety net. Accordingly, the government should thoroughly manage the risks of these three companies.”
Source: BusinessKorea

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