Asian ship­yards fig­ured things couldn’t get much worse. They may be wrong

The oil slump and a weaker China will ham­mer or­ders and earn­ings “We’re still at the worst” point in the cy­cle for rig or­ders

Bloomberg Businessweek (Asia) - - Contents - −Kyunghee Park and Jonathan Bur­gos

Many Asian ship­yards fig­ured busi­ness couldn’t get much worse than in 2015, when a global freight slow­down sent or­ders—and com­pany shares—into a tail­spin. But with oil prices forecast to fall as low as $15 a bar­rel and China’s growth slow­ing, this year could be even more try­ing for Hyundai Heavy In­dus­tries, Dae­woo Ship­build­ing & Marine Engi­neer­ing, and Sam­sung Heavy In­dus­tries, the world’s three big­gest ship­builders. A trou­bled foray into build­ing off­shore rigs in re­cent years bal­looned the debts of the Big Three, push­ing them into losses and pum­mel­ing their share prices for a sec­ond con­sec­u­tive year in 2015. As their oil-drilling and ship­ping cus­tomers strug­gle with over­ca­pac­ity and low freight rates, de­liv­ery sched­ules have been pushed back or or­ders can­celed. “No­body is or­der­ing new rigs,” says Lee Yue Jer, an an­a­lyst at RHB Se­cu­ri­ties Sin­ga­pore. “We’re still at the worst” point of the cy­cle.

The stock of Dae­woo Ship­build­ing was the poor­est per­former last year on Seoul’s Kospi 200 in­dex, fall­ing 73 per­cent. And the woes of the big South Korean builders are now spread­ing to ri­vals in Sin­ga­pore, Ja­pan, and China. Sin­ga­pore-based Sem­b­corp Marine, the No. 2 oil rig builder, dropped 46 per­cent, the sec­ond-worst per­former on the city-state’s Straits Times In­dex. It expects to post a loss in the fourth quar­ter, its first since it started re­port­ing three-month earn­ings in 2003. In Ja­pan, IHI, co-owner of the coun­try’s No. 2 ship­builder, fell 45 per­cent, making it the fourth-worst on the Nikkei 225 in­dex.

More bad fi­nan­cial news is likely. Cosco Corp. Sin­ga­pore, the ship­build­ing arm of China Ocean Ship­ping Group, forecast a “sig­nif­i­cant” fourth-quar­ter net loss. Dae­woo Ship­build­ing, the sec­ond-largest yard, is set to record its big­gest-ever loss af­ter writ­ing off costs from or­der can­cel­la­tions and de­lays in de­liv­er­ing off­shore rigs. Hyundai Heavy and Sam­sung Heavy also posted losses for the first nine months of 2015.

“The ship­build­ing en­vi­ron­ment will prob­a­bly be more chal­leng­ing next year, al­though we ex­pect some or­ders from Iran once sanc­tions are lifted,” Dae­woo Ship­build­ing said in a state­ment e-mailed Dec. 31. “The off­shore busi­ness will also face hard­ship as well next year un­less oil prices re­bound.” The com­pany said it’s in dis­cus­sions with two cus­tomers to push back de­liv­ery dates for four drill ships, sched­uled to be handed over at the end of 2015.

The South Korean gov­ern­ment plans to work with banks to set up a $1.2 bil­lion fund to help lo­cal ship­ping com­pa­nies pay for new ves­sels they’ve

or­dered, ac­cord­ing to the Min­istry of Oceans and Fish­eries. The gov­ern­ment also will push ship­yards to down­size and fo­cus on their main busi­nesses, and it will try to close or fa­cil­i­tate the sale of those that can’t sur­vive on their own.

In Ja­pan, IHI in Au­gust re­duced its net in­come tar­get for the year end­ing in March, partly due to in­creased costs for a drill ship project. Mit­sui Engi­neer­ing & Ship­build­ing also cut its out­look in Oc­to­ber. “The or­der book for the oil-rig builders will be dwin­dling over the next one to two years,” says Joel Ng, an an­a­lyst at KGI Fraser Se­cu­ri­ties in Sin­ga­pore. “We’ve been see­ing can­cel­la­tions, as it will be dif­fi­cult for the smaller en­ergy pro­duc­ers to pay for the new rigs be­ing built.”

Sem­b­corp Marine said in Oc­to­ber it had won S$2.91 bil­lion ($2 bil­lion) worth of new or­ders to that point last year, putting it on pace for its slow­est year for or­ders since 2009. Kep­pel, owner of the world’s big­gest rig builder, re­ceived S$1.7 bil­lion in new con­tracts in the first nine months of 2015, which could make the pe­riod the slow­est for or­ders since 2002. Dae­woo Ship­build­ing recorded no or­ders for off­shore projects last year.

China’s ship­yards have also been hit. Cosco Sin­ga­pore, which is owned by a Chi­nese com­pany and has its ship­yards on the main­land, saw some bulk-car­rier or­ders can­celed as slower com­modi­ties de­mand in China led to over­ca­pac­ity and a 39 per­cent drop last year in the Baltic Dry In­dex, a mea­sure of the cost of mov­ing raw ma­te­ri­als by sea.

Still, one ship­builder says some good may come from the slump. Sam­sung Heavy will try to im­prove its com­pet­i­tive­ness through re­search and de­vel­op­ment, Chief Ex­ec­u­tive Of­fi­cer Park Dae Young said in an e-mail. “Not all com­pa­nies col­lapse be­cause there’s a cri­sis,” he wrote. “We need to ag­gres­sively try to find hid­den op­por­tu­ni­ties in cri­sis.”

The bot­tom line The price of oil is forecast to sink to as low as $15 a bar­rel this year. So South Korea is try­ing to bol­ster its em­bat­tled ship­yard in­dus­try.

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