Bloomberg Businessweek (Europe)
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
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.