Seatrade Maritime is part of the Informa Markets Division of Informa PLC

This site is operated by a business or businesses owned by Informa PLC and all copyright resides with them. Informa PLC's registered office is 5 Howick Place, London SW1P 1WG. Registered in England and Wales. Number 8860726.

The almost total meltdown of Korean shipbuilding and shipping sectors

The almost total meltdown of Korean shipbuilding and shipping sectors
South Korea’s shipbuilding and shipping segments are reeling from a state of a complete meltdown amid debt restructuring efforts and negative financial results, and the real threat of bankruptcy.

Korea’s ailing shipbuilding industry, which has been a key engine of industrialisation and growth for the country’s economy, is now in a crippled state with the big three shipyards forced to restructure due to mounting debts and lacklustre operating environment.

The big three, Hyundai Heavy Industries (HHI), Samsung Heavy Industries (SHI) and Daewoo Shipbuilding & Marine Engineering (DSME), have all implemented self-rescue restructuring plans as urged by their creditors. The austerity measures include massive staff lay-offs, executive pay cuts, and disposing of non-core assets and subsidiary businesses.

The difficult plight of the Korean yards has been magnified by the collapse of the offshore oil and gas market due to low oil prices, as orders for offshore newbuilds such as drillships and FPSOs, the main product focus for the Korean yards, have virtually come to a halt. The similarly depressed state of the conventional shipping market, including container shipping, has also resulted in a dearth of new orders for large boxships, which is also one of the key products at Korean yards.

Apart from Korea’s big three, other small to medium sized yards such as Hanjin Heavy Industries & Construction (HHIC), Sungdong Shipbuilding & Marine Engineering, Dae Sun Shipbuilding & Engineering are also going through restructuring, while STX Offshore & Shipbuilding has filed for a court-led restructuring.

Early casualties of the shipbuilding slump were Samho Shipbuilding and 21st Century Shipbuilding, which were liquidated in 2012 and 2013 respectively. Another yard SPP Shipbuilding, which became insolvent, was revived after it was acquired in April this year by SM Group, which also owns shipowner Korea Line.

The only profitable yard at present is Hyundai Mipo Dockyard, which is part of the HHI group. Daehan Shipbuilding, which only has one dock, is also surviving after it exited receivership in October 2015 to be managed by DSME.

To put things in perspective, the victims of the gloomy shipbuilding market are not just the shipbuilders themselves. The ripple effect on the creditors, mainly the banks, can in turn have an impact on the overall financial health of the country.

According to numbers cited by the local press, the exposure for Korean banks to the shipbuilding sector is a whopping more than KRW70trn ($58.7bn). State-run Korea Development Bank (KDB) is the main bank that is hit, and other banks affected included KEB Hana Bank and Woori Bank, as well as Korea Export-Import Bank (Kexim). Between KDB and Kexim, the two have around 60% of their banking sector’s credit exposure to shipbuilding, according to a recent report published by Societe Generale.

In today’s volatile and unpredictable global economy, the notion that one is “too big to fail” should be discarded. The death knell is already sounding for the big three yards if their restructuring plans are not carefully managed and if the severe recession of the shipbuilding market persists. Such failures on the yard side will lead to a definite spillover to the banking sector, posing serious threats to the country’s economy.

In Korea’s shipowning sphere, the situation is not looking good either. The country’s two leading shipowners, Hanjin Shipping and Hyundai Merchant Marine (HMM), are struggling to survive, choked by tight liquidity, hefty charter fees and low freight rates.

Hanjin Shipping has filed for a creditor-led debt restructuring and HMM might have managed to avert court receivership as it has secured bondholders’ approval to restructure its debts, though it continues to engage in negotiations with shipowners to cut charter fees.

Both Hanjin Shipping and HMM are streamlining their businesses to focus on container shipping. With Hanjin Shipping already named as one of the six-member of the new THE Alliance, HMM is soon expected to join the alliance as well after it pulled through some last minute efforts to mitigate its financial mess.

Merger and consolidation are perhaps seen as the tickets to surviving the current industry storm, as attested by the recent coming together of container alliances forging new partnerships, and the consolidation of shipyards and shipping conglomerates in, for example, the huge maritime market of China.

China’s two major state-owned yards, China Shipbuilding Industry Corporation (CSIC) and China State Shipbuilding Corporation (CSSC), are reshuffling their operations internally and they could potentially merge certain sections of their businesses in time to come. Shipping conglomerates China Cosco Group and China Shipping Group have merged to form China Cosco Shipping Corporation (Coscocs).

In South Korea, while talks have surfaced on possible mergers among the big three Korean yards and between owners Hanjin Shipping and HMM, there are yet confirmed signals that such marriages will happen. Restructuring efforts for the distressed Korean corporations, however, are continuing apace and the outcome could go either way.