- Hyundai, Samsung, Daewoo to raise $7.3 billion from revamp
- South Korea to set up $9.5 billion fund as cushion for banks
The world’s three biggest shipyards, battered by the deepest industry slump in at least two decades, are getting a helping hand -- from the state.
South Korea’s government is at the forefront of efforts to revive the shipbuilders, which employ almost 62,000 people, or 1.4 percent of the nation’s manufacturing sector workforce. After pledging active steps in April to help the sector weather the slowdown, policy makers in Seoul on Wednesday announced an 11 trillion-won ($9.5 billion) fund to help lenders absorb losses.
For their part, Hyundai Heavy Industries Co., Daewoo Shipbuilding & Marine Engineering Co. and Samsung Heavy Industries Co. unveiled plans to raise a combined 8.41 trillion won selling assets as part of the restructuring. The companies have struggled with losses and mounting debt after a slide in crude oil prices, which more than halved in the past two years, prompted customers to slash investments, and cancel or postpone projects.
“They aren’t out of the woods,” said Hong Seok Jun, an analyst at Korea Investors Service, a local affiliate of Moody’s Investors Service. “The industry needs new shipbuilding orders to really start showing signs of a recovery and after that there has to be high-quality orders.”
The fund, created by the government and the Bank of Korea, is expected to start operation July 1 and run through the end of 2017. The restructuring program pursued by President Park Geun Hye’s administration could cost tens of thousands of workers their jobs in an economy that’s been hit by falling exports and weak demand at home.
"We will swiftly carry out restructuring of shipping and shipbuilding companies under the principle that the companies strictly implement their own reform plans and take losses incurred," according to a written copy of remarks made Wednesday by Finance Minister Yoo Il Ho.
Shares of Hyundai Heavy were unchanged at 115,500 won as of 9:24 a.m. in Seoul Thursday while Samsung Heavy dropped 0.6 percent to 9,990 won. Daewoo Shipbuilding gained 1.8 percent to 4,905 won after announcing a $580 million order.
The three shipbuilders have submitted their fund-raising plans to their creditors, including state-run Korea Development Bank and KEB Hana Bank, South Korea’s government said in a statement Wednesday. The banks and regulators will meet twice a month to review the progress of the plans.
Today’s troubles contrast with the situation five years back when the yards consumed 7.4 million tons of steel plates annually -- enough to build about 1,000 Eiffel Towers. Vessels built by the ‘Big Three’ were the single-largest export item from South Korea in 2011.
Average consumption has now slid to 5.7 million tons of steel plates, according to data from the companies.
Shrinking orders for new vessels amid mounting losses have heightened concerns their cash may dwindle further. The government told the shipyards to submit their plans to help manage their financials better and minimize the impact on the economy. Brent crude traded at $52.72 a barrel, compared with about $115 two years ago.
Oil companies are projected to reduce capital expenditure by 17 percent this year, with offshore projects and exploration facing the steepest cuts, the International Energy Agency said in February. This follows a 24 percent drop in 2015, the IEA said. Leaders of the world’s largest suppliers of offshore drilling rigs and the services that go with them see the oil-market recovery taking even longer than expected last year.
Daewoo Shipbuilding said it will carry out the restructuring plan and expects to post an operating profit in the second quarter, the company said in an e-mailed response to Bloomberg. Hyundai Heavy said it will do its utmost to rebuild market confidence. Samsung Heavy expects orders to revive in the second half and aims to win more than $5 billion worth contracts by the end of this year, it said.
Not all of it may be negative news for the industry, said Park Moo Hyun, a Seoul-based analyst at Hana Daetoo Securities Co. The steps by South Korea may be coming amid nascent signs of a recovery as vessel deliveries in terms of deadweight tons increased 39 percent in May from a year earlier, he said.
“Things are starting to turn around for the shipyards as more vessels and offshore projects are delivered to clients,” Park said. “The focus now should be on providing funds to help them win new orders.”
South Korean shipbuilders aren’t the only ones feeling the pain. Rivals in Japan, China and Singapore, such as Mitsui Engineering & Shipbuilding Co., Cosco Corp. Singapore and Sembcorp Marine Ltd., posted losses or smaller profits last year because of write-offs from their offshore operations.
Hyundai Heavy, whose first-quarter net income beat estimates, plans to raise 3.5 trillion won selling shares in other companies such as KCC Corp. and Hyundai Motor Co., as well as its three financial units, the Ulsan-based company said Wednesday. It will seek to save 900 billion won from job and pay cuts. The shipyard plans to cut its debt-to-equity ratio to 80 percent from the current 134 percent.
Daewoo Shipbuilding, which counts Korea Development Bank as its biggest shareholder, will seek to raise 3.45 trillion won from sale of its 14 subsidiaries, two floating docks and the spin-off its specialty shipbuilding business. It will also reduce jobs and salaries to save money, it said.
The latest plan is in addition to the 1.85 trillion won the shipyard said it will seek to raise in October last year.
Samsung Heavy plans to sell assets through bond sales and reduce jobs to raise 1.46 trillion won. It also plans to sell new shares if more cash is needed, it said.
The three shipyards have 9.57 trillion won in debt and loans with maturities that extend to as long as 2022, according to data compiled by Bloomberg.