South Korea’s ‘Big Three’ Shipbuilders Post Record Loss as Offshore Downturn Bites

By Rose Kim and Jungah Lee

(Bloomberg) — The world’s three largest shipbuilders posted a mixed 4.8 trillion received ($4.1 billion) in working losses within the second quarter, paying the value for a failed foray into deep-sea oil rigs.

[contextly_sidebar id=”WEhFqhnPcfbYx5iznEQy3fQbu4k7OYh3″]Hyundai Heavy Industries Co., Daewoo Shipbuilding & Marine Engineering Co. and Samsung Heavy Industries Co. — South Korea’s Big Three shipbuilders — all reported losses Wednesday that had been far worse than analysts had estimated. The root trigger: a enterprise into offshore oil rigs beginning round 2010 to keep away from direct competitors with Chinese shipbuilders, who had the benefit of low cost labor to make low-profit tankers.

Mounting losses at vessel makers are the newest instance of difficulties for the worldwide shipbuilding business after a glut of vessels and low freight charges spelled hassle for Chinese shipyards in recent times, prompting them to hunt authorities support.

“The losses can be attributed to offshore projects that cost more than the companies anticipated, and fierce competition between the three major players that led to unreasonably low pricing to win more orders,” mentioned Heo Pil Seok, Seoul-based chief govt officer of Midas International Asset Management Ltd., which abroad $10 billion in property. “Uncertainties still remain going forward, as the offshore rigs haven’t been completed yet and a low oil price lessens the need for new orders.”

Hyundai Heavy reported an working lack of 171 billion received in contrast with an anticipated 55.4 billion received in revenue, in response to the typical estimate of 10 analysts compiled by Bloomberg up to now 4 weeks.

Samsung Heavy posted 1.55 trillion received in losses within the final quarter, greater than 4 occasions the loss estimated by analysts. Daewoo Shipbuilding recorded an working lack of 3.03 trillion received, greater than triple what analysts had estimated.

Shipbuilding has been central to South Korea’s financial system for the reason that Nineteen Seventies. Ships accounted for 8.5 % of the nation’s complete exports via June 20 of this yr, up from 7 % for all of 2014, in response to the commerce ministry.

Worldwide, the shipbuilding business is seeing fewer orders as a sluggish international financial system and low freight charges discourage ship house owners from shopping for new vessels. Last yr, China Rongsheng Heavy Industries Group Holdings Ltd., as soon as the nation’s largest shipyard exterior authorities management, was compelled to hunt monetary support.

Mounting losses and lack of orders have harm the inventory costs of the shipbuilders. Hyundai Heavy shares have fallen 13 % this yr whereas Daewoo has declined 60 % and Samsung 29 %. Korea’s benchmark Kospi index is up 6.4 % for the reason that begin of the yr.

The transfer into offshore drilling rigs started in earnest round 2010, as the worldwide slowdown and competitors from cheaper Chinese firms challenged the Big Three’s conventional enterprise. With oil costs rising and Chinese shipyards unable to construct refined rigs, the offshore enterprise appeared to vow greater income and fewer competitors.

It didn’t work out that approach. Crude oil costs collapsed 60 % from June 2014 to March 2015, damping demand for drilling rigs. What’s extra, Korean firms used to engaged on rig tasks at depths of 1,000 meters or much less discovered deep-sea building extra difficult and dear.

In an announcement Wednesday, Samsung Heavy mentioned it expects to indicate a revenue as quickly because the third quarter.

It’s unlikely to have additional losses from tasks which might be in an early building stage or haven’t been began but, the corporate mentioned.

–With help from Shinhye Kang in Seoul.