The Korean Big Three Face Heavy Loss

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The Three giant Korean shipbuilders grapple with low profits due to increased competition, lesser orders and labour unrest.

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The recent months have seen a sheer drop in rig jobs that has eaten into the profits of the three major Korean Shipbuilders.  The world’s three largest shipbuilders Hyundai Heavy Industries, Samsung and Daewoo Shipbuilding & Marine Engineering  are based in Korea and they are grappling with low profits due to increased competition, lesser orders and labour unrest.

Korea began its investments into offshore drilling rigs in the year 2010.  The big-3, as the three companies are known, found this as an opportune time to combat the stiff competition from Chinese Shipbuilding companies as well as to deal with the global slowdown.  That was a time when oil prices were bullish at $100 per barrel, and the Chinese lacked the expertise and know-how to build sophisticated rigs.  Therefore, investment into offshore drilling rigs seemed to assure future profits with less competition to face.

The reasons that provoked the loss are (a) Korean companies were used to working on less than 1000 m deep rigs, but the new demand for deep sea drilling construction proved to be  more of a challenge, complicated and expensive. (b) Unfortunately from June 2014 onwards, crude oil prices saw a 60% fall. This resulted in International oil companies minimising their capital expenditure by either delaying/ cancelling their earlier placed orders for drillships and offshore production facilities.  This in turn resulted in an overall fall of profits for the big three. (c)  The Korean shipbuilders bid aggressively to make the most of the lucrative economic conditions.  They booked orders for oil rigs, energy platforms at low-margin profits. But, this very move was their undoing.

Of the three, Daewoo reported a 3.03  billion KRW  loss, Samsung reports 1.55 trillion KRW while Hyundai a 171 billion KRW.  This amounts to a total loss of 4.75 trillion KRW or $4.1 billion.  The second quarter of 2015 has been the toughest for the big Three.  Daewoo’s revenue has seen a 63.1% fall while that of Samsung by 44.8% and Hyundai a 240 KRW loss compared to last year.

Daewoo says  that the practice of  receiving payment after delivery has brought in a tough cash crunch in the shipbuilding sector.  The time taken to construct an oil rig takes around 40 months when compared to a tanker ship that takes only 18 months.  Thus a longer waiting period for payment.

The silver lining appears to be the increasing demand for LNG and LPG carriers, due to the US shale gas boom and Russia’s Yamal LNG project.  70% of the new LNG orders were procured by the Korean shipbuilders last year, but with the Chinese and Japanese shipbuilders joining the competitive market, Korea is gradually losing its grip in this area.

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