Boom Over for Shipyards?
By Jane Han
Staff Reporter
Life's been good for domestic shipbuilders over the past decade.Their dry docks were full and orders were backed up to keep them busy for at least two years. But the smooth sailing has hit a bump. Suddenly, buyers are starting to cancel their orders as they find it impossible to make the huge payments on time.
Industry sources said such a situation would emerge from the global credit crunch, but what is surprising is that the world's biggest shipyards are losing orders.
Daewoo Shipbuilding & Marine Engineering, the world's third-largest shipyard, said Friday that an unnamed European client failed to make a pre-payment for an order worth 619 billion won ($619 million) to build eight container ships.
The same day, Hyundai Mipo Dockyard, a unit of the world's largest shipbuilder Hyundai Heavy Industries, also announced a canceled order for four product carriers worth 197 billion won.
The news sent the shares of major Korean shipyards tumbling, such as Hanjin Heavy Industries (down 13.65 percent), Hyundai Heavy Industries (10.41 percent), Samsung Heavy Industries (7.91 percent), STX Shipbuilding (5.94 percent) and Doosan Heavy Industries (3.26 percent). The decline continued through Tuesday.
Experts say losses could last longer, as slowing market growth could force more customers to cancel orders.
``Investors are worrying that more cancellations could come as shipping companies are facing funding difficulties due to the global credit crunch,'' said Yoon Phil-choong, an analyst at Samsung Securities.
To dispel fears that Korea's situation could spread to other yards, even overseas shipbuilders are in a rush to dismiss market uncertainty.
``The cancellations that happened to Korean shipyards mean nothing to Cosco Corp.,'' said Jin Haishen, president of China's largest shipping group's shipyard subsidiary.
Analysts in Korea agreed that the latest turn of events will have a significant effect on profit, and stressed the need for risk management.
``The long-term prospects still look bright, but some immediate variables could work against domestic shipbuilders,'' said Jo In-gap, an analyst at Good Morning Shinhan Securities.
He said Korean shipyards' collective orders sealed in the first half of the year dipped 19.7 percent in amount year-on-year, adding a further decline is possible due to seasonal factors.
Another negative factor is the soaring price of heavy steel plates, an essential material for ships.
Steel plate prices reached a record 1.26 million won per metric ton due to a supply shortage. Shipyards spend about 15 percent of sales on plates, but the figure is expected to go up if steel makers raise prices, analysts say.
Aside from these cost variables, Kim Hyon-ah of the Korea Logistics Research Association says lower logistics in an economic downturn naturally leads to less demand for new ships.
The Baltic Dry Index, which gauges changes in the price of shipping commodities, has dropped for three weeks, showing demand for shipping is slipping.
``It's clear that the boom seen over the past 10 years will not come again, but there's still more room for growth for domestic shipbuilders,'' said one analyst.