Huge maturing debts and labor costs pose hurdles to ailing shipyards

South Korean ship builders struggling with a dearth of orders, heavy maturing debts and mounting labor costs will embark on extensive restructuring and cost-cutting, industry watchers said Monday, forecasting the nation's three major shipyards are to announce they will shed about 4,000 employees this week.

They said the three major shipyards -- Hyundai, Daewoo and Samsung -- will have to pay back over 2 trillion won ($1.71 billion) worth of debts maturing during 2017, adding to their already shaky financial health and loss-making business. According to the data, Hyundai Heavy Industries Co., Daewoo Shipbuilding & Marine Engineering Co. (DSME) and Samsung Heavy Industries Co. have a combined 2.2 trillion won in corporate bonds due in the middle of 2016.

DSME has the largest amount of debt worth 940 billion won, while Hyundai Heavy Industries and Samsung Heavy Industries have to pay back or roll over 680 billion won and 600 billion won next year.

The three are going through corporate restructuring in the face of worsening business conditions caused by slumping demand. Given the concerns over their financial status and prospects for lowered credit ratings, experts say that it would be hard to secure liquidity to pay back such a massive amount of debt.

The shipbuilding industry, once regarded as the backbone of the country's economic growth and job creation, has been reeling from mounting losses caused by an industrywide slump and increased costs.

The big three shipyards racked up a combined loss of 7.7 trillion won last year. It was the first time that all three of the nation's largest industry players registered losses.

Things are not showing signs of bouncing back anytime soon as new shipbuilding orders are drying up. Up until April this year, they had secured orders to build a mere five ships.

Worries are mounting that their credit ratings could go down, possibly making it harder to pay back the massive amount of maturing debts.

"The three shipyards have secured few new orders recently, leaving them unlikely to make a profit for the time being," an analyst said. "Market observers say that things will get worse in the years to come."

Meanwhile, the labor cost that the three shipyards have to pay increased sharply in terms of its ratio to the total sales, a report showed.

The report compiled by Korea 20,000, a local research institute, showed that their labor cost took up 11.2 percent of the total sales, based on the financial data from the last three years.

The ratio is much higher than other businesses as the corresponding figure for tech behemoth Samsung Electronics is 7.6 percent. The report said that a 2-percentage-point drop in the ratio could result in about 900 billion won in reduced cost.

Industry sources said that the three shipyards are now planning to draw up reform measures in which they will let a combined 4,000 workers go. At the end of last year, the number of their workers stood at 54,582. (Yonhap)