All 3 Major Korean Shipbuilders Achieve Surplus for First Time in 11 Years
The three major South Korean shipbuilders – HD Korea Shipbuilding & Offshore Engineering (KSOE), Hanwha Ocean, and Samsung Heavy Industries – are likely to simultaneously achieve a quarterly profit in the third quarter of this year, marking the first time in 11 years.
According to the shipbuilding and securities industry on Oct. 15, Hanwha Ocean is estimated to post a profit of 12.1 billion won (US$8.94 million) in the third quarter. This marks a turnaround to profitability after 12 consecutive quarters of losses since the fourth quarter of 2020. Consequently, the company is expected to join the “profitability rally” along with HD KSOE and Samsung Heavy Industries, which reported profits in the second quarter. HD KSOE is estimated to have earned 200.4 billion won, while Samsung Heavy Industries is estimated to have earned 56.4 billion won in profits.
The shipbuilding industry expects to deliver most of the low-priced orders received in the first half of 2021 by the end of this year. Next year, it is anticipated that their profits will grow even further as they construct ships with higher prices due to the increase in shipbuilding prices from the second half of 2021. After achieving simultaneous profitability, concerns about the three major shipbuilding companies in South Korea falling into losses have diminished. According to Clarkson Research, the Newbuilding Price Index increased from 145.77 in September 2021 to 162.12 in September last year and jumped to 175.38 last month.
Generally, shipbuilders follow a payment structure where they receive 20 percent of the payment at the time of signing the ship contract. Subsequently, they receive 30 percent at different construction stages. The remaining 50 percent is collected using the “heavy tail” method upon delivering the completed ship.
However, more ship contracts are being structured according to the “standard method,” as the shipbuilding industry has seen increased activity lately. In this approach, shipbuilders receive payments in 20 percent installments at various stages such as contract signing, keel laying, steel cutting, launch, and delivery. Following the standard method contract benefits shipbuilders by ensuring financial stability during the construction period without requiring them to cover additional costs. An industry insider said, “Since shipowners are struggling to find available docks, shipbuilders now have more bargaining power.”
The main challenges for the three major shipbuilders, which have essentially secured three years of profits, are cost reductions and the development of next-generation technologies. Having endured about a decade of prolonged downturn since 2014, the shipbuilding industry sees this upturn as an opportunity to enhance their fundamental capabilities. Since being acquired by Hanwha Group in May, Hanwha Ocean is primarily focused on cost reduction as its “first priority” to improve profitability. HD KSOE has already established a cost reduction system to some degree and aims to maintain a “technological super gap” by securing next-generation shipbuilding technologies. Samsung Heavy Industries is also making every effort to acquire technology.
Note: Article by Jung Min-hee https://www.businesskorea.co.kr)