Korean shipbuilders facing tough times

Korean shipbuilders are headed for a turbulent 2009 amid a sharp contraction in the global shipbuilding sector, with small firms expected to take a particularly harsh battering. “2009 will be a year of restructuring for the shipbuilding sector, but the big three may get opportunities to solidify their market leadership,” said Jo Young-jun, an analyst at Shinyoung Securities Co.

The global shipbuilding industry was hit hard by the recent financial market turmoil and the ensuing global market slump. New ship orders, which came in record volumes until early last year, have virtually stopped. Korea’s big three makers, Hyundai Heavy Industries Co., Samsung Heavy Industries Co. and Daewoo Shipbuilding and Marine Engineering Co., received orders for a total of just five vessels since October.

According to London-based shipbroker Clarkson Plc., shipbuilding orders placed around the world between January and November in 2008 totalled 40.9 million CGT, less than half of 87.8 million CGT a year earlier. In the third quarter, orders won by Korean yards amounted to 3.29 million CGT, less than half of the 7.12 million CGT three months earlier, which is about 32% of global orders. In 2009, orders are projected to reach 15.2 million CGT, down 11.6% from 2008. However, construction output will increase to 18 million CGT, up 20% from 2008.

The three giants, having secured enough work for the next 3.5 years, should be able to withstand the abrupt downturn in the global shipbuilding sector, and may even be able to cement their leadership, experts said. “A focus on high-tech, high value-added vessels would pay off, sharpening their competitive edge,” the analyst said.

However, many new small and medium yards that have borrowed from banks to expand capacity may go bankrupt when ship owners cancel or postpone orders, they warn. During the boom years, many new players emerged in the sector, mainly producing bulk carriers. Korea has about 300 shipyards, of which about 30 are big enough to build vessels with a capacity of more than 10,000 tons. Builders of the low-cost bulk carriers, particularly those in China and Korea, have been racing to expand capacity until recently and are unprepared for a downturn like this.

The Korean government is pushing for a restructuring of small shipyards, in a bid to rescue viable ones. C&Heavy Industries, a unit of C&Group, already faces bankruptcy, sparking the restructuring of cash-strapped shipyards in earnest.

Meritz Fire and Marine Insurance, the largest creditor of C&Heavy Industries, last month backed out of a plan to inject emergency capital to the liquidity-squeezed company.