Offshore sinks shipbuilders’ profits

SEOUL, July 30, 2015 – The crisis affecting the oil and gas industry has reverberated into the shipping industry, with the world’s three biggest shipbuilders posting a combined $4.1 billion in losses for the second quarter of 2015. The losses accrued by Hyundai Heavy Industries, Daewoo Shipbuilding & Marine Engineering and Samsung Heavy Industries, known as South Korea’s “Big Three,” far exceeded analysts’ expectations, and signalled the companies’ overexposure to the offshore sector.

Starting in around 2010, the Big Three entered the offshore oil rig market, then seen as a refuge against direct competition with Chinese shipyards. The technical challenges presented by the market kept Chinese companies out – the same companies that were pushing the Big Three out of their tanker market through the advantage of cheaper labour costs.

However, even before oil and gas prices began to fall precipitously in June 2014, the Big Three’s strategy was showing signs of souring. The shipbuilders faced frequent cost overruns, having underestimated the technical difficulties of deepwater projects. To make matters worse, intense competition between the Big Three drove down prices, further cutting into profit margins. Thus, as oil and gas companies started to pull back from the expensive offshore sector, the Big Three were in a position to take a big hit.

Despite Korean’s Kospi index showing gains of 6.4 percent since the start of the 2015, shares in the Big Three have been steadily losing value. Hyundai Heavy’s shares are down 13 percent, Daewoo Shipbuilding 60 percent and Samsung Heavy 29 percent.

The tanker market that the Big Three sought to leave has also faced tough times in recent years, plagued by continuing over-supply and weak demand growth. Many Chinese shipbuilders have been forced to seek government aid, including Rongsheng Heavy Industries, once the country’s largest independent shipbuilder.

Some see the shipbuilding industry as indicative of the predicament faced by the global economy. Massive injections of capital spurred by a loose credit market following the 2008 financial crisis led to a frenzy of activity producing supply that, it was expected, demand would grow to meet. With interest rates at all-time low, precluding further credit stimulation, many companies could face years of sluggish growth until a balance is restored.