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Banks Want More Self-help from South Korea’s Big Three Yards

Posted on May 9, 2016

By Xiaolin Zeng, IHS

Creditor banks have moved to request South Korea’s Big Three shipbuilders submit self-rescue plans in addition to measures already being taken by Hyundai Heavy Industries (HHI), Samsung Heavy Industries (SHI), and Daewoo Shipbuilding & Marine Engineering (DSME).

The actions of the banks, led by state policy lender Korea Development Bank (KDB), the country’s largest provider of ship financing, follows the 26 April announcement by the Financial Services Commission that the government will spearhead the restructuring of the country’s troubled shipbuilders and shipping lines.

HHI, SHI and DSME are experiencing one of the worst years of operations, with dwindling orders amid a weak oil market. The trio were known for building drillships and offshore plants, but demand for such vessels is at a low ebb as oil majors have scaled back on capital investments.

Orders for ultra-large container ships and LNG carriers, which were also among the trio’s key products, have also declined due to weak freight rates.

KDB sources said that the three shipbuilders are expected to execute massive lay-offs and sales of non-core businesses and assets.

DSME, which had a massive KRW3.3 trillion (USD2.8 billion) loss for 2015, will cut its workforce by not renewing the tenure of 19,000 contract staff by 2019. It is also looking to sell some properties and its yard in Romania.

Commenting on the development, CIMB Securities analyst KJ Hwang told IHS Fairplay that what the banks are asking for are self-rescue plans, and differs from the government-led restructuring.

Hwang said, “This means that the authorities have temporarily concluded that enforced shutdown of the shipbuilders would erode the core competitiveness of each yard, just like in the case of the Japanese shipbuilders in the 1990s and hence, are asking the Big Three shipbuilders to carry out their own downsizing first, to focus on the respective areas where they are best at.”

Hwang believes HHI is likely to focus on tankers, container ships, LPG carriers, SHI would concentrate on the offshore sector, while DSME would specialise in LNG carriers.

“If the situation worsens, then a government-led shutdown of the shipbuilders can be an option, but the government won’t carry out this extreme measure for the time being,” said Hwang.

Separately, DSME said today that it had returned to the black in 1Q16, posting a KRW9.8 billion net profit for the profit, reversing a KRW1.04 trillion loss in 1Q15. Analysts expected improved results as the shipbuilder cleared its backlog of problematic offshore plant orders.

Source: IHS

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