Ship Prices Fall to Eight-Year Low as Hyundai Heavy Competes for Orders

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October 31, 2012

Newbuild construction at Hyundai Heavy. Image: HHI

(Bloomberg) — Prices for new ships have fallen to an eight-year low as shipyards sacrifice margins to win orders. Hyundai Heavy Industries Co., the world’s largest shipbuilder, may be about to make the price war worse.

The company could push prices down as much as 15 percent industrywide as it tries to replenish an order backlog that is near a five-year-low, according to E*Trade Securities Co. analyst Park Moo Hyun. The Ulsan, South Korea-based shipbuilder, which has as much capacity as the next two biggest yards combined, has so far largely resisted price cuts even as global orders drop to the slowest since 1999.

“Hyundai Heavy will have to aggressively go out there and win orders to fill up its docks,” said Seoul-based Park. “That means it has to cut prices.”

The company only has about 18 months of work in hand for its shipyards because of the order slowdown and Chinese competition, and it has started its first early-retirement program. The shipbuilder has also had less success than Daewoo Shipbuilding & Marine Engineering Co. and Samsung Heavy Industries Co. in offsetting the slump with contracts to build offshore-energy equipment because of its larger facilities and later push into the sector.

“Hyundai Heavy is now paying for focusing on ships and not building up its skills in the offshore business,” said Um Kyung A, a Shinyoung Securities Co. analyst in Seoul, who cut the stock to hold on Oct. 26. “They’ve been late to realize that they had to change tactics.”

The shipbuilder declined to comment on prices and its retirement program in an e-mailed reply to Bloomberg News questions. The company, including unit Hyundai Samho, employs about 28,500 people, mainly in Ulsan.

Fewer Docks

Daewoo and Samsung Heavy, ranked second and third among shipbuilders globally, have enough vessel orders to keep their yards busy for more than two years, according to Um. The companies, both based in Seoul, have fewer docks for building ships than Hyundai Heavy as they have less land and used more of their resources building facilities for making offshore units.

Hyundai Heavy, including Hyundai Samho, has the capacity to build 20.6 million deadweight tons of ships a year, across 13 dry docks. The last of these opened in 2008, when the collapse of Lehman Brothers Holdings Inc. caused a slump in world trade and ship purchases. The group, which also has a dock for offshore units, had $26.3 billion of ship orders in hand at the end of September.

“The drop in the order book is worrisome,” said Lee Jae Won, an analyst at Tong Yang Securities Inc. in Seoul. The company in July replaced the head of its offshore business by promoting Kim Oi Hyun to president and co-chief executive officer, overseeing both shipbuilding and offshore.

Trailing Targets

Hyundai Heavy only achieved 55 percent of its 2012 vessel- order target by the end of September, booking $5.02 billion of contracts. The tally included a $1.2 billion deal for 10 container vessels from Enesel SA, the largest cargo-box ship contract worldwide this year.

The shipbuilder charged about $120 million each for the 13,800-box capacity ships, $10 million less than it got in a similar order from Neptune Orient Lines Ltd. in 2011. A decline in steel-plate costs, the biggest expense for shipbuilders, doesn’t fully explain the lower price, Um said.

“Hyundai Heavy has come to realize that they no longer have the upper hand,” she said. “They’re getting a reality check, a very big one.”

The company has dropped 11 percent this year in Seoul trading, compared with a 20 percent gain for Samsung Heavy and a 3.7 percent decline for Daewoo.

Offshore Deals

Hyundai Heavy only achieved 31 percent of its annual target for offshore deals by the end of September, racking up $1.61 billion of contracts. It lost out to Samsung Heavy and Daewoo in competitions to build gas processing and floating oil production facilities. The company in 2006 won what was then the single biggest order to build an offshore oil production facility.

Samsung Heavy has this year won at least $7.65 billion of offshore contracts, accounting for more than 90 percent of its total orders. Daewoo has won $7.9 billion of offshore deals, helped by contracts from Inpex Corp. and Petroliam Nasional Bhd. Offshore products generally offer higher margins than ships as their greater complexity reduces competition.

New Markets

Hyundai Heavy, which also builds power plants and makes construction equipment, is expanding further to pare its reliance on vessels. Last year, it pooled its alternative-energy business into a separate division and it’s competing against Korean Air Lines Co. to buy a $1 billion controlling stake in jet-plane maker Korea Aerospace Industries Ltd.

The company may see an orders pick-up next year as an economic revival spurs demand for offshore units and vessels, Tong Yang’s Lee said. New rules designed to cut ship emissions 30 percent by 2030 could also help as the company has an edge in design and technology over Chinese yards, E*Trade’s Park said.

Chinese yards have surpassed Korean shipbuilders as the biggest builders of commodity ships because of state support and lower wages. They are now targeting other sectors because of a collapse in demand for dry-bulk vessels caused by overcapacity.

Global ship orders dropped 53 percent in the first nine months of the year to 31.1 million deadweight tons, according to Clarkson Plc. The shipbroker’s ship price index, which tracks the value of all vessel types, has dropped 7.9 percent this year to 128 in September. That’s the lowest since February 2004.

The average price for container ships has dropped 39 percent this year to $11,682.45 per deadweight ton in October, according to Clarkson. For bulk ships, the prices are down 7.6 percent to $462.87 a ton.

“Shipowners know shipyards are having difficult times and that if they wait long enough that can place orders at really good prices,” Um said. “It’s going to get even tougher next year for Hyundai Heavy and others.”

-By Kyunghee Park. Copyright 2012 Bloomberg.

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