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(Bloomberg) — The world’s three biggest shipbuilders posted a combined 4.8 trillion won ($4.1 billion) in operating losses in the second quarter, paying the price for a failed foray into deep-sea oil rigs.
[contextly_sidebar id=”WEhFqhnPcfbYx5iznEQy3fQbu4k7OYh3″]Hyundai Heavy Industries Co., Daewoo Shipbuilding & Marine Engineering Co. and Samsung Heavy Industries Co. — South Korea’s Big Three shipbuilders — all reported losses Wednesday that were far worse than analysts had estimated. The root cause: a venture into offshore oil rigs starting around 2010 to avoid direct competition with Chinese shipbuilders, who had the advantage of cheap labor to make low-profit tankers.
Mounting losses at vessel makers are the latest example of difficulties for the global shipbuilding industry after a glut of vessels and low freight rates spelled trouble for Chinese shipyards in recent years, prompting them to seek government aid.
“The losses can be attributed to offshore projects that cost more than the companies anticipated, and fierce competition between the three major players that led to unreasonably low pricing to win more orders,” said Heo Pil Seok, Seoul-based chief executive officer of Midas International Asset Management Ltd., which overseas $10 billion in assets. “Uncertainties still remain going forward, as the offshore rigs haven’t been completed yet and a low oil price lessens the need for new orders.”
Hyundai Heavy reported an operating loss of 171 billion won compared with an expected 55.4 billion won in profit, according to the average estimate of 10 analysts compiled by Bloomberg in the past four weeks.
Samsung Heavy posted 1.55 trillion won in losses in the last quarter, more than four times the loss estimated by analysts. Daewoo Shipbuilding recorded an operating loss of 3.03 trillion won, more than triple what analysts had estimated.
Shipbuilding has been central to South Korea’s economy since the 1970s. Ships accounted for 8.5 percent of the country’s total exports through June 20 of this year, up from 7 percent for all of 2014, according to the trade ministry.
Worldwide, the shipbuilding industry is seeing fewer orders as a sluggish global economy and low freight rates discourage ship owners from buying new vessels. Last year, China Rongsheng Heavy Industries Group Holdings Ltd., once the nation’s biggest shipyard outside government control, was forced to seek financial aid.
Mounting losses and lack of orders have hurt the stock prices of the shipbuilders. Hyundai Heavy shares have fallen 13 percent this year while Daewoo has declined 60 percent and Samsung 29 percent. Korea’s benchmark Kospi index is up 6.4 percent since the start of the year.
The move into offshore drilling rigs began in earnest around 2010, as the global slowdown and competition from cheaper Chinese companies challenged the Big Three’s traditional business. With oil prices rising and Chinese shipyards unable to build sophisticated rigs, the offshore business seemed to promise higher profits and less competition.
It didn’t work out that way. Crude oil prices collapsed 60 percent from June 2014 to March 2015, damping demand for drilling rigs. What’s more, Korean companies used to working on rig projects at depths of 1,000 meters or less found deep-sea construction more complicated and costly.
In a statement Wednesday, Samsung Heavy said it expects to show a profit as soon as the third quarter.
It’s unlikely to have further losses from projects that are in an early construction stage or haven’t been started yet, the company said.
–With assistance from Shinhye Kang in Seoul.
©2015 Bloomberg News
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