Big 3 Problems
South Korea’s top three shipbuilders posted their worst-ever combined operating loss in the third quarter this year: over 7 trillion won (US$6.15 billion). Interested parties are beginning to wonder when the earnings shocks will end.
According to industry sources on Nov. 1, there are 70 units of order backlogs for offshore plant projects worth US$66.2 billion (75.37 trillion won) from three shipbuilders as of the end of Oct. By company, the three firms show a similar level of backlogs with about 20 units, or US$20 billion (22.77 trillion won). Samsung Heavy Industries (SHI) shows a relatively high backlog of 24 units, or US$24.3 billion (27.67 billion). Hyundai Heavy Industries (HHI) shows a backlog of 24 units, or US$22 billion (25.05 trillion won), while Daewoo Shipbuilding & Marine Engineering (DSME) has a backlog of 22 units, or US$19.9 billion (22.66 trillion won).
The DSME in particular, which posted some 3 trillion won (US$2.64 billion) in losses in the second quarter and some 1 trillion won (US$878.35 million) in the third quarter, got a respite for the time being, after the company’s creditors decided to supply some 4 trillion won (US$3.51 billion). Its creditors believe that most of the remaining orders will be delivered and make an operating profit by next year. However, industry watchers say that the unfavorable business conditions of the company will not end next year, considering the fact that there are still possible loss-making facilities after next year.
According to the DSME, it plans to complete the delivery of a total of 14 units by next year – two drill ships to the Americas in the fourth quarter this year, six units in the first quarter next year, two units in the second quarter, three units in the third quarter and another three units in the fourth quarter. However, many doubts if it is possible to complete the delivery of these 14 facilities by next year, as the business conditions of the ordering companies will be affected by low oil prices. In fact, two contracts to build two drill ships for an American shipping company that are supposed to be delivered in the fourth quarter next year were recently postponed to the fourth quarter of 2017.
The SHI is also on shaky ground, though it was the only company that ran a surplus among the top three shipbuilders in the third quarter as it made a one-time profit with incentives from the compliance process. Seven out of 10 orders to build drill rigs, including drill ships, were either canceled or postponed to after 2017. For large projects worth more than US$1 billion (1.14 trillion won), including fixed platforms, there is only one Prelude floating liquefied natural gas facility (FLNG) worth US$3 billion (3.42 trillion won) to be delivered next year. Ichthys Central Processing Facility (CPF) and Egina Floating Production Storage Offloading (FPSO) vessel constructions, which are considered projects that take losses, have been put off to next year and 2017, respectively. Also, Petronas FNLG will be delivered after 2018.
Hyundai Heavy Industries, which also lost more than 600 billion won (US$527 million) in the offshore plant sector in the third quarter, recently received a notice of termination for the contracts from Seadrill and Fred. Olsen to build two semi-submersible drilling rigs. Most production facilities, which are currently under construction, will be delivered next year. However, there are still some projects that cannot be guaranteed. The delivery of the US$1.1 billion (1.25 trillion won) cylindrical FPSO, which the company won in 2012, will be completed in 2017.
As a result, industry sources say that the shock will continue until offshore plant facilities, for which the three shipbuilders received orders at low prices in the past, are all delivered.