Korean companies are facing a do-or-die battle once again after surviving chicken games triggered by chronic gluts in the shipbuilding, shipping, steel industries. Japanese and Chinese companies which had been employing aggressive strategies with support from the governments in the restructuring process failed to survive slumps in the industries and recently withdrew from their business in the industries. On the other hand, Korean companies turned to surpluses after restructuring, and they have had the opportunity to launch a counter-offensive.
According to related industries on November 7, Korean shipbuilders such as Samsung Heavy Industries (SHI) Hyundai Heavy Industries (HHI) inked surpluses in the third quarter thanks to structural restructuring, while Japanese companies in a hot pursuit of the Korean companies was found to have suffered from massive losses. Namura Shipbuilding, the fourth-largest shipbuilder in Japan, recorded a loss of 7.8 billion yen in the first half of this year (April to September) in one year while Kawasaki Heavy Industries saw its operating income decrease to one twentieth and posted more than 200 million yen in net loss over the same period. Following this, Mitsubishi Heavy Industries announced plans to shrink the shipbuilding business, and Kawasaki pointed out the possibility of withdrawing shipbuilding and marine sectors.
HHI and SHI succeeded in going to the black in the third quarter, chalking up 321.8 billion won and 84 billion won in net income, respectively. Their orders are on a steady rise, too.
The shipping industry is in a changing atmosphere, too. Although Hyundai Merchant Marine (HMM) announced a normalization plan through debt restructuring, skepticism has prevailed in the shipping industry. Some experts said that HMM will fall into a liquidity crisis again next year and even expected that HMM will be acquired by the world's biggest shipping company, Maersk. However, amid a slump in the global shipping market, Maersk's earnings fell, giving the Korean shipping industry a new hope.
In the third quarter of this year, the company's shipping division, Maesk Line (2M) posted an 11 percent drop in sales year on year and net loss of US$122 million according to its business performance report released this year. Maersk continued to play a chicken game to annihilate its opponents, but suffered from loss after an unreasonable price war. In the shipping industry, it is said that 2M has enjoyed excess profits thanks to a restructuring of Korean companies, but other shipping companies that formed the Ocean Alliance are also emerging as competitors by ordering large-sized new vessels. “It seems that a second chicken game between the two alliances is starting." said a representative of Korea Ratings.
Experts analyzed that changes in the shipping market could be a valuable opportunity for Korean companies. In particular, HMM is expected to compete in the world market once again if the company can restore its global sales network early, as earnings of Maersk among others are clearly on the skids. This means that Korean shipping firms is in a position to take part in a second chicken game as a challenger. In fact, HMM is planning to acquire Hanjin Shipping’s stake in Long Beach Terminal in Los Angeles and American and Asian route assets in a package. Maersk and others have coveted the two routes and watched thirstily for a chance to take over them. However, it is expected that if HMM successfully succeeds in taking them over with the government and creditors' strong support, HMM will be possible to get a foothold to become the winner in the best-case scenario or at least a partner for winning the chicken game in the shipping industry.
The same goes for the steel industry. “This is a problem that even Chinese President Xi Jinping cannot solve,” said POSCO Chairman Kwon Oh-joon while explaining a steel oversupply problem in China last year. However, Chinese steel companies have become a threat to Korean steelmakers by aggressively restructuring themselves before the Korean steelmakers built an appropriate restructuring framework. For example, Wuhan Steel, the 11th largest steelmaker in the world merged with Baoshan Iron and Steel which ranked fifth in the world and the world's second-largest steelmaker, Hebei pushed forward with its marriage with Shougang Group, the world’s 9th largest steelmaker. However, it is forecast that marginal firms will be shut down as ST Xiaogang, a subsidiary of the Baoshan Iron and Steel Group and the largest steelmaker in Guangdong Province posted a cumulative deficit of 95.6 million yuan until September of this year.
Industry experts said that this may be a sign that a chicken game will happen again in the steel industry. They said that although the Chinese government encouraged big companies to merge, but other companies could be liquidated after failing to overcome a market slump. They analyzed that if Korean steel companies can make profit and aggressive investments for 6 months to one year, they will be able to win the chicken game.
In fact, while Chinese companies were struggling with restructuring, our companies have succeeded in turning the tide. POSCO’s third-quarter results show that its consolidated operating profit reached 1.34 trillion won, exceeding one trillion won in quarterly operating profit in four years. The figure increased 59% from the same period of last year. After two years of intense restructuring, the company succeeded in swinging back to high profitability. What is most encouraging is that sales of so-called premium products have been rising sharply. POSCO's operating profit ratio stood at 14.0% which was the highest level since the third quarter of 2011 and 2.1%p higher than the previous quarter thanks to increased sales of world premium (WP) products and solutions, higher steel prices, and cost reductions among others. In particular, the proportion of WP products, which have an average margin ratio of 15 to 20%, increased to 48%.
Another positive signal in the resumed chicken game is that there is a sign of a gradual improvement in markets in which Korean firms have competitiveness in industries under restructurings.
In the case of shipbuilding, it is forecasted that the containership market where large shipbuilding companies in Korea have advantages will recover beginning next year. According to industry trade magazine Tradewinds, Germany's Hermann-Wulff handed over the 4,546-TEU container ship “Viktoria Wulff” to the dismantling market, while Greek shipbuilder Vox Ships recently decided to take apart the 4,546-TEU class container ship “Vox Queens.” It is worth noting that the relatively “young” ships which are only 10-years old, will be dismantled for the first time in 35 years. Therefore, Korean shipbuilders can have anticipation that they will be able to overcome a chronic new order cliff if they endure a little longer. In a recent report, Clarkson predicted that container ship orders will recover the fastest among orders by ship types as container ship orders will rise to 224 units next year, up 1.7 times from 134 vessels this year.