Unexpected Happening
North Korea’s sixth nuclear test hit the domestic shipbuilding industry which has been struggling with the sluggish market. Samsung Heavy Industries and Daewoo Shipbuilding & Marine Engineering (DSME) was about to sign deals to build 11 ultra large container vessels (ULCVs) but Mediterranean Shipping Company (MSC), the world's second largest shipping line, postponed the contract citing the North Korea risk.
An official from the shipbuilding industry said on September 5, “MSC told Samsung Heavy and DSME that it cannot trust a refund guarantee (RG) before closing the ULCV deal. In short, MSC think that the RG issued by the Korea Development Bank, which is actually guaranteed by the South Korean government, is not safe as it used to be due to North Korea’s nuclear tests.”
According to industry sources, MSC was about to sign US$1.5 billion (1.7 trillion won) deals with Samsung Heavy and DSME to build six and five 22,000 TEU mega container ships for each. The deal was not from a public tender but that MSC placed an order to the two companies. In particular, the contract was meaningful in that the South Korean shipbuilders would wipe out the disgrace of losing 9 ULCV deals consigned by CMA-CGM to Chinese shipbuilders last month.
However, MSC expressed concerns over the contracts with Samsung Heavy and DSME as military and geopolitical tensions have been mounting around the Korean peninsula after North Korea carried out its sixth nuclear test on September 3. The two shipbuilders were planning to issue a RG at the state-run KDB. A RG is for a financial institution providing it, such as a bank, to return prepaid expenses to a shipowner in place of a shipbuilder in a case where the shipbuilder goes under or fails to deliver its ship to the shipowner. MSC worried about the fact that the credit rating of the state-run bank, which is closely connected with the nation’s credit rating, can fall if there is a military collision in the Korean peninsula.
Market watchers believe that MSC is making use of the North Korea risk in business for its own interests. The company is giving prominence to the risk in order cut the price or change some details. Meritz Securities analyst Kim Hyun said, “It means that shipbuilders should get a RG from global leading banks which have higher credit ratings than South Korea. Or, MSC is trying to lower the price or adjust the number of ships by creating competition between Samsung Heavy and DSME, citing the North Korea risk.”