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S. Korea’s Two Big Shipbuilders Suffer from Severe Deficits
Fraught with Difficulties
S. Korea’s Two Big Shipbuilders Suffer from Severe Deficits
  • By Jung Min-hee
  • July 24, 2018, 12:12
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Hyundai Heavy Industries and Samsung Heavy Industries are expected to have difficulties in improving performance for a while due to the rapid rise in prices for materials.
Hyundai Heavy Industries and Samsung Heavy Industries are expected to have difficulties in improving performance for a while due to a steep rise in materials prices.

Both Hyundai Heavy Industries Co. and Samsung Heavy Industries Co. recorded massive deficits in the second quarter. Vessel prices have rebounded and the number of orders won has increased. However, the two companies are expected to have difficulties in improving performance for a while due to a rapid rise in materials prices.

Hyundai Heavy Industries announced on July 23 that it posted 175.7 billion won (US$154.87 million) in consolidated operating losses in the second quarter. The figure was up 42.9 percent from the previous quarter. Its sales increased 2.7 percent to 3.12 trillion won (US$2.75 billion) while its net losses decreased 7.5 percent to 233.7 billion won (US$205.99 million). An official from Hyundai Heavy Industries said, “The losses in the shipbuilding sector grew as the prices of materials went up further and the company paid compensations to those who signed up for voluntary retirement programs despite the increase in prices for ships.”

Samsung Heavy Industries announced on the same day that its consolidated operating losses in the second quarter came to 100.5 billion won (US$88.59 million), up 100 percent from the previous quarter. Its sales stood at 1.35 trillion won (US$1.19 billion) over the same period, while its net losses amounted to 142.7 billion won (US$125.78 million).

With the price of vessels rebounding, sales slightly bounced back as well. Clarkson Newbuilding Price Index, which indicates the market conditions, has been on the rise from 121.8 in January last year to 128 last month. As the price of ships and the number of new orders have increased, the number of orders won has also grown than usual. Hyundai Heavy Industries only received US$5.9 billion (6.69 trillion won) worth of orders in 2016, showing the biggest drop in orders won, but it obtained US$10 billion (11.35 trillion won) worth of orders last year and US$6 billion (6.81 trillion won) in the first half of this year alone. Samsung Hyundai Heavy also received US$6.9 billion (7.83 trillion won) worth of orders last year and US$2.5 billion (2.84 trillion won) this year after winning US$500 million (567.25 billion won) in 2016.


The problem is that profitability is getting worse with the higher price of materials. The price of thick plate, which is one of key materials, is currently 700,000 won (US$617) after two hikes from some 600,000 won (US$529) per ton in the first half of last year. The shipbuilding industry says that it doesn’t make any profits even after building and selling a new ship due to the growth in tick plate prices. In fact, domestic shipbuilding companies receive orders of mostly very large crude carriers (VLCCs) and the price of thick plates account for 20 percent of the total VLCC production costs. When the price of steel rises 5 percent, the total shipbuilding production costs increases about 1 percent. Since the operating margins for a newly built ship stands at some 1 percent, it is hard to get its money’s worth.


As steel producers are trying to increase the price of thick plates once again, shipbuilders are forecast to suffer for a while. South Korea’s top three steelmakers – POSCO Co., Hyundai Steel Co. and Dongkuk Steel Mill Co. – are seeking to raise the price of thick plates in the second half of the year.