Most SLL readers are probably not too interested in Korean shipbuilders, but this article offers a disturbing picture of what depression in a significant industry looks like. From Wolf Richter at wolfstreet.com:
Orders plunge 87% from an already terrible 2015.
The ravaged shipbuilding industry in South Korea, deemed too big to fail, is getting its largest taxpayer bailout yet, totaling $9.6 billion, on top of the bailout funds already handed out last year, and on top of another $9.6 billion this year to bail out state-owned banks that were getting slammed by defaulting loans extended to the shipping industry.
Their problem: according to trade ministry, cited by the Wall Street Journal, orders for new ships to be built in South Korea have collapsed by 87% over the past nine months from the already terrible 9-month period last year, to almost nothing.
South Korean container carrier Hanjin was allowed to collapse in August. It “shattered the complacency” that TBTF carriers “are immune to failure.” It is now getting chopped into pieces to be sold off under bankruptcy court orders. Its rival, Hyundai Merchant Marine, was bailed out and restructured earlier this year. Other carriers around the globe have been sunk by two years of excruciating low shipping rates, triggered by rampant overcapacity and stagnating world trade. Larger carriers are consolidating to survive. Just on Monday, Japan’s Big Three – Nippon Yusen, Mitsui O.S.K. Lines, and Kawasaki Kisen Kaisha – announced that they would merge to form the world’s sixth largest container carrier.
These carriers have stopped ordering ships, and many have canceled orders, and Chinese shipbuilders have muscled into the market years ago to grab share by slashing prices, and they too are going bankrupt.
But the shipbuilding industry is special to South Korea, a country whose economy depends on exports. The world’s three largest shipbuilders by erstwhile order volume are Korean: Hyundai Heavy Industries, Daewoo Shipbuilding & Marine Engineering, and Samsung Heavy Industries. In 2015, the industry accounted for 7.1% of South Korea’s manufacturing jobs and 7.6% of exports.
The beleaguered Big Three have already sold noncore assets and sloughed off employees as part of prior bank-led restructuring plans.
They’re dealing with terrible economic dynamics. Global orders for ships peaked in 2007 at over 90 million compensated gross tonnage (CGT), of which about one-third went to Korean shipbuilders. Orders crashed during the Financial Crisis to a low of 18 million CGT in 2009, then recovered. In 2013, orders maxed out at 60 million CGT, still down 33% from the prior peak. Those were the good times.
In 2016 so far, orders have collapsed to only 9 million CGT, according to the Wall Street Journal. That’s about half of the orders during the worst part of the Financial Crisis. And South Korea’s share of this pittance in orders has fallen from one-third to just a tiny sliver.
So on Monday, South Korean Finance Minister Yoo Il-ho announced another big bailout program: to help the shipbuilding industry deal with the “order cliff,” the government would directly order vessels and also provide financing for shipping companies to order vessels. In total, this would generate orders for 250 vessels through 2020, valued at 11 trillion won ($9.6 billion) funded by the government.
But these ships won’t be the big traditional money makers, such as large containerships and dry-bulk carriers, of which the world is already vastly oversupplied. Instead, these will be vessels for the fishing industry and for small shipping companies, along with ferries, patrol boats, warships, and coastguard vessels. The hope is this will carry shipyards into the next glory period, when world trade and shipbuilding would resurge.
To continue reading: Done in by Overcapacity, Stagnant World Trade, and China, Korean Shipbuilders Collapse on Top of Taxpayers