Shipbuilding Industry "8 Trillion Won Is Out of the Question" Government "Will Consider Response Measures If Necessary"

COVID-19 Hits the World... Gap Widens with China, No.1 in Q1
Global VLCC Orders Decline Due to Crude Oil Demand Drop, Industry Faces Liquidity Crisis Concerns
Must Prevent Delivery Delays Amid Demand, Production, and Liquidity Shocks
Industry Calls for Liquidity Support, Ship Delivery Payment Collateral Loans, and Expanded Advance Payment Refund Guarantees
Minister Sung Yun-mo of Industry: "Providing 8 Trillion Won in Shipbuilding Finance Support... Reviewing Response Measures if Necessary"

[Asia Economy Reporters Moon Chaeseok and Park Soyeon] Although the government announced it would inject 8 trillion won to support liquidity such as production financing in the shipbuilding industry, the industry complained that it was insufficient. They appealed to diversify the scope of support to include not only production financing but also loans secured by ship delivery payments, operating funds, and working capital, and to expand the issuance scale of refund guarantees (RG) for advance payments. Among these, RG is a type of insurance where the issuing institution compensates if problems arise during the shipbuilding process at the shipyard, but the government did not announce measures to expand the current issuance limit of 200 billion won. The government stated that if the COVID-19 pandemic prolongs, the industry could face a more severe order cliff than in 2016 and that it would consider additional response measures if necessary. Meanwhile, the gap in order performance between our shipbuilding industry and China, the world’s number one, is widening.

On the 27th, Sung Yun-mo, Minister of Trade, Industry and Energy, held a meeting with representatives of major shipbuilders and equipment companies at L Tower in Seocho-gu, Seoul. Attendees included Lee Seong-geun, CEO of Daewoo Shipbuilding & Marine Engineering; Ga Sam-hyun, CEO of Korea Shipbuilding & Offshore Engineering; Nam Jun-woo, CEO of Samsung Heavy Industries; Jang Yoon-geun, CEO of STX Offshore & Shipbuilding; Jeong Dae-seong, CEO of Daehan Shipbuilding; and Lee Soo-geun, CEO of Daesun Shipbuilding.

As of last month, the total order backlog of domestic shipbuilders was 21.18 million CGT (Compensated Gross Tonnage). Our shipbuilders are operating with secured orders for 1 to 2 years of construction. The problem is that amid the global freeze in orders caused by the COVID-19 pandemic, the gap between Korea, which has fallen to second place, and China, which is first, is widening. In the first quarter, Korea secured 400,000 CGT in orders, less than half of China’s 920,000 CGT. Until the end of last year, Korea and China were neck and neck with 7.12 million CGT (36% of the world) and 7.08 million CGT (35% of the world), respectively, but Korea fell significantly behind in the first quarter.

Moreover, due to reduced crude oil demand, global shipping companies have cut orders for Very Large Crude Carriers (VLCC), putting the domestic shipbuilding industry’s liquidity at risk. Initially, orders for VLCCs were expected due to the sharp drop in oil prices, but with the rapid decline in demand caused by COVID-19 and the recent decrease in crude oil demand and global cargo volume, the possibility of order delays or cancellations has increased. Orders for offshore plants, which are oil drilling equipment, are also scarce.

Actual ship orders have also significantly decreased. According to Clarkson Research, a UK-based shipbuilding and shipping market analysis firm, the cumulative global ship orders in the first quarter were 2.33 million CGT, down 71.3% from 8.1 million CGT in the first quarter of last year. To make matters worse, bank loans and bond issuance have become difficult, and the industry is expecting government-level liquidity supply measures to prepare for the prolonged COVID-19 situation. An industry official said, "By April, we should have achieved about 30-40% of the annual order target, but currently, we are below 10% of the plan. Large projects have not been ordered, and LNG ship orders are also delayed, so securing liquidity is the top priority." Minister Sung also expressed concern, saying, "If COVID-19 prolongs and the global recession deepens, we could face an order cliff worse than in 2016."

Representatives of shipyards and equipment companies attending the meeting appealed that the government’s measures announced at the crisis management meeting on the 23rd, such as continuous supply of about 8 trillion won for production financing and timely issuance of refund guarantees, are insufficient. The industry requested ▲ liquidity support such as production financing ▲ loans secured by ship delivery payments for operating funds ▲ extension of production financing maturity and expansion of working capital supply ▲ maintenance and timely issuance of RG ▲ simplification of entry procedures for foreign technical experts. Among these, the industry believes support for RG issuance is necessary given the increased risks to the shipbuilding industry due to COVID-19. The current RG issuance limit is 200 billion won, but the government’s measures do not include an announcement to increase the RG limit.

The government also somewhat agrees that additional support is necessary. It diagnosed that if the COVID-19 situation prolongs, there is a possibility of delivery delays due to reduced container ship cargo volume, delayed final investment decisions (FID) on major projects leading to decreased new orders for LNG and container ships, delays in inspection approvals due to restrictions on the entry of shipowner supervisors and overseas engineers, and commissioning disruptions.

Minister Sung said, "We have decided to consider extending the designation of shipbuilding as a special employment industry and to expand production cost support for parts and equipment companies based on supply contracts, but these measures alone may not be sufficient, and there may be blind spots or delays in delivery to the field. We have prepared support measures focusing on urgent industry needs such as production financing and RG support, and we will strengthen communication through the Industrial Crisis Response Team within the Central Disaster and Safety Countermeasures Headquarters while reviewing necessary response measures."

This content was produced with the assistance of AI translation services.