Daewoo Shipbuilding & Marine Engineering, Timing of LNG Ship Market Recovery Is Crucial

Can domestic shipbuilders regain their past glory? Since the 2008 global financial crisis, the shipbuilding industry has sharply deteriorated. Taking advantage of the global economic downturn, China, leveraging price competitiveness, snatched the world's number one ship order country status. Internally, the industry endured difficult times due to accounting fraud and harsh restructuring. The long-term slump in shipbuilding has recently shown signs of emerging from the depths of stagnation. As global cargo volume, which had faltered due to the COVID-19 pandemic, recovers, freight rates are rapidly on the rise. Additionally, expectations are growing that demand for replacing aging vessels will increase due to the International Maritime Organization (IMO)'s regulations on air pollutant emissions. This is interpreted as an increasing incentive for shipowners to place more ship orders. While there are positive factors, uncertainties in the economy and declining shipbuilding prices remain as negative factors. Asia Economy takes a closer look at the current status of domestic shipbuilders Daewoo Shipbuilding & Marine Engineering and Hyundai Mipo Dockyard, which stand at a crossroads of prosperity and decline, and assesses the potential for future management improvements.

[Asia Economy Reporter Park Hyungsoo] Amid the global economic freeze caused by the COVID-19 pandemic, Daewoo Shipbuilding & Marine Engineering (DSME) is also suffering from a drought in orders. With the development of COVID-19 vaccines, expectations for economic recovery next year are gaining momentum. Although optimism about the recovery of ship orders is growing, uncertainties surrounding DSME remain.

DSME recorded sales of 1.4414 trillion KRW and an operating profit of 33.6 billion KRW in the third quarter. Compared to the same period last year, sales decreased by 26%, but operating profit turned positive. The third-quarter operating profit fell about 18% short of market expectations. This was due to factors such as the decline in the won-dollar exchange rate, reduced operating days, sluggish sales from the completion of large offshore projects, and provisions related to drilling vessels.

On a cumulative basis through the third quarter, DSME achieved sales of 5.3654 trillion KRW and operating profit of 386 billion KRW. Compared to the previous year, sales decreased by 13%, but profit size increased by 135%. Han Youngsoo, a researcher at Samsung Securities, analyzed, "If various one-time factors are removed, the third-quarter operating profit can be seen as break-even or a slight loss. DSME's cumulative order amount as of November was 4.1 billion USD, achieving 56% of the forecasted 7.2 billion USD."

According to Clarkson, a shipbuilding and shipping analysis firm, cumulative new orders until November this year decreased by 43% compared to the same period last year, and shipbuilding volume decreased by 22%. While most ship-related indicators declined year-on-year, scrapping volume surged. The cumulative ship scrapping volume from January to November this year increased by 33%. It appears that shipowners have scrapped aging vessels as the global economy contracted due to COVID-19.

Increased scrapping triggers future replacement demand, which is a positive factor for the shipbuilding industry from a long-term perspective. However, as seen from the reasons for increased scrapping, it cannot be overlooked that shipowners are not optimistic about future market conditions. The ongoing impact of COVID-19 continues to suppress the global economy. Historically, ship scrapping has moved inversely to freight rates. Ultimately, new ship orders increase when shipowners have a positive outlook on future market conditions.

Among the shipbuilding sectors, the liquefied natural gas (LNG) carrier market shows strong performance by domestic shipbuilders, especially DSME. DSME is performing well in this year's market, which is focused on LNG carriers, based on its LNG ship technology. DSME has developed optimal hull forms and propulsion systems to secure eco-friendly and high-efficiency performance for its main ship types, including LNG carriers and large container ships. It has secured orders for many vessels applying these technologies. DSME was the first in the world to apply its self-developed energy-saving device, the Air Lubrication System (ALS), to LNG carriers.

The outlook for LNG carrier orders is one of the important variables in considering DSME's performance forecast. LNG carrier orders are fundamentally linked to LNG cargo volume and LNG prices. As of 2019, a total of 554 LNG carriers were delivered cumulatively, and by 2023, the cumulative number of LNG carriers is expected to exceed 750. In the past, Japanese shipbuilders actively built small and medium-sized LNG carriers to meet domestic LNG demand, but they have virtually withdrawn from the market. Korean shipbuilders hold absolute competitiveness.

NICE Credit Rating analyzed that LNG carrier orders can vary greatly depending on complex factors such as the progress of COVID-19, ship investment sentiment, LNG prices, changes in LNG supply and demand by country, and LNG carrier freight rates. Given the many variables, it is not easy to provide an order forecast, but most experts are optimistic.

Park Muhyun, a researcher at Hana Financial Investment, explained, "DSME recently signed Letters of Intent (LOI) for the construction of 10 ultra-large crude carriers (VL tankers) with LNG propulsion specifications." He added, "DSME has the most experience among global shipyards in building 300,000 DWT VL tankers." He emphasized, "The fuel consumption of VL tankers built at Korean shipyards has decreased to about 60 tons per day. Korean shipyards, including DSME, have achieved technological progress where the propulsion fuel of VL tankers they build is changing to LNG."

From 2013 to 2016, DSME experienced increased cost of goods sold due to material cost rises from major offshore project design changes and delivery delays. Large operating losses occurred due to recognition of bad debt provisions related to long-term accounts receivable and impairment losses from drilling vessel order cancellations, worsening financial stability. DSME is improving its financial structure by implementing strong self-help plans such as asset and subsidiary sales and personnel restructuring. Net borrowings decreased from 5.7 trillion KRW at the end of 2016 on a separate basis to about 1 trillion KRW at the end of the first half of this year.

During the debt restructuring process, the Export-Import Bank replaced existing loans with new capital securities, applying a 1% interest rate until the end of next year. However, after the end of 2021, if the step-up interest rate materializes, the financial cost burden will increase.

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