IMF: Restructuring Korea's Shipyards Could Cost $27B

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By MarEx 2016-10-24 18:02:53

The International Monetary Fund has completed a study of the troubled South Korean shipbuilding industry, and it estimates that the cost of restructuring the sector's massive debts will approach $30 billion. 

The employment impact would affect up to one percent of the overall workforce, including 10,000 positions in shipbuilding, and creditor's losses would come to between 5.5 and 7.5 percent of GDP. 

The IMF's baseline estimate assumed the most effective possible restructuring efforts. 

Despite the near-term pain, the IMF said that it would yield benefits a decade down the road. "The accumulated benefits of corporate restructuring will offset the one-time costs in about 10 years," IMF said. "The key qualitative insight is that corporate debt restructurings 'pay off' in the medium-term."

The government is working with the yards to help them reorganize their obligations, notably with DSME, the most troubled of the South Korean shipbuilders. DSME could receive as much as $3.5 billion in a debt relief and cash infusion package from its two biggest creditors, state-owned Korea Development Bank and Eximbank (or KEXIM). The assistance would be in addition to a capital injection of $3.6 billion announced last year. 

Earlier this month, DSME announced a plan to cut nearly 20 percent of its workforce – over 2,000 positions – by the end of the year.

A recent report by global consulting firm McKinsey & Co. suggested that DSME might not be able to survive past the end of the decade, pulled down by a negative operating margin and a projected liquidity shortfall approaching $3 billion.

"Due to the global downturn in the shipbuilding industry, it's inevitable that Korea's three shipbuilders will face harsh losses. Of them, DSME has the weakest financial structure and without a responsible management group is least likely to survive by 2020," McKinsey Korea wrote.

McKinsey recommended cutting DSME's operations and workforce back and retaining it as an independent entity, rather than integrating it with the other Big Three shipbuilders, Hyundai Heavy and Samsung Heavy Industries. In an interim report in August, McKinsey recommended cutting all three yards' capacity back by half by 2020. 

DSME strongly contested the report's conclusions, and asserted that it was "based on completely false assumptions about DSME's situation" and did not include its "future strategies and self-rescue efforts."

Its domestic competitors are not exempt from the industry’s headwinds. Orders for all of the nation’s Big Three shipbuilders have been few and far between this year. 

Samsung Heavy Industries recently warned of additional layoffs ahead if it cannot hit its annual order target of $5 billion. It already plans to reduce its 14,000-strong workforce by 40 percent. 

Hyundai Heavy has plans to cut 4,000 positions from its headcount of 26,000.