Korean Shipbuilders Challenged by Order Cancellations and 2020 Decline
The Korean shipbuilding sector is experiencing a turbulent start to 2021 similar to much of the shipbuilding industry. Despite a strong finish to 2020 and optimistic statements from shipyard executives, the yards are now facing a slowdown in near-term workflow and have been forced to cancel contracts as the shipowners have not been able to fulfill the terms of the agreements.
After saying that it had a good start to 2021, Hyundai Heavy Industries is reporting a setback for its order book. In January, HHI received orders for 14 ships valued at over $1.4 billion. They said that was about three times the orders received in January 2020.
In a regulatory filing on February 4, the parent company Hyundai Heavy Industries Holdings, however, announced that it had been forced to cancel contracts for 10 VLCCs valued at nearly $900 million due to the failure of the unnamed clients to meet deadlines for progress payments stipulated in the contract. "The client did not pay the contractual shipbuilding fee within the deadline so we notified the client of the termination of the contracts,” Hyundai Heavy Industries Holdings wrote in the filing.
The order had been booked in November 2020 with seven of the ships to be built at Hyundai Heavy Industries’ yard and the other three by Hyundai Samho Heavy Industries. The company will remove the orders from its 2020 results.
Representing more than 10 percent of the total orders for VLCCs worldwide, the loss of the contract comes as a significant blow to the company and its short-term workflow. However, it is not the only order cancelation the Korean shipyards have recently experienced. At the end of 2020, Daewoo Shipbuilding & Marine Engineering also reported that it had canceled a conditional order received in December 2019 for six containerships also due to the shipowner’s failure to meet a deadline.
News of this latest order cancelation came as Korea Shipbuilding & Offshore Engineering (KSOE), the parent company of the HHI shipbuilders reported that profits had declined by nearly 75 percent in 2020 to a net loss of nearly $750 million While sales for the year recovered to a total decline of less than two percent versus 2019, the company reported an operating loss of more than $16 million in the fourth quarter of 2020.
The three leading South Korean shipbuilding groups projected that the recovery would continue in 2021 targeting a better than 40 percent increase in orders. According to the Korean news agency Yonhap, KSOE would represent half the order book with a target of nearly $15 billion. Both Samsung Heavy Industries and Daewoo Shipbuilding & Marine Engineering were reported to be each targeting just under $8 billion.
Even before the latest order cancelations, there was a concern that the yards would face a slowdown in work in the second half of 2021 due to the decline in new orders earlier in 2020 Yonhap reports. The recovery in orders late in 2020 came too late to fill the schedules for the yards especially in the second half of 2021. Analysts, however, noted to Yonhap that this was expected to be a short-term challenge for the yards as the scheduled for construction from the orders received later in 2020 would increase the workflow by the later part of 2021 and on into 2022.