Mounting Pressure on South Korean Shipbuilders as DSME Declares Crisis

Despite a surge in orders over the past two years, the South Korean shipbuilding industry is facing mounting pressures due to rising costs and labor shortages. Faced with the continuing competition from China and the industry’s exposure to Russian shipping, several South Korean shipbuilders are struggling to strengthen their positions.

The Korean Ministry of Trade, Industry and Energy yesterday highlighted the strength of the industry in the first half of 2022 saying that South Korean shipbuilders received the most order volume and highest value of orders so far in 2022 beating out their Chinese rivals. According to the figures, the South Koreans received 45 percent of the volume measures in gross tonnage, and with their focus on higher value ships such as LNG carriers received 47 percent of the value of orders placed this year. 

While the Ministry was highlighting the order success, Daewoo Shipbuilding & Marine Engineering (DSME) one of South Korea’s leading shipbuilders announced mounting problems in a regulatory filing. The company’s financial losses increased by more than 120 percent with management citing rising costs and the Ukraine war. The mounting losses have driven DSME's debt to equity ratio to 547 percent as of the end of March.

DSME reported however that its order flow remains strong. It booked orders worth $5.47 billion in 2022, which the company says equals nearly two-thirds of its order target for 2022. The recent recovery in orders the company reported had raised hopes for an improvement in its financial performance by improving utilization. However, a series of recent challenges forced the company to say it is now in crisis and moving to an emergency management approach to address the problems.

While the entire sector is facing labor shortages, DSME said its problem has been made worse by a long, ongoing strike by workers at its subcontractors. Starting at the beginning of June, subcontractors have gone on strike demanding among other things a 30 percent increase in pay and improved working conditions. To drive home their demands, workers at the company’s Okpo shipyard began disrupting production by occupying a tanker currently under construction at the yard.

Across the industry, all of the major shipbuilders are facing similar labor challenges. The Korea Offshore & Shipbuilding Association points out that the industry reduced its workforce by more than half to under 100,000 people during the prolonged downturn in orders and is now having a hard time winning back employees. They estimate the shipbuilders need to attract at least 20,000 people to fulfill the increases in orders received over the past two years. 

Hurting the recruiting efforts is the industry’s historical lower pay. Government figures suggest average hourly wages for the shipbuilders are more than 20 percent behind those of other manufacturing jobs such as in the semiconductor industry.

DSME also cited the loss of two lucrative LNG carrier orders in recent weeks. The company canceled the two orders which were believed to be tied to Sovcomflot after the shipowner failed to make progress payments. A third order is believed to also be in jeopardy as a progress payment deadline approaches. 

Some of the company’s competitors have fared better. Korea Shipbuilding & Offshore Engineering Co. (KSOE) announced in a filing yesterday that it had replaced three LNG carrier contracts with new higher-priced contracts for the ships. It is believed the company resold orders linked to Sovcomflot to competing shipowners and in the process was able to increase the value of the two contracts received in January 2021 with new orders each at nearly 50 percent higher prices.

The South Korean shipbuilders are placing a lot of importance on orders for new high value ships including the LNG carriers tied to Qatar’s expansion of its operations. DSME won the first contract valued at $850 million for four LNG carriers to be built at its Opko shipyard. The vessels are due for delivery in the first quarter of 2025. Samsung Heavy Industries also reported a record order for 12 LNG carriers valued at $3 billion and yesterday KSOE reported an order for 10 LNG carriers valued at $2.2 billion.

The industry’s orderbooks are strong with the current total standing at over 35 million tons, with the ministry pointing out of the building slots are now being committed to 2025 and 2026. However, the South Korean shipyards need to find ways to resolve their labor and cost issues so that they can turn profitable on these orders.