Korea commits $9.6b to aid ailing shipbuilders

The South Korean government revealed plans earlier this week to order more than 250 vessels and extend 6.5 trillion won in financing by 2020 to prop up a shipbuilding industry that continues to suffer from weak demand and mounting losses.    South Korea earlier this week committed to spend about 11 trillion won (U.S. $9.6 billion) by 2020 to aid its ailing shipbuilding industry, according to multiple media reports.
   The government plans to place orders for more than 250 vessels and extend 6.5 trillion won in financing to prop up the country’s battered shipbuilders, Finance Minister Yoo Il-ho said Monday at a ministerial meeting in Seoul.
   Korea is home to the three largest shipyards in the world – Hyundai Heavy Industries, Samsung Heavy Industries Co. and Daewoo Shipbuilding & Marine Engineering Co. (DSME) – all of which have seen loses pile up during a prolonged shortfall in demand for newbuild vessels. The firms reported a combined 8.5 trillion won in losses last year amid an industrywide slump that increased competition from cheaper shipyards in China.
   The country’s fourth largest shipbuilder, STX Pan Ocean, recently filed for court receivership in Korea and Chapter 15 bankruptcy protection in the United States, as has its largest ocean carrier, Hanjin Shipping.
   And according to Yoo, the outlook for the industry in the next few years isn’t much brighter either.
   “The world’s shipbuilding industry is expected to suffer shrinking demand until 2020,” he said. “In order to deal with an order shortage, the government will help shipyards receive new orders for 250 or more vessels, worth 11 trillion won, by 2020 from the public sector.”
   Under creditor-led restructuring plans, Hyundai Heavy will spin off its non-shipbuilding businesses like wind power and other energy segments, Samsung Heavy will sell non-essential properties like hotels, and DSME will eliminate 5,500 jobs.
   This comes after the industry already cut around 20,000 positions during first half 2016, according to a report from Bloomberg news service. The Korea Labor Institute estimates as many as 40,000 more jobs, primarily subcontract workers, could be eliminated in the second half.
   In all, Hyundai Heavy, Samsung Heavy and DSME will reduce their combined workforce 32 percent – from about 62,000 to 42,000 – and cut operations 23 percent – from the current 31 docks to 24 – by 2018, said Yoo.
   “Aggressive restructuring will be carried out to ensure financial soundness of the companies in case the dire situation prolongs and they would be ready should things start to recover,” he added. “Companies will be monitored regularly on their restructuring progress and prevented from winning offshore orders at low prices.”
   The economic policymaker said DSME will also seek a new owner following the downsizing and operational and managerial restructuring.
   “The government is aiming to privatize the shipbuilder in the end,” Deputy Trade Minister Toh Kyung-hwan said in a briefing, according to local media outlet Yonhap News Agency. “But before privatization, the company should normalize its management first, through disposing of under-performing businesses and improving more competitive sectors.”
   As part of an overall effort to support the shipping industry, Korea will pump another $1.2 billion into a fund designed to help shipping companies order more vessels, effectively doubling its size, the government said Monday.
   The country will form a new company with 1 trillion won in capital to buy bulk carriers, tankers and containerships for shipping companies, and increase another fund set up to buy up their existing vessel fleets to as much as 1.9 trillion won by 2019, up from the current 1 trillion won. State-run policy lenders led by the Korea Development Bank will finance 80 percent of the new company’s total assets.
   In addition, the government said it will increase incentives to ocean carriers in an effort to attract more international cargo to the Port of Busan and other smaller seaports around Korea.
   “The global shipbuilding industry has managed to decrease their capacity, but South Korea has lagged behind so far,” said Toh. “The government came up with a plan to keep up with the pace of worldwide efforts to overcome the slump.”
   “The government has made constant efforts to push forward with corporate restructuring and structural reform,” said Yoo. “The government will keep close tabs on the companies to make sure they comply with the restructuring program.”