Korea’s Shipbuilders and Lenders Navigate an Oil Storm

In response, major oil companies have reduced their capital expenditures, which led to significant losses for South Korea’s shipbuilders. Energy consultant Wood Mackenzie estimates that 68 oil and gas projects worldwide worth $380 billion have been postponed or cancelled since 2014 and more projects in the pipeline are likely to be cancelled. This reduced capital investment has lowered earnings for a range of companies engaged in energy infrastructure construction. Korean shipbuilders that specialize in deepwater oil and gas projects are among the hardest hit. In anticipation of further losses on their exposure to shipbuilders, Korean banks have been increasing their loan loss provisions to shore up their allowances and are reporting a considerable impact on earnings.

Shipbuilding has been an important contributor to South Korea’s economy since the 1970s and accounted for 7% of the country’s exports in 2015. Beginning in 2010, and in response to low-cost competition from Chinese firms, Korean shipbuilders implemented a strategy to move up the value chain and diversified into offshore oil rig construction. To gain market share, Hyundai Heavy Industries, Samsung Heavy Industries, and Daewoo Shipbuilding and Marine Engineering—Korea’s “Big Three” shipbuilders—gave clients favorable financing deals structured with low down and interim payments, and a balloon payment upon delivery (generally, shipbuilders are in the red on construction projects until the balloon payment is received).

http://www.frbsf.org/banking/programs/asia-program/pacific-exchange-blog/koreas-shipbuilders-and-lenders-navigate-an-oil-storm/