Shipbuilders nervous as oil prices plummet

South Korean shipbuilders are jittery as oil prices in the US plummeted to negative territory for the first time in history this week, coupled with the reduced demand for crude oil and global shipments driven by the novel coronavirus pandemic.

The business outlook for the global shipbuilding industry is also not very rosy.

In the first quarter of this year, global orders for ships fell 78 percent year-on-year to 2.33 million compensated gross tons. Here, only two liquefied natural gas carriers -- the major product in Korean shipbuilders’ portfolio -- were ordered during the period, according to the Korea Offshore & Shipbuilding Association.

Clarksons Research forecast 756 ships are likely to be ordered this year, down 23.4 percent from last year.

“With the global economic slowdown since the spread of COVID-19 and the sharp drop in oil prices, the most shipowners are putting their order plans on hold,” said Choi Jin-myung, an analyst at NH Investment & Securities.

On Monday, the US benchmark West Texas Intermediate crashed into negative territory for the first time in history at minus $37.63 per barrel. Brent oil prices -- the key benchmark price for crude oil globally -- have plunged to around two-decade lows.

The order forecast for offshore plants is also dim. Orders for the plants are usually on the rise when international oil prices are above $50 to $60 per barrel due to improved profitability. In this era of plummeting oil prices, shipowners are unlikely to place orders because drilling will cost them more, according to industry watchers.

As a result, shipbuilding shares are on the decline.

Korea Shipbuilding & Marine Engineering closed at 75,000 won ($60.90), down 1.69 percent from the previous day. Samsung Heavy Industries and Hyundai Mipo Dockyard are also bearish.

Amid the prolonged industry difficulties, Hanjin Heavy Industries & Construction, whose largest shareholder is Korea Development Bank, was put up for sale. Hanjin Heavy’s capital was impaired in February last year due to insolvency at its subsidiary Subic Shipyard in the Philippines.

Industry watchers said very few companies will be interested to take over the struggling shipbuilder because a megasized merger between Hyundai Heavy Industries and Daewoo Shipbuilding & Marine Engineering is already underway, and the shipbuilding business situation is sluggish.

“Small and medium-sized ships are now completely losing ground to China in terms of construction competitiveness,” an industry source said. “Few shipbuilders will consider acquiring Hanjin Heavy.”

Shareholders of Hanjin Heavy have decided to push for an open sale within this year. The sale price will be finalized through bidding.

The government has announced that it would form 40 trillion won worth stabilization fund to support seven key industries, including automobiles and shipbuilding, hit by the coronavirus outbreak.

“The fund will help in terms of capital liquidity. It would be good to implement it quickly to the extent of ensuring the autonomy of companies,” an industry source said.

Another source said that although it is still unclear how much money can be used for the shipbuilding industry or individual companies, sufficient liquidity is expected to be provided.

By Shin Ji-hye (shinjh@heraldcorp.com)