Shipbuilding Weekly:SHI to manage Sungdong Shipbuilding?

SHI to manage Sungdong Shipbuilding? A report in the domestic press said thatSamsung Heavy Industries will accept the Export-Import Bank of Korea’s (Kexim Bank)request that SHI take over managerial responsibilities for Sungdong Shipbuilding &Marine Engineering. The report said Kexim Bank will support Sungdong financially, andthat SHI will be invited to consider acquiring the shipyard after two years in a managerialrole. Contrary to these reports, some online media are still suggesting SHI will declinethe management role.

    Overview of Sungdong: Founded in 2001, Sungdong is the world’s ninth largestshipbuilder in terms of order backlog, which stands at 1.86m CGT and consists of productcarriers (52%), crude oil carriers (18%), and bulk carriers (30%) according to Clarkson data. In2013, the firm delivered an 8,800-TEU containership and an FSO. Sustained losses followingthe global financial crisis resulted in capital impairment, and the firm’s debt exceeded itsassets by KRW1.2t at end-2014. With a 71% stake, Kexim Bank is the largest shareholder.

    Synergies? Any affiliation between SHI and Sungdong—be it consignment management oracquisition—would likely produce no meaningful synergies (such as cost savings or onesrelated to product-mix expansion). First, as the two shipbuilders’ vessel mixes do not overlapmeaningfully, cost savings would likely be minimal. Second, though SHI’s product mix wouldexpand, synergies from this would likely be negligible, too, as Sungdong’s flagship bulkcarriers and PCs (not SHI specialties) are categorized as low-value-added vessels, and thuscompetition with Japanese and Chinese players would be inevitable in the long term. Also,global orders for bulk carriers and PCs plummeted 93% and 90% y-y, respectively, in 1H. InApril this year, SHI announced that it was mulling constructing a shipyard overseas in a bid togive its facilities in Geoje (Korea) the chance to focus on large and high-value-added vessels. Atthat time, however, the most likely candidate location was somewhere in Southeast Asia,where labor costs are cheaper than in Korea. All told, if SHI accepts the management role—but not the later acquisition—the impact on SHI shareholders will be limited provided the dealis confined to management advice and the co-purchase of equipment. Acquiring Sungdong,however, would be negative in the long term, as it would be tantamount to conducting acapacity expansion in the low-value-added segment at a time when the shipbuilding industryis struggling.

    Industry news.

    HHI labor union votes to strike: Hyundai Heavy Industries’ labor union yesterdayannounced that 59.5% of its members had voted to strike. Press reports said the union has notyet determinedwhether to proceed with the strike.

    Hyundai Mipo Dockyard wins string of orders: Industry publication Shipnewsreports that Hyundai Mipo Dockyard has won an order from Scorpio Tanker to build two MRtankers, with an option contract for six more vessels priced below USD36.5m/vessel (theaverage price according to data compiled by Clarkson). Meanwhile, the shipbuilder alsoannounced that it has won orders to build two LPG carriers for an as-yet-unnamed clientDSME wins LNG carrier order: Daewoo Shipbuilding & Marine Engineering has takenan order to build one LNG carrier for Chandris as the Greek ship owner exercised an optioncontract it signed last year.

    Industry indicator update.

    The shipbuilding price index was unchanged at 133 last week.

    The secondhand price index was also unchanged at 99 last week.