No Relief in Sight for Shipbuilding & Shipping Sectors

Lim Dong-pyo, planning director at TPC Korea, one of the country’s top 10 shipping companies, recently visited the Korea Shipowners’ Association and financial institutions to ask for liquidity assistance.

The company placed an order for 10 ships but failure to meet the down payment will result in TPC losing 30 percent of its advance payment for breaking the contract.

Shipping companies are seeing business rapidly deteriorate with the sharp drop in ship orders caused by the decline in China’s iron ore imports in the wake of the economic downturn. The Baltic Dry Index, a benchmark for the price of shipping bulk commodities, has plummeted to 600 to 700, or less than one tenth of its highest point last year (11,793).

Certain small and medium-size shippers in December last year gave their staff pay for January, February and March this year to save corporate taxes by maximizing costs on their books. Shipping companies at risk are conducting emergency measures in finance, organization and management.

○ Smaller shipping companies hardest hit

The global financial crisis has hit not only the shipping industry but also small and medium-size shipbuilders, dragging both sectors down. This is because contracts are broken as shipping companies cannot get loans to meet down payments.

The fall in ship prices caused by the decline in shipping fares is also a significant factor.

The Korea Shipowners Association and the industry said the contracts of 50 ships ordered by Korean shipping companies that failed to receive refund guarantees are expected to be broken. Last year, 56 percent (188) of the remaining ship orders (334) were ordered by domestic shipping companies.

Accordingly, the association is planning to create SAMCO, a ship management company, with NH Investment & Securities. Shipping companies suffering from a cash crunch can sell ships to SAMCO to secure cash, and borrow the ships from the company for three years.

When the shipping company repays debt and the term ends, it can regain the ship from SAMCO.

○ Shipping companies restructuring

Shipping companies are scrapping their bulks to balance supply and demand.

The Korea Maritime Institute forecast that more than 70 bulks will be scrapped by the end of this year worldwide. This is a response to the falling demand for ships in the wake of the decline in shipping, and also saves on maintenance costs for old ships.

This is in contrast with the first half of last year, when shipping companies competed to order more bulks. Large shipping companies having more room for maneuver plan to borrow ships rather than buy new ones. Hanjin Shipping and Hyundai Merchant Marine will seek to buy no new ships.

A Hyundai source said, “We used to order new ships because they didn’t cost much three or four years ago, but last year and this year, we can just borrow ships as plenty of them are out there.”

sukim@donga.com jmpark@donga.com