South Korean shipbuilder Samsung Heavy Industries is trying to increase high value-added offshore orders to overcome the status quo of the downturn in its merchant ships orders, offshore orders are expected to bring Samsung Heavy Industries 2 trillion won in annual revenue. However, due to the huge uncertainty of offshore projects affected by external factors, and the South Korean shipbuilding industry has experienced huge losses in the field of offshore industry, some industry insiders in South Korea have expressed concern about this.
According to recent news from the Korean media, it is expected that the three major Korean shipbuilding companies (HD Korea Shipbuilding & Offshore Engineering (HD KSOE), Samsung Heavy Industries, and Hanwha Ocean) will see a significant increase in their operating income this year, but there is an increasing possibility of a decrease in the number of orders for merchant ships, and an increase in the order shortfall is likely to ensue.
The Overseas Economic Research Institute of the Export-Import Bank of Korea (KEXIM) analyzed in its report “Trends in Shipping and Shipbuilding Industry in 2023 and Outlook for 2024,” “The order book in the global newbuilding market is expected to decline in 2024 due to the lack of clear investment motives.”
Against this backdrop, HD KSOE and Hanwha Ocean are competing for domestic and foreign naval ship and submarine as well as MRO (Maintenance, Repair & Operations) orders, based on their long history in the naval defense field. In contrast, Samsung Heavy Industries does not have a competitive advantage in this field, however, the company is seeking opportunities to win more orders in the offshore field.
In fact, Samsung Heavy Industries has become a leading builder in the offshore field and received an order for a floating liquefied nature gas unit (FLNG) worth about 2.1 trillion won late last year.
Compared with merchant ships, offshore units are more specialized ships with high value-added. Take the FLNG contracted at the end of last year as an example, one FLNG is equivalent to the value of eight conventional 174,000 m³ LNG carriers. Meanwhile, Samsung Heavy Industries is currently a candidate shipyard for several FLNG orders.
“With many projects in the front-end engineering design (FEED) stage or development stage, we expect to be able to maintain one to two FLNG orders per year,” a Samsung Heavy official said. In April, the company announced its participation in the first FLNG tender launched by U.S. LNG developer Delfin. The project is estimated to be worth about 2.1 trillion won.
However, the high added value of offshore orders also means high risks. However, the high value-added nature of offshore orders also implies a high degree of risk. Due to the large scale of offshore projects, developers usually use various methods, including borrowing, to raise funds and pay the relevant contractors. As a result, variables such as interest rates and the macroeconomic environment can lead to significant uncertainty.
Last June, Equinor and its partner BP decided to extend the BayduNord project off the coast of Newfoundland, Canada, by three years, as well as the associated design and construction of a floating production, storage and offloading vessel (FPSO). Samsung Heavy Industries and Hanwha Ocean, which had been eyeing the project, were eventually disappointed.
In addition to order delays, offshore shipyards also face other serious risks.
n the mid-2010s, the oil and gas industry fell into a sharp recession as offshore shipowners cancelled orders due to falling oil prices. At that time, the “shale gas revolution” in the United States led to an increase in crude oil supply, oil prices fell by more than 70%, and the demand for oil drilling decreased, forcing offshore shipowners to cancel shipbuilding contracts.
In addition, the design difficulty and equipment and material costs of offshore orders are higher than those of ordinary merchant ships, South Korea’s shipbuilding industry in the field of offshore had encountered a huge “trap”.