Analysis of Risk Factors Between Russian War and Shipyard Orders

 Following the Russia-Ukraine war, many countries, including the United States, are sanctioning Russia. In particular, the United States and the European Union (EU) have agreed to exclude Russia from the society for worldwide interbank financial telecommunication (SWIFT) payment network, and there is concern about damage to the shipbuilding industry that has signed a large-scale contract with Russia.

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1. Analysis of the status of order receipts by shipbuilders

 

 If you look at the table above, you can see the orderbook status of the five Korea(Global) shipbuilders.

 

 Based on the number of units, orders can be confirmed in the following order: Hyundai Mipo, Samsung HI, Hyundai HI (Ulsan), Daewoo (DSME), and Hyundai Samho HI. Although there is a slight difference between shipbuilders, it can be seen that they received a lot of orders for container, LNG, and tanker ships. In particular, LNG ships are high value-added ships, which are helpful for future business performance based on the excellent technology of Korea shipbuilders and high ship prices. Moreover, since there is no need to compete with China's low-cost policy (bulk carriers), it seems like a good strategy based on technology.

 

 However, despite such outstanding order performance, risk factors from the Russia-Ukraine war are being highlighted. In particular, Samsung HI cannot be free from this debate as 9 of the 49 LNG ships it has ordered by 2026 (share: 18.4%) have received orders from Russia.

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2. Analysis of Concerns Following the Russian War

  According to a major Internet article, the size of orders for ships from Korean companies that have signed contracts with Russia amounted to 12 trillion won (as of March 22nd). The LNG carrier contract amounted to 1.8 trillion won (as of March, based on 7 ships). It is also known that the amount of re-orders of LNG carrier-related ship blocks and equipment, etc., to Samsung HI, etc., that Russian shipbuilders have ordered is close to 5.2 trillion won.

 Also, Last year, a 10-ship LNG carrier ordered by a Japanese shipping company from a Korean shipbuilder was finally ordered by Russia. It is expected to be used in the current Arctic LNG project, which is estimated to exceed 2 trillion won in terms of ship price. In addition, Korean shipbuilders have won orders from Russia for icebreaker shuttle tankers that can break through the Arctic sea ice.

 

 Despite receiving a large order amounting to a total of 12 trillion won, the possibility of default following Russia's withdrawal from Swift has gone beyond delays in delivery of ships and cancellation of contracts. They were in danger of being left behind and having to bear the maintenance costs. Accordingly, let's take a look at the current status of Korea Shipbuilder's orderbook received from Russia as of May.

 

 By shipyard, Samsung HI has 10 ships (9 LNG, 1 tanker), Daewoo (DSME) 5 (3 LNG, 2 FSU), and 3 Hyundai Samho HI (3 LNG). As can be seen from the table, Samsung Heavy Industries, which has the largest number of backlogs, has been referred to as a case of refusal by ship owners to deliver drillships (oil rigs) when oil prices plummeted in the past, increasing uncertainty.

 

 In terms of money, Samsung HI has signed a contract to supply facilities worth KRW 5.1 trillion for LNG carriers and icebreaker LNG carriers, Hyundai Samho HI has 3 LNG carriers (KRW 720 billion), and Daewoo (DSME) has 3 LNG carriers. It has signed an LNG facility contract worth about KRW 1 trillion with Chuck (KRW 720 billion).

 

 The shipbuilding industry is concerned that if the financial sanctions against Russia are prolonged, it will become impossible to recover the ship price. In the worst case, delivery is canceled because ship-related payments are not received even after construction is completed, and these ships remain in bad stock. In this case, the cost of maintenance and depreciation for the completed ship is reflected in the accounting valuation loss of hundreds of billions of won per quarter, and it goes back to the shipbuilders.

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 3. Conclusion

 The shipbuilding industry does not take on the entire contract amount as a loss because it receives a partial payment for each process step, but there is still a risk of not receiving the order payment in a timely manner if the situation is prolonged. In particular, it is necessary to keep an eye on the risks posed by the Russian war, especially considering that maintenance costs are incurred when remaining in stock.

 

Thanks.