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Hyundai Heavy shuts factory making offshore oil rigs

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Hyundai Heavy Industries is to temporarily shut one of its two factories making offshore oil rigs, due to a dearth of orders as the crude price rout forces international oil companies to cut spending.

The closure of the Onsan plant in South Korea underscores the dire state of the country’s big shipbuilders. They are reeling from losses on offshore oil rigs and production facilities — an area in which they have expanded significantly in recent years in an effort to offset falling orders for commercial ships hit by a supply glut and low freight rates.

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“We don’t have enough offshore plant work to run the second factory in Onsan so we’ve decided to shut it down from the end of March until we have new orders,” said a company spokesman.

The move is part of belt-tightening by the world’s largest shipbuilder as it grapples with a protracted industry downturn. The industry leader by revenue failed to win a single new order for offshore oil rigs and production facilities last year, as global oil majors cancelled orders or sought delayed delivery.

Last year Hyundai Heavy Industries won $14.5bn in new orders, falling short of its $22.95bn target.

South Korea is home to the world’s top three shipbuilders by revenue — Hyundai Heavy Indusries (HHI), Daewoo Shipbuilding & Marine Engineering and Samsung Heavy Industries.The trio suffered billions of dollars of combined losses last year from failed forays into offshore energy projects.

They were forced to write off huge potential losses as sliding oil prices inflated costs for their offshore operations. Losses swelled as a lack of design expertise and engineering capability meant they struggled to cope with frequent design changes for the complex facilities — for which oil groups refused to pay extra.

The three have as a result embarked on steep cost cuts involving the sale of non-core assets, disposal of lossmaking overseas operations and workforce reductions.

Analysts project HHI and SHI to report small operating profits for the fourth quarter that ended in December, after setting aside hefty provisions against potential losses, but they expect DSME to remain in the red.

But the three have an average order backlog of just 1.8 years due to the lack of new orders, and analysts say a near-term turnround is unlikely.

The the cycle will probably worsen this year with oil prices falling below $30 a barrel, according to analysts, who reckon oil prices will need to return to levels above $80 per barrel for South Korean ship builders’ offshore projects to become profitable again.

“Lower oil prices are the biggest factor making their situation worse this year. Unless the global economy picks up sharply, it is hard to expect any turnaround,” said Chung Sung-yop, an analyst at Daiwa Securities.

The Original Posted by Song Jung-a / ft.com

 

 

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