Korean gov’t to expand guarantee for shipbuilders to $303 mn

Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho visits Hanwha Ocean Co. shipyard in Geoje, South Gyeongsang Province, on Sep. 4. [Photo by Yonhap]

The South Korean government plans to expand financial support for local shipbuilders that have seen a sharp increase in overseas orders, in a move to boost the overall industry and exports.

Under plans announced by Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho on Monday, the government will expand refund guarantee (RG) coverage for shipbuilders to 400 billion won ($303 million) from the current 120 billion won through new investments in the Korea Trade Insurance Corp. next year.

The plans were announced during Choo’s visit to the Hanwha Ocean Co. shipyard in Geoje, South Gyeongsang Province.

Customers of shipbuilders often require RG as a basic safety measure when placing orders, given the substantial funds provided to shipbuilders.

If the RG limit assigned to shipbuilders is exhausted, they are practically unable to take on new orders. An increase in the RG limit will prevent local shipbuilders from facing challenges related to the limit.

Also, up to $4.9 billion will reportedly be additionally allocated to Samsung Heavy Industries Co. and $330 million to a medium-sized shipbuilder.

According to local financial data tracker FnGuide Inc. local shipbuilders are projected to swing to profits this year.

HD Korea Shipbuilding & Offshore Engineering Co. is projected to post an operating profit of 662 billion won this year, marking a turnaround from last year‘s loss of 355.6 billion won.

Samsung Heavy Industries is also projected to raise 210.1 billion won in operating profit this year, versus a loss of 854.4 billion won last year.

Hanwha Ocean is projected to narrow its operating loss to 130.7 billion won from 1.61 trillion won.

In line with the robust trend in the industry, the government is also expected to support workforce development.

According to Choo, the government is considering increasing the current E-9 foreign labor quota for the shipbuilding industry. Earlier this year, the government introduced a foreign labor quota for the industry that allows E-9 visa holders up to 5,000.

Following the government’s extensive support, in the meantime, observers suggest that the shipbuilders should cooperate in stabilizing exchange rates, including selling forward exchange contracts.

A forward contract refers to an arrangement to buy or sell foreign currency at a specific exchange rate that is agreed upon now but executed on a future date.

When shipbuilders place forward contract orders with banks, banks borrow dollars and sell them in the foreign exchange market.

This often results in an increase in the supply of dollars in the market, causing the dollar price to drop and the Korean won’s value to rise, leading to exchange rate stability.

According to the shipbuilding industry, the government had provided an extensive range of financial support to Hanwha Ocean, formerly Daewoo Shipbuilding & Marine Engineering, in December.

At the time, Hanwha Group was hesitant to acquire the shipbuilder due to exchange rate risks concerning the company, but state banks, including the Korea Development Bank and the Export-Import Bank of Korea, stepped in and increased credit limits for forward exchange contract sales, which accelerated Hanwha Group’s acquisition of the shipbuilder in May.

However, Hanwha Ocean has not actively engaged in forward contract sales this year.

According to an analysis of the mid-year reports of the three major Korean shipbuilders by Maeil Business Newspaper, the contract amounts for forward contracts for HD Korea Shipbuilding increased to $21.8 billion in the first half of this year from $19.8 billion during the same period the previous year, while those for Samsung Heavy Industries to $20.2 billion from $18.4 billion.

In contrast, the amount for Hanwha Ocean decreased to $4.9 billion from $6.8 billion over the same period.

Hanwha Ocean explained that its reduced contract amount was due to a sharp drop in orders in the first half of this year, falling to about one sixth compared to the previous year, coupled with the depletion of forward contract limits due to the rapid depreciation of the Korean won last year, preventing the shipyard from entering into new forward contracts.