Jerri-Lynn here: I first became aware of the consequences of Hanjin’s collapse via Lambert’s coverage in Water Cooler. The South Korean government’s bailout strategy– a version of kick the can down the road– looks worrying and unsustainable, given the ongoing slowdown in world trade, with little cause for optimism that trend will reverse anytime soon. As Richter indicates, much more pain is sure to follow.
By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Wolf Street,
The ravaged shipbuilding industry in South Korea, deemed too big to fail, is getting its largest taxpayer bailout yet, totaling $9.6 billion, on top of the bailout funds already handed out last year, and on top of another $9.6 billion this year to bail out state-owned banks that were getting slammed by defaulting loans extended to the shipping industry.
Their problem: according to trade ministry, cited by the Wall Street Journal, orders for new ships to be built in South Korea have collapsed by 87% over the past nine months from the already terrible 9-month period last year, to almost nothing.
South Korean container carrier Hanjin was allowed to collapse in August. It “shattered the complacency” that TBTF carriers “are immune to failure.” It is now getting chopped into pieces to be sold off under bankruptcy court orders. Its rival, Hyundai Merchant Marine, was bailed out and restructured earlier this year. Other carriers around the globe have been sunk by two years of excruciating low shipping rates, triggered by rampant overcapacity and stagnating world trade. Larger carriers are consolidating to survive. Just on Monday, Japan’s Big Three – Nippon Yusen, Mitsui O.S.K. Lines, and Kawasaki Kisen Kaisha – announced that they would merge to form the world’s sixth largest container carrier.
These carriers have stopped ordering ships, and many have canceled orders, and Chinese shipbuilders have muscled into the market years ago to grab share by slashing prices, and they too are going bankrupt.
But the shipbuilding industry is special to South Korea, a country whose economy depends on exports. The world’s three largest shipbuilders by erstwhile order volume are Korean: Hyundai Heavy Industries, Daewoo Shipbuilding & Marine Engineering, and Samsung Heavy Industries. In 2015, the industry accounted for 7.1% of South Korea’s manufacturing jobs and 7.6% of exports.
The beleaguered Big Three have already sold noncore assets and sloughed off employees as part of prior bank-led restructuring plans.
They’re dealing with terrible economic dynamics. Global orders for ships peaked in 2007 at over 90 million compensated gross tonnage (CGT), of which about one-third went to Korean shipbuilders. Orders crashed during the Financial Crisis to a low of 18 million CGT in 2009, then recovered. In 2013, orders maxed out at 60 million CGT, still down 33% from the prior peak. Those were the good times.
In 2016 so far, orders have collapsed to only 9 million CGT, according to the Wall Street Journal. That’s about half of the orders during the worst part of the Financial Crisis. And South Korea’s share of this pittance in orders has fallen from one-third to just a tiny sliver.
So on Monday, South Korean Finance Minister Yoo Il-ho announced another big bailout program: to help the shipbuilding industry deal with the “order cliff,” the government would directly order vessels and also provide financing for shipping companies to order vessels. In total, this would generate orders for 250 vessels through 2020, valued at 11 trillion won ($9.6 billion) funded by the government.
But these ships won’t be the big traditional money makers, such as large containerships and dry-bulk carriers, of which the world is already vastly oversupplied. Instead, these will be vessels for the fishing industry and for small shipping companies, along with ferries, patrol boats, warships, and coastguard vessels. The hope is this will carry shipyards into the next glory period, when world trade and shipbuilding would resurge.
For now, the government is hoping to keep the Big Three shipbuilders alive. They will have to shed 32% of their workforce by 2018, cut their operations by 23%, sell more noncore businesses, and take other measures.
This bailout comes on top of prior bailouts, including the one of Daewoo Shipbuilding & Marine Engineering in October 2015, when the state-owned Export-Import Bank of Korea and the Korea Development Bank (which already owned a controlling 31.5% stake) handed it a $3.7 billion bailout package of new loans, a rights offering, and debt-to-equity swaps.
The South Korean shipbuilders weren’t just sunk by the collapse of the global shipping industry, but also by their expedition into new territories: Seeing over the years that orders for big vessels would be heading south, and that prices were under pressure from competition in China, they decided in 2010 to get into the nirvana of profits: building offshore oil rigs. But that turned into a nightmare, and heavy losses, even before the price of oil crashed.
In June, the government and the Bank of Korea set up a special fund of 11 trillion won ($9.6 billion) to recapitalize state-run banks which were getting hit by defaulting loans from carriers and shipbuilders.
In addition, the finance ministry said the government would offer 6.5 trillion won ($5.6 billion) for South Korean carriers to order new bigger vessels to improve their profit margins and survive a little longer. And then there are plans to create a state-backed ship-financing company with initial capital of 1 trillion won ($880 million).
No one knows for sure how long the misery in the shipbuilding and shipping industries will continue. Overcapacity is a terrible condition. Creating it benefits many on the way up. It enriches them and makes the economy look good. But when it comes home to roost, the price is stiff. People lose their jobs. And many of the costs will be socialized. It’s only then that you see just how much capital has already gone down the drain, and how much more will follow.
The pain will continue, with many more false-hope-ups and brutal smack-downs, and more carriers will crack under their debt. Read… Why Hanjin’s Zombie Collapse Won’t Be the Last One.
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It isn’t a liquidity problem. It is an insolvency problem.
And … and … AND … bailing these yahoos out versus letting them go into bankruptcy isn’t saving the little guys … its bailing out the monied interests … so that they can continue to be part of the elite.
Ghost cities … ships … jobs … are not for the greater good.
‘To help the shipbuilding industry deal with the “order cliff,” the government would directly order vessels.’
Shades of Europe’s wine lakes and butter mountains of the 1980s.
Korea’s chaebol were patterned on Japan’s keiretsu business conglomerates — not surprisingly, since Japan ruled Korea from 1910 to 1945. Koreans have maintained a love-hate obsession with showing up the Japanese ever since.
Japan’s MITI-led macro business model seemingly hit a wall in 1990. But Korea carries on following it a quarter century on? They’ll be sorry.
Moreover, if Koreans learnt the lesson of German reunification in the early 1990s (in which West Germany exchanged worthless ostmarks for D-marks at 1:1, and lent billions to redevelop East Germany), they would know that South Korea shouldn’t max out its credit card when it may have the chance of a lifetime to reunify Korea — if only it can shoulder the bill.
Instead, South Korea apparently is preparing to invade the North with a maritime version of French general Gallieni’s taxis of the Marne. Let us know how that works out for y’all.
Yep, that’s the problem with mercantileism — it works all too well. Until it doesn’t. (usually because you’ve milked your “customers” dry and\or they start revolting)
My money is on Germany to be the next to experience exporter-stress.
First gradually, then suddenly.
Germany will also experience more social stresses and reaction to growing immigrant/refugee crime, while assessing its EU role once again.
Germany will start WW III. They were deeply complicit in the previous four (WW II, WW I, Franco-Prussian War, and the 30 Years war).
Yep, looks like some creative destruction is due. However, I wouldn’t put all the credit on the Germans.
Its a big world out there and the view that Germany will start WWIII is a bit Eurocentric.
Quite possibly the next big war could break out over some damn thing in the Koreas or some damn islands in the China Sea.
That’s some grasp of history there, Synoia. Back to your western civ textbook; otherwise you might not make it to the eighth grade.
State-run banks … bad idea
Private-run banks … bad idea
Both fail for the same reason … corrupt motivation, one by political correctness, the other by greed.
Accept that economics is cyclical and unpredictable, and hedge accordingly. But don’t let hedging dominate your GDP, don’t let the hedging tail wag the main street economic dog.
Private-run banks … bad idea Disturbed Voter
Not having a Postal Checking Service or equivalent for the risk-free storage of and transactions with fiat and other implicit and explicit privileges for depository institutions means we’ve never had truly private banks, at least in the US.
“Banking was conceived in iniquity and was born in sin. The bankers own the earth. Take it away from them, but leave them the power to create money, and with the flick of the pen they will create enough deposits to buy it back again. However, take away from them the power to create money and all the great fortunes like mine will disappear and they ought to disappear, for this would be a happier and better world to live in. But, if you wish to remain the slaves of bankers and pay the cost of your own slavery, let them continue to create money.” (Said to be from an informal talk at the University of Texas in the 1920s, but as yet unverified.)[14] from https://en.wikipedia.org/wiki/Josiah_Stamp,_1st_Baron_Stamp [bold added]
I don’t go that far. I say let banks create all the liabilities (deposits) they dare but let’s make sure those liabilities are genuine with respect to the population and not largely a sham as they have been for centuries. And when a bank fails to meet a single liability on time, it should be foreclosed on zealously.
Who can object to honest accounting?
yawn
Sloth is considered one of the 7 deadly sins. For a reason.
Want to reflect on your attitude?
After a nap.
Preferably a nap in a hammock slung in our cabin on a tramp steamer, and container ships are the ‘new’ tramp steamers now, crossing the Pacific.
Need to put them to work building gigantic floating cities to house permanent stateless colonies of offshore libertarians. Thousands of “coders”, drifting across the waves in hivelike steel argosies, all working 20 hours a day making software, or whatever it is libertarians actually do all day…free of force, fraud, restrictions and regulations…
Most of the libertarian types are all about selfishness.
They want the benefits of a state without paying the taxes. Oh, and I bet the libertarian types would be unwilling to pay the construction costs of the floating city, even with the steep discount they could probably negotiate with this massive undercapacity.
Libertarians…*snort*. The kids from high school that didn’t evolve beyond 10th grade Ayn Randian kookery. From Ron “my son is Rand!” Paul to Chip Crackers (or whatever his last name is) the founder and/or CEO of Lululemon who had his outfit’s shopping bags printed with “I Am John Galt” because the target demographic for yoga wear is well known in Randian fantasist circles (or maybe Chip fantasizes about Rand and Galt getting sweaty wearing form fitting tights)…are whack jobs who are either a few slices short of a loaf or running interference in the name of personal enrichment and hoping nobody parses their “logic”.
That Libertarianism is the religion of choice for misfit computer types and angry youth who think more capitalism and less state “interference” will show those evil corporations and banks who’s really boss (because Obama and HRC are too farking socialist) are good for a laugh because they are dumb as a bag of marbles and nobody takes them seriously.
That they can’t see that our economic and political system is being transformed into something that very closely resembles the Libertarian ideal is a bit odd. I mean how dense is that? Their non-interventionist anti-war stance is the only part of their philosophy that makes sense.
To be honest, I would not be surprised to discover if most libertarians were actually authoritarian in their beliefs.
They won’t see anything that does not look upon their ideal as something to question their ideology. They also cannot see that the failures of the Robber Baron era, or today’s Robber Barons for that matter (whom they are often loud apologists for).
Perhaps they could be thought of as Market Stalinists.
Libertarians seem to envision a world where they and their in-group have maximized freedom at the expense of everyone else, and oppression by any entity other than government is un-possible.
In Spain we have a saying that goes like this “when you see your neighbor beard being cut, start soaking your hair glut”. This is to me the first symptom that countries with large commercial surpluses are next in the struggling line. Today are carriers and shipbuilders. Tomorrow carmakers, phonemakers, computermakers etc. Comparative advantages are vanishing it seems.
What you have told us in so many words is that humanity is devoting too much of its time to commerce and industry and making a bit, and not enough time to those other pursuits, the arts and sciences, that make life so rewarding. I completely agree.
Excuse me NC. I know this is fundamentally an economics site and one of the best available but of late it has blossomed into concern for humanity that I also share.
My ship breaking friends in Alang are absolutely thrilled. They’re going to make some money on that new steel
The article and comments treat Korean shipbuilding problem as an instance of the business cycle and overproduction due to capitalist competition. Okay, that is what is happening. But, there is a deeper problem arising from enormous productivity in the global system. Productive capacity has overrun the ability of global economic and political system to absorb its products.
The global economic system must be restructured to deal with this problem, so layoffs, bankruptcies, and petty national advantage are no longer a part of how we live.
Yep, all the people who can afford to buy sh!t have bought all the sh!t they can afford to buy. The other 5 billion are out of luck, the cheap raw materials to make sh!t for them don’t exist.