Korean shipbuilders see material impact from sanctions on Russia

International sanctions on Russia over its invasion of Ukraine are set to have a material impact on South Korea’s three largest shipbuilders, which have a combined $8.05 billion worth of orders from Russia.

With Russian banks denied access to the global financial settlement messaging system SWIFT, the Korean Big Three, also the world’s top three players, might be at risk of not being paid for ships ordered by Russian buyers, industry watchers said.

According to industry sources on Sunday, Samsung Heavy Industries Co. will postpone the delivery of two Aframax-size ice-breaking crude oil carriers originally scheduled for this month.

The two crude oil tankers were ordered from Sovcomflot, Russia’s largest shipping company, the sources said. The US recently imposed financial restrictions on Sovcomflot as part of broader sanctions to hold Moscow accountable for its military attack on Ukraine.

From March 13, Russian companies on the blacklist can’t use the SWIFT system, meaning they can’t pay the bill for any contracts and orders they earlier placed with companies in other countries.

The construction cost for the two ships that Samsung Heavy has nearly completed is $160 million. The Korean shipbuilder is known to have received about half the cost.

The usual industry practice is that shipping companies pay about 20% of the ship prices upfront at the time of the contract, 30% as the shipbuilding proceeds, and the remaining 50% on delivery.

The Korean Big Three – Korea Shipbuilding & Offshore Engineering Co. (KSOE), Daewoo Shipbuilding & Marine Engineering Co. and Samsung Heavy – have a combined order backlog worth $8.05 billion from Russian companies.

Specifically, Samsung Heavy has $5 billion worth of orders from Russian companies, followed by Daewoo Shipbuilding with $2.5 billion and KSOE with $550 million. Their Russian orders are mostly for the construction of ice-breaking LNG carriers to be used in Arctic natural gas development projects.

DEFAULT RISK HEIGHTENED

The construction of up to 60% of the ships contracted with Russian companies has already begun, putting Korean shipbuilders at risk of huge losses if Russian buyers default on payments.

Analysts said if Russian companies refuse to accept the ice-breaking LNG tankers built by the Korean shipbuilders, it may be hard to find other buyers, given that those ships are special-purpose carriers, unsuitable for general-purpose transportation.

“The LNG carrier market is currently in a boom cycle, but the ice-breaking ships are mostly for Russian companies. If Korean shipbuilders fail to sell them to Russians, those ships have nowhere else to go,” said an official at a Korean shipbuilding company.

According to an industry estimate, KSOE, the intermediate holding firm of Hyundai Heavy Industries Group, is forecast to log an operating loss of 2 billion won ($1.6 million) this year due to the Russian risk. That compares with market tracker FnGuide's earlier forecast of 38.7 billion won in 2022 profit for KSOE.

Last year, the three major Korean shipbuilders swept global orders for LNG carriers, more profitable than oil tankers and container ships, amid signs of a global economic recovery from the pandemic.

Ship operators have increased their new vessel orders to meet rising seaborne transportation demand, boosting freight rates and new shipbuilding prices.

Write to Jung-hwan Hwang at jung@hankyung.com
In-Soo Nam edited this article.