[The Crisis of Heavy Industries] Shaking 'Jung Hoo Jang Dae'... Refining, Shipbuilding, Steel "Q3 Won't Be Easy Either"

Oil, Slow Recovery in Petroleum Demand Amid COVID-19 Resurgence
Shipbuilding "100 Billion Dollar Order Target Now Impossible"
Steel, Iron Ore Prices Peak... Product Prices Cut or Frozen

[Asia Economy Reporter Hwang Yoon-joo] The position of traditional heavy industries such as refining, steel, and shipbuilding, which have driven the Korean economy, is precarious due to the resurgence of the novel coronavirus infection (COVID-19) and the US-China trade conflict. As the industry struggles to escape the quagmire of COVID-19, it is expected to remain in the red tunnel in the third quarter following the second quarter. The refining, shipbuilding, and steel industries are busy devising self-help measures for survival, but concerns are emerging that it will be difficult to get out of the deep recession tunnel without government support.

◆ Refining industry once lowered operating rates by more than 15% due to COVID-19... "Demand recovery falls short of expectations"

In particular, the situation of the refining industry, a national key industry, is worsening. According to the related industry on the 14th, SK Innovation lowered its refining facility operating rate to the 70% range last month. SK initially planned to temporarily reduce the operating rate in the second quarter, when the COVID-19 crisis was at its peak, and then raise it to 90% from the third quarter. However, this plan was disrupted by the resurgence of COVID-19 in Korea. International oil prices also turned downward again, so the operating rate for the second half of the year was decided to be maintained at around 80-85%, similar to the second quarter.

In fact, domestic petroleum product consumption from January to July this year was 517.03 million barrels, down 3.5% from 536.21 million barrels in the same period last year. By product, diesel, which accounts for the largest production share, decreased by 6.3% from 99.74 million barrels to 93.39 million barrels compared to the same period last year, and naphtha decreased by 3.2% from 254.24 million barrels to 245.87 million barrels. Aviation fuel sharply dropped by 39.9%, from 22.57 million barrels to 13.55 million barrels.

As demand decreases, refining margins are also hitting bottom. Since the third week of March, when the COVID-19 crisis was at its peak, margins have recorded negative values for three consecutive months. At least since the third week of June, margins have fluctuated between negative and zero dollars. This clearly shows the contraction of oil demand due to the impact of COVID-19.

Given this situation, there is no assurance for the market's expectation of a return to profitability in the third quarter. In the securities industry, SK Innovation, which suffered operating losses of 1.775 trillion won and 439.7 billion won in the first and second quarters respectively due to the direct hit from COVID-19, is expected to post an operating profit of 68.1 billion won in the third quarter. Other refining companies are holding emergency meetings weekly to respond flexibly to market conditions. As there is no sign of performance recovery, S-OIL, once considered a 'windless zone' for employment, is reportedly planning to continue voluntary retirement programs next year, which it implemented for the first time this year.

Professor Lee Deok-hwan of Sogang University said, "Just as smallpox disappeared 180 years after vaccine development, the COVID-19 crisis will not end easily," emphasizing, "Since the situation is more serious than the refining industry perceives, they must prepare emergency self-help measures such as securing liquidity."

◆ Shipbuilding says "No glory of the past"... Steel industry also struggling

The shipbuilding industry is in a similar situation. In 2007, the order amount for domestic shipbuilders reached 68.5 billion dollars, but this year the order target has shrunk to 18.1 billion dollars. This figure clearly shows the situation faced by the three domestic shipbuilders this year. The bigger problem is that even this target, reduced to a quarter, is not being met. As of the end of last month, the order achievement rate of the three companies was only 20%.

The shipbuilding industry points to the stagnation of China's economic growth as the biggest cause of the market downturn. China achieved rapid growth after joining the World Trade Organization (WTO) in 2001, with an economic growth rate of 14.2% in 2007. During China's economic golden period from 2003 to 2007, cargo volume increased, leading to more ship orders, and the three domestic shipbuilders benefited from this.

In the first quarter of this year, China's economic growth rate plummeted to -6.8%. This negative growth rate is the first since 1976. It is a scar left by the COVID-19 crisis. As the world decided on shutdowns and blocked the movement of goods and people, ship orders were halved. As of the end of August, the cumulative global ship order volume was 8.12 million CGT, down 54% from 17.47 million CGT in the same period last year. Although the industry is focusing on orders for high-priced liquefied natural gas (LNG) carriers, it is insufficient to overcome the order cliff. Considering that it takes three years from ship order to delivery in the shipbuilding industry, the direct impact of COVID-19 is expected to appear two to three years later.

A shipbuilding industry official said, "It is difficult to encounter the super-boom period like 2006-2007 anymore," adding, "At that time, China led the increase in global cargo volume with rapid growth and competitively increased ship orders, but with the US-China trade dispute, China's low growth, and the COVID-19 crisis overlapping, the era of '10 billion and 20 billion dollar' orders has ended."

The contraction of the shipbuilding market has directly affected the steel industry, which is a downstream sector. Steel plates used in shipbuilding account for 10-20% of steel industry sales, and especially steel plates are produced in blast furnaces, which are difficult to adjust flexibly, making it hard to actively respond to demand decreases.

To make matters worse, iron ore prices hit $127.38 per ton on the 21st of last month, marking the highest price in six years. Although raw material prices have risen, steel supply prices have fallen due to decreased demand. A steel industry official explained, "Unlike automobile production lines, blast furnaces cannot be turned off or adjusted in volume, so a certain amount of steel plates must be produced," adding, "This is why POSCO and Hyundai Steel lowered steel plate prices at a loss."