Kexim to extend loans for ailing shipbuilders

The government has decided to increase its financial support for local shipbuilders as global ship finance is drying up, further squeezing their profitability.

The Ministry of Strategy and Finance announced yesterday that it will let Korea Export-Import Bank (Kexim Bank) provide a total of 3 trillion won ($2.62 billion) for local shipbuilders to manufacture outbound ships this year at an emergency economic meeting.

For projects over $2 billion, the government will provide even more financial support.

The decision was made as the shipbuilding industry, the largest contributor to the country’s exports, continues to struggle against worsening conditions in the global shipbuilding market. This is due to frozen liquidity in the European shipping industry. European banks like Germany’s Commerzbank, the third largest loan provider for shippers, have downsized their ship financing in the wake of the region’s fiscal debt crisis.

Orders declined more than 60 percent in the first half compared to the same period in 2011.

Although shipbuilding accounts for 10.1 percent of the nation’s total exports, recording $56 billion last year, the government has been cutting funds for the industry.

Kexim Bank is the only government-led financial institution that supports shipbuilders. It doled out 5.5 trillion won to domestic shipbuilders in 2009, but the figure was slashed by a whopping 60 percent to around 1.4 trillion won as of June this year.

Domestic shipbuilders have recently been complaining of a contract system that takes more than two years to receive full payments. For example, under a so-called “heavy tail” contract for a 100 billion won ship, the client pays four installments of 10 billion won in the first year, and pays the remainder when the ship is delivered.

“European shippers currently prefer these contracts because they can pay less during the initial stages,” said an employee at the country’s largest shipbuilding firm.

Moreover, local shipbuilding firms, especially smaller ones, have been complaining about a lack of financial support from the government.

The main cause is a change in the loan issuance system at Kexim Bank, industry officials say. Shipbuilders had some flexibility to get loans under a system that ran from 2009 to 2010. However, this was ditched last year and changed to one in which shipbuilders have fixed limits for available loans.

Because of the rigid system, small shipbuilders argue that the government is giving ship manufacturers the cold shoulder at a tough time.

By Song Su-hyun [ssh@joongang.co.kr]