Harsh winters tend to follow Indian summers

The fall in the price of oil has hammered Singapore’s top two shipyards leading some to speculate merger is the best way to survive.

Meteorologists will tell you harsh winters tend to follow Indian summers. Singaporean yards can vouch for this swift change. No other sector in Singapore has been hit so hard by the low oil prices worldwide than the republic’s main yards run by Keppel and Sembcorp. The pair –who defied the odds for much of the past decade, building up enviable offshore orderbooks — have yet to secure any new rig orders this year, a sharp turnaround from the recent past where they have the led the world in snaffling up rig contracts.

Contract cancellations and delays, combined with a severe drop in new orders, have seen both conglomerates report poor results in the first three quarters of the year. With most analysts convinced low oil prices are here to stay for at least the next couple of years Singapore’s top two yards are doing all they can to make their organisations leaner.

Keppel chief executive Loh Chin Hua said towards the end of October that his company was readying itself for “a possibly longer winter” by slashing its workforce. “We are making ourselves more efficient [and] leaner,” the Keppel boss said.

In early November the chairman of the Economic Development Board (EDB) Beh Swan Gin said Singapore’s offshore and marine industries would need to reinvent themselves to ride out the downturn.

“The sector is a significant contributor to our economy, providing good jobs for Singaporeans, but the continued transformation of the industry is critical for its long-term success,” Beh said.

Merger mooted

What Keppel and Sembcorp are suffering is by no means unique. Shipbuilders across Asia have been whacked by the downturn in shipping and then the drop in the price of oil. In plenty of other shipbuilding nations – led by South Korea and China – consolidation among shipbuilders is now taking place. Could Sembcorp and Keppel join forces in this downturn? A far-fetched idea considering the ferocity of the rivalry between the pair? However, a recent report by local bank DBS said that consolidation is possible for both companies, as restructuring will allow the two rigbuilders to streamline their cost structure and improve their competitiveness on the international front.

DBS noted that in the previous downcycle, Singapore shipyards went through a major consolidation during the late 1990s, where various mergers resulted in the formation of the two government-owned shipyard groups.

This time, the shipbuilders are facing an even greater challenge, with contract wins sinking to record lows and manpower woes adding insult to injury.

“This may force the yards to look for ways to restructure. We do not rule out restructuring, mergers and acquisitions possibilities, as any cost rationalisation exercises will boost competitiveness of Singapore yards amid rising competition from Korea and China, and the added burden of operating shipyards in Brazil,” said the report.

“A potential merger of KepSMM will create a global champion with a powerful combination – Keppel’s market leadership, branding, and greater overseas experience plus SMM’s world class facilities in Singapore and Brazil, which complement Keppel’s older facilities. KepSMM will account for almost one-third of the global market share for drilling rigs by orderbook,” DBS noted.

Ploughing ahead

Despite the drop in rig orders both Keppel and Sembcorp remain in expansive moods. Keppel has used the downturn in the oil and gas industry for investment. In August, it announced the acquisition for $100m of US-based Cameron International’s offshore rig business, which includes jack-up rigs and after-sales services. “Conglomerates tend to perform well through crises due to their access to capital,” commented Keppel boss Loh.

Sembcorp Marine, meanwhile, recently opened a new steel structure fabrication workshop. The 120,000 sq m facility, the largest facility of its kind in Southeast Asia, will integrate with the firm’s other capabilities at its flagship Tuas Boulevard Yard.

In July this year, Sembcorp Marine consolidated from a multi-business-unit organisation structure into a single brand and company under its long-term ‘Transformation for Growth’ strategy.

The company now focuses on four key capabilities across its global operations, namely rigs and floaters, repairs and upgrades, offshore platforms and specialised shipbuilding.

This article first appeared in the recently published Singapore Market Report 2015, published by Splash. Readers can access the full magazine for free by clicking here.

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