South Korea’s shipbuilders have been forced to make over US$1 billion in loss provisions to cover offshore project delays and offshore cost overruns, paying a heavy price for tackling ever-more complex orders as Chinese rivals dominate the market for simpler ships.

Shares in Hyundai Heavy Industries, the world’s largest shipbuilder, hit a more-than five-year low after the yard reported a record quarterly loss of 1.1 trillion won (US$1.07 billion). The loss included a provision of about 500 billion won for delayed projects. Hyundai Heavy shares tumbled as much as 13 percent after it said the April-June 2014 quarter was plagued by cost increases on big offshore and plant construction projects, as well as delays. The strong South Korean won also undercut the value of earnings overseas, it said. “Korean shipbuilders have focused on complex offshore structures but they do not have the ability to design them, only construct them,” said Yang Jong-seo, an industry analyst at Korea Eximbank. “So they cannot flexibly meet design changes and tend to pay the full brunt of it in delays and costs.” Earnings for Korean shipbuilders are expected by analysts to remain under downward pressure this year, affected by low-margin orders booked in recent years as risks from offshore projects persist. Hyundai Heavy newbuilding projects hit by delays include a US$2.06 billion module for a liquefied natural gas plant in Australia’s Gorgon project, co-owned by units of Chevron, Exxon Mobile and Shell, the shipbuilder said. Another is the Goliat floating production storage and offloading (FPSO) vessel ordered by Eni Norge AS, a unit of Italy’s Eni SpA, in partnership with Norwegian group Statoil. The Goliat contract was awarded in 2010, initially for US$1.1 billion, but frequent design changes have pushed up total expected costs to US$2 billion, analysts said. Hyundai Heavy said it is in talks with one or more unnamed customers to change contract terms, seeking to recover some of the losses already booked. The Hyundai Heavy move to book a provision for delays echoes a step taken by Samsung Heavy Industries, the world’s second-biggest shipbuilder. Samsung Heavy set aside about 500 billion won during the first quarter of this year for losses expected on offshore structure projects, reporting a 362.5 billion won operating loss for the January-March period. At Daewoo Shipbuilding & Marine Engineering, the country’s third-biggest shipbuilder, loss provisions booked throughout the course of 2013 totalled to around 300 billion won, analysts said. South Korean shipbuilders focused on winning complex offshore construction projects to fill capacity added during the 2006-2008 shipbuilding boom, as Chinese shipyards have won market share for simpler vessels such as bulk carriers and container ships.