China announced sanctions on five U.S. subsidiaries of Hanwha Ocean, but securities firms said the fallout will likely be limited. They noted China lacks effective tools to exert real impact. However, shrinking seaborne cargo volumes amid the U.S.-China trade dispute are reducing orders for commercial ships, which is seen as a drag on Hanwha Ocean's share price.
As of 10 a.m. on the 15th, Hanwha Ocean was trading at 106,400 won. The share price rose 3.2% (3,300 won) from the previous day. It was a different tone from the previous day, when the share price fell below the 100,000-won mark for the first time since Jul.
Hanwha Ocean shares fell sharply the previous day. News that China's Ministry of Commerce placed Hanwha Ocean's subsidiary Hanwha Shipping LLC, as well as Hanwha Philly Shipyard Inc., Hanwha Ocean USA International LLC, Hanwha Shipping Holdings LLC, and HS USA Holdings Corp., on the "Anti-Foreign Sanctions Law" list led to selling. Under the sanctions, the corporations are banned from transaction with all Chinese companies and individuals.
The United States has no deep-sea shipping company of its own, and the shipyards in the U.S. build only warships or coastal vessels. That means it is effectively free from China's sanctions. This is why Hanwha Ocean's U.S. subsidiaries are analyzed to have become China's targets.
Hanwha Ocean is also a symbol of the "MASGA (Make American Shipbuilding Great Again)" project, which the United States is pushing to revive its shipbuilding industry. As the United States leverages the superior shipbuilding technology of Korea, an allied nation, Hanwha Group is playing a key role, including acquiring Philly Shipyard in Philadelphia. When China put that symbol on its sanctions list, investor sentiment froze.
Still, the consensus in the securities industry is that the latest step by China will have little impact on Hanwha Ocean's business activities. That is because all 10 petrochemical product carriers (PC) and three feeder (small) container ships currently under construction at Hanwha's Philly Shipyard are intended for use mainly along the North American coast.
Kim Yong-min, an analyst at Yuanta Securities Korea, said, "The United States is not a big player in the shipbuilding and shipping markets, so the only thing China can realistically sanction is Korean shipbuilders," adding, "Given that Korean shipbuilders have drawn attention in the U.S.-China maritime power race as China's only real counterweight, these sanctions are actually evidence that China is nervous."
The prevailing view is that it is unlikely China will restrict thick steel plate used in shipbuilding. Chinese steelmakers are already struggling with weak demand. Some 20% to 30% of the shipbuilding steel plate used by Korea's shipbuilding industry is made in China.
Lee Ji-ni, an analyst at DAISHIN SECURITIES, said, "With China's economic stimulus faltering, Korean shipbuilders are a reliable buyer for Chinese steelmakers," adding, "If sanctions expand, the damage Chinese steelmakers suffer will be no less than that of Korean shipyards."
Experts advised using the share-price correction in shipbuilding stocks as a buying opportunity. Kang Kyung-tae, an analyst at Korea Investment & Securities, said, "China's sanctions are a kind of warning measure," adding, "Share prices fell on various uncertainties that these sanctions would spread to Korea's parent companies and the entire Korean shipbuilding industry, but it remains only a possibility." He continued, "Along with strong results in the third quarter (Jul.–Sep.) this year, we maintain an 'overweight' view on Korean shipbuilders, which also have additional order momentum (upside drivers)."
A burden is that orders for newly built ships (newbuilds) have plunged amid U.S.-China trade tensions. From the start of the year through Sep., global newbuild orders totaled 1,185 ships and 32.64 million CGT (compensated gross tonnage), half the level of the same period a year earlier. While order volumes in China and Japan fell by more than 50% year over year, Korean shipbuilders held up better with only a 16.7% decline, but if weak ordering persists, concerns about a work cliff could resurface.
Lee Jae-hyuk, an analyst at LS Securities, said, "If China's sanctions expand, they could negatively affect Korean shipbuilders' commercial ship order activities," adding, "It is necessary to assess the possibility that overseas shipowners will hesitate to place orders for Korean-built ships."