“Big boss” is finally profitable! South Korea's three major shipbuilders are expected to return to profit
2022-10-12 09:00
With the increase in orders for high-value-added new vessels such as LNG carriers and the gradual digestion of low-priced orders from previous years, coupled with the continued sharp decline in the Korean won against the US dollar, the profitability of South Korea's three major shipbuilders is rapidly improving.
The sharp drop in the Korean won exchange rate + rising ship prices, accelerates the improvement of the profitability of the three major shipbuilders.
According to the forecast released by the South Korean financial information company FnGuide on October 9, South Korea's shipbuilding and ocean engineering industry achieved an operating profit of 80.9 billion won (approximately US\$57 million) in the third quarter of this year, successfully returning to profitability after falling into losses in the third quarter of last year. From the fourth quarter of last year to the second quarter of this year, due to factors such as rising steel prices, South Korea's shipbuilding and ocean engineering industry suffered a total operating loss of 1.35 trillion won (approximately US\$957 million).
FnGuide predicts that South Korea's shipbuilding and ocean engineering industry's operating profit in the fourth quarter of this year will reach 141.5 billion won (approximately US\$100 million), and the upward trend in profitability will continue into the first half of next year.
According to analysis, the reason why South Korea's shipbuilding and ocean engineering industry returned to profitability in the third quarter is mainly due to the continued sharp drop in the Korean won against the US dollar, rising new ship prices, and an increase in the construction of high value-added vessels. In particular, for South Korean shipbuilders who receive shipbuilding fees in US dollars, the decline in the Korean won against the US dollar is a positive factor. In the second quarter of this year, the average exchange rate of the Korean won against the US dollar was 1260 won:1 US dollar, and in the third quarter, it was 1326 won:1 US dollar. On September 22, the US raised the federal funds rate for the third consecutive time, and the Korean won against the US dollar broke through 1400 won:1 US dollar for the first time in 13 years and 6 months.
In addition, new ship prices have been rising. At the end of last year, the price of a new 174,000 cubic meter LNG carrier was US\$210 million per vessel, which exceeded US\$240 million at the end of August this year and rose to US\$244 million in September. This is also the highest value since Clarkson released the new ship price for large LNG carriers in October 2014.
According to analysis, the stabilization of raw material prices such as steel has also contributed to the improvement in the performance of South Korea's shipbuilding and ocean engineering industry.
In addition to South Korea's shipbuilding and ocean engineering industry, South Korea's other two major shipbuilders, Daewoo Shipbuilding and Samsung Heavy Industries, will also achieve significant reductions in losses in the third quarter, laying a solid foundation for achieving profitability next year.
According to FnGuide's forecast, Daewoo Shipbuilding's operating losses in the third and fourth quarters of this year will be 53.9 billion won (approximately US\$38 million) and 17.6 billion won (approximately US\$12.5 million), respectively. Although it continues to lose money, the amount of losses has been significantly reduced compared to the 569.5 billion won (approximately US\$400 million) in the first half of the year. Some market participants believe that the shipbuilding industry will enter a large cycle after 2024, and Daewoo Shipbuilding, due to its acquisition by Hanwha Group, may achieve profitability ahead of schedule.
Relevant personnel in South Korea's shipbuilding industry said: "Daewoo Shipbuilding's products such as ocean platforms can create synergy with Hanwha Group's military industry department. Using Hanwha's high-quality overseas customer network as a springboard, Daewoo Shipbuilding's export regions can be expanded."
According to FnGuide's forecast, Samsung Heavy Industries' operating losses in the third and fourth quarters of this year will be 70.5 billion won (approximately US\$50 million) and 36.6 billion won (approximately US\$26 million), respectively, which is also a significant reduction compared to the loss of 350.6 billion won (approximately US\$250 million) in the first half of the year.
The three major shipbuilders have a backlog of orders exceeding US\$100 billion, and the trend of improved performance will continue into next year.
Although the international shipbuilding market has remained buoyant since the second half of 2020, and South Korea's three major shipbuilders have also undertaken orders that meet the workload for the next four years, these orders have not immediately led to an improvement in corporate performance. This is because, from the production characteristics of the shipbuilding industry, it often takes 1 to 2 years for orders to be reflected in actual performance. In addition, due to the recent surge in the prices of raw materials such as ship plates, as well as worker strikes, litigation compensation, increased outsourcing costs, and one-time costs such as the loss of asset valuation of "inventory" drilling rigs, the three major shipbuilders have been mired in losses.
However, since 2022, the three major shipbuilders have been grabbing new ship orders at a faster pace than in 2021, when the shipbuilding industry was entering its initial period of prosperity. As of the end of September, South Korea's shipbuilding and ocean engineering industry has received 176 new ship orders this year, with a total contract value of US\$20.35 billion, reaching 116.6% of the annual order target of US\$17.44 billion; Daewoo Shipbuilding has received a total of 36 orders this year, including 28 LNG carriers, with a total value of US\$8.1 billion, completing 91% of its annual order target of US\$8.9 billion; Samsung Heavy Industries has received a total of 37 new ship orders this year, with a total value of US\$7.2 billion, reaching 82% of its annual order target of US\$8.8 billion.
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