Korea Shipbuilding & Offshore Engineering Aims for Profit, Daewoo Shipbuilding's Deficit Significantly Reduced... Earnings Expectations 'UP'

Korea Shipbuilding & Offshore Engineering Expected to Return to Profit in Q3
High Exchange Rates and New Ship Prices Boost Construction Volume
Daewoo Shipbuilding and Samsung Heavy Industries Anticipate Significant Deficit Reduction

A 174,000㎥ class LNG carrier built by Hyundai Heavy Industries and delivered in 2020. Photo by Hyundai Heavy Industries

[Asia Economy Reporter Choi Seoyoon] Expectations for the shipbuilding industry's performance in the second half of the year are rising due to the high exchange rate trend and escape from low-price orders. In particular, Korea Shipbuilding & Offshore Engineering is expected to turn profitable in the second half of this year after recording losses of several hundred billion won for three consecutive quarters.

According to financial information firm FnGuide on the 9th, Korea Shipbuilding & Offshore Engineering is expected to record an operating profit of 80.9 billion won on a consolidated basis in the third quarter of this year. This marks a return to profitability after three quarters. From the fourth quarter of last year to the second quarter of this year, the company posted a total loss of about 1.35 trillion won due to rising steel prices. It is also expected to continue its profit streak until the first half of next year by posting an operating profit of 14.15 billion won in the fourth quarter of this year.

The turnaround to profitability is analyzed to be due to an increase in construction volume amid rising exchange rates and new ship prices. A high exchange rate is a favorable factor for domestic shipbuilders who receive shipbuilding payments in dollars. The won-dollar exchange rate averaged around 1,260 won in the second quarter but rose to an average of 1,326 won in the third quarter. Due to the U.S.'s consecutive policy rate hikes, it even surpassed 1,400 won on the 22nd of last month for the first time in 13 years and 6 months.

The newbuilding price for 174K-class LNG carriers was 210 million dollars per vessel at the end of last year but surpassed 240 million dollars at the end of August and recorded 243 million dollars last month. This is the highest since Clarkson began announcing large LNG carrier newbuilding prices in October 2014. Additionally, the stabilization of raw material prices is also analyzed to have contributed to the good performance.

Daewoo Shipbuilding & Marine Engineering is expected to post operating losses of 53.9 billion won and 17.6 billion won in the third and fourth quarters of this year, respectively. However, the scale of losses itself is significantly reduced compared to the first half (-569.5 billion won). With market expectations that the shipbuilding industry will enter a big cycle after 2024, Daewoo Shipbuilding is highly likely to achieve an early turnaround to profitability as Hanwha Group is taking the lead in its acquisition. A shipbuilding industry insider said, "It can create synergy with Hanwha Group's defense sector, such as offshore platforms," and added, "Using Hanwha's overseas prestigious customer network as a foothold, Daewoo Shipbuilding can also expand its export regions." Samsung Heavy Industries is expected to post losses of 70.5 billion won and 36.6 billion won during the same period. Samsung Heavy Industries also reduced its losses to about one-third compared to the first half (-350.6 billion won).

The improvement in the shipbuilding market is expected to continue into next year following the second half of this year. This is because the order backlog and the newbuilding price composite index, which can gauge shipbuilders' profits, are positive. The order backlogs of the three major shipbuilders are secured until 2025. According to the latest order backlogs of each company, Korea Shipbuilding & Offshore Engineering has accumulated 45.1 billion dollars (as of the end of August) in sales terms, Daewoo Shipbuilding & Marine Engineering 29.7 billion dollars (as of the end of September), and Samsung Heavy Industries 39.8 trillion won (as of the end of August).

The market expects the newbuilding price composite index to trend upward until next year. Researcher Bae Gi-yeon of Meritz Securities said, "It is highly likely to rise to 172 points by 2023," and predicted, "Due to the supply-demand effect caused by the production capacity limits of shipbuilders, newbuilding prices will surpass 250 million dollars for 174K CBM-class LNG carriers."