Soaring steel prices hit South Korean shipbuilders’ turnround hopes

Higher steel prices are set to delay South Korean shipbuilders’ return to profitability, despite surging orders and rising prices for new container ships and gas tankers.

South Korea’s biggest producers are struggling to persuade customers who have already ordered new vessels to pay more because of higher prices for steel, which accounts for around a fifth of shipbuilding costs.

The Korean shipbuilders recently agreed to an eight per cent increase in steel plate prices, on top of a near doubling in the price over the past two years, according to a company official and an industry analyst.

“It is difficult to reflect higher steel prices in our previously signed deals although we can increase the prices for new contracts,” said Korea Shipbuilding & Offshore Engineering, the world’s biggest shipbuilder by revenues.

Korea Shipbuilding, the parent firm of Hyundai Heavy Industries, lost Won396bn ($314mn) in the first quarter and now no longer expects to return to profitability this year. “So we’ve set provisions,” the company said.

Other Korean shipbuilders also remain in the red following a prolonged industry slump. Their higher steel plate costs have been exacerbated by the war in Ukraine, which has disrupted energy markets and supply chains.

There are also concerns about whether Korean shipbuilders will ultimately be paid for $5.6bn of outstanding orders from Russia. Daewoo Shipbuilding recently cancelled a Russian LNG order worth Won338bn after the Russian customer failed to pay.

The South Korean shipbuilders have benefited from surging demand for liquefied natural gas tankers since the beginning of last year. Orders for LNG tankers are expected to increase further as European countries seek to reduce dependence on gas piped from Russia because of the war.

The big three South Korean shipbuilders — Korea Shipbuilding, Daewoo Shipbuilding & Marine Engineering and Samsung Heavy Industries — are the dominant producers of LNG ships, controlling more than 70 per cent of the global market.

Large-size LNG carrier orders jumped nearly seven-fold in the first four months of this year, with the Korean builders winning 30 of a total of 47 ships ordered, according to shipbroker Clarksons.

The strong demand for LNG tankers helped Korea Shipbuilding to win new orders worth $10.3bn between the January and April period, hitting nearly 60 per cent of its annual target. Daewoo Shipbuilding won $4.6bn in new orders in the same four months, 52 per cent of its annual target, while Samsung Heavy won $2.2bn, 25 per cent of its target.

Prices for building new vessels have been rising for more than a year and are up more than 26 per cent since November 2020 to the highest level in nominal terms in 13 years, according to Clarksons.

But the three Korean shipbuilders in February reported $3.5bn in combined operating losses for last year.

“The strong orders don’t get reflected immediately in their sales this year,” said Chung Sung-yop, an analyst at Daiwa. “A turnround in the fourth quarter had been expected before but, because of higher material costs, they are likely to swing to profits next year.” 

The three big South Korean builders are trying to renegotiate the terms of the $19bn in total preliminary orders for more than 100 LNG carriers to be delivered through 2027 that they agreed with QatarEnergy in 2020.

“Their margins from the deal will certainly deteriorate due to higher material prices, as it won’t be easy to raise the contract prices,” said Chung.

Lee Dong-heon, an analyst at Daishin Securities, said Chinese and Japanese shipbuilders were also suffering from the high steel prices, which would “likely weigh on their earnings this year”. 

Additional reporting by Eri Sugiura and Xueqiao Wang