Korean shipbuilders see profit margins fall

Daewoo Shipbuilding & Marine Engineering (DSMA) will be reporting that its second-quarter profit will fall by 21% because of rising steel prices. DSME?s announcement will be followed by others from Korean shipbuilders since the price of steel plates, about 18% of a shipbuilder’s costs, rose as much as 70% this year.

A 30% increase in the price of steel lowers operating profit margins by an average 4.5 percentage points, according to Song Yung Sun, an analyst at Seoul-based Korea Investment Trust Management Co. “Second-quarter profits won’t be as good as last year because raw material costs rose more than expected,” Song said. Rising raw material costs come as shipyards complete orders they received in 2001 and 2002, when ship prices were at a 10-year low. The price for VLCCs, an industry benchmark, fell to $62.5 million in 2002, although last year it rose 22% to $70 million,.

DSME, Hyundai Heavy Industries, Samsung Heavy Industries, Hanjin Heavy Industries and STX Shipbuilding all anticipate that steel plate prices will likely continue to rise and will have a negative affect on shipbuilders’ earnings.

Operating profit for Hyundai Heavy, the world’s largest shipbuilder, may have slumped 21% in the second quarter, according to Song. DSME, the world’s second-largest shipbuilder, is likely to report that its net income slumped to $55.5 million, according to 13 analysts polled by Thomson Financial. Samsung Heavy, the world’s third-largest shipbuilder, will probably say it had net income of 28.4 billion won in the quarter, according to the average of nine analysts surveyed by Thomson. That’s 8.6% less than last year. Hanjin Heavy, Korea’s fifth-largest shipbuilder, is likely to report a 13% drop in income to 12.7 billion won.

Shipuilders’ earnings may also be hurt by losses on foreign exchange rates after the won strengthened against the U.S. dollar, analysts said. The won has risen 2.6% against the dollar this year, reducing the value of orders, which are in U.S. dollars, when they’re converted back into the local currency.

Hyundai Mipo Dockyard Co., a ship repair company that switched to making chemical vessels, may be the only shipbuilder to have increased its profit. Mipo’s second-quarter net income may have tripled to 14.8 billion won, analysts said. The Ulsan-based shipyard makes smaller ships that take less time to complete, so its earnings this year will reflect income from orders it received in 2003, when prices started to pick up.

“Third-quarter profits may fall further,” said Song. “They will only improve next year as they start to book more 2003 orders at higher prices.”