Korean yards mull over price increase

South Korea’s seven major shipbuilders, which delivered 38% of the world’s vessels in 2005, may raise the price of new ships by 5% to take advantage of record orders and protect their profits from rising costs.

Higher prices protect shipbuilders’ earnings from the Korean won’s gains against the U.S. dollar and shield them from steel costs that have risen 70% since 2003. Shipyards now have the advantage over ship owners because their order books are filled for the next three years while global trade continues to expand. Available slots to build vessels for delivery in the first half of 2010 are expected to be filled by the end of the third quarter this year,

The price of steel, usually 18% of a vessel’s construction cost, rose dramatically last year although, according to Posco, the biggest supplier of the metal to South Korea’s shipyards, it fell by 4.6% in May this year to $644.60 a tonne. Dongkuk Steel Mill cut its prices by 21% in Apeil to $585. Despite these reductions, the Korean shipbuilders claim it’s still a burden since the pace at which steel price is falling is much slower than when it was raised. A 30% rise in the price of steel cuts shipyards’ operating profits by 4.5 percentage points on average.

The price of a VLCC rose 4% to about $125 million in December, the Korea Shipbuilders Association said, citing Clarkson Plc. The price of a vessel that can carry 3,500 TEUs increased 2.8% to $54 million from last year.

Shipyards are also trying to shield earnings from a stronger Korean won, which erodes the value of dollar-denominated ships when converted into the local currency. The won traded at an average of 964.29 per dollar this year, 5.3% more than last year’s average of 1,015.10 won.