South Korean shipbuilders face deterioration in their bottom line despite fattening order book due to jump in production costs.

Shipbuilders and their steel suppliers on Sunday agreed to raise the wholesale price of thick steel plates 6 millimeters wide or thicker by about 100,000 won ($78.46). The raise comes after a hike of 500,000 won last year to reflect higher raw material prices.

The price of steel plates for vessels doubled from 667,000 won in December of 2020 to 1.21 million won at the end of March this year.

Shipbuilders cannot translate higher production cost from spike in raw material value to finished vessel price after orders are signed. Thick steel plate takes up 20 percent of the manufacturing cost of a ship.

They had signed contracts for a huge fleet of liquefied natural gas (LNG) carriers in 2020 when vessel prices have been low. Korea Shipbuilding & Offshore Engineering (KSOE), Samsung Heavy Industries, and Daewoo Shipbuilding & Marine Engineering (DSME) are consigned to deliver more than 100 LNG carriers to Qatar. Production cost at the time had been sharply lower than now.

Russia’s aggression in Ukraine has added to their strains.

Korean shipbuilders cannot collect payment from Russia as major financial institutions have been kicked out of the SWIFT messaging network that financial institutions use for data transmission since the invasion.

DSME had to cancel a 337.9 billion won worth order for an icebreaker LNG carrier after its Russian client missed the payment deadline. Contracts KSOE, Samsung, and DSME have with Russian ship owners are estimated at around $8 billion.

Shortage of labor force also hardens Korean dockyards.

Korea Offshore & Shipbuilding Association project 9,500 workers would be short at local dockyards in September, which won’t be covered by the eased regulation for migration workers.

Korea’s shipbuilding majors are piling up bigger loss reserves against rainy days.

Their order backlog amounted to 88.96 trillion won at the end of March, doubled from 43.48 trillion won at the end of 2020. Debt set aside for loss coverage increased by greater 3.7 times from 907.4 billion won to 3.40 trillion won during the same period.

By Moon Gwang-min and Jenny Lee

[ⓒ Pulse by Maeil Business Newspaper & mk.co.kr, All rights reserved]