Worrying first-quarter earnings at South Korean shipyards indicate they are struggling to cope with the recent doubling of steel and other major shipbuilding costs. The three leading yards reported big losses for the first three months. Daewoo Shipbuilding & Marine Engineering registered a net loss of KRW 498.1bn ($393m), Hyundai Heavy Industries KRW 396bn and Samsung Heavy Industries KRW 103.9bn. SHI and HHI have said they do not expect a turnaround in fortunes in 2022.

DSME said that despite the losses, the dramatic rise in shipbuilding prices this year will be positive for its future earnings. The yard pointed out that in its main business in the LNG carrier market, which it expects to account for 33% of its order intake this year, prices have increased to $224m from less than $200m last year. Similarly, the cost of 23,000-teu container ships, which will account for 25% of its sales this year, has broken the $200m barrier compared with a price of less than $150m last year. But the problem for the yards is making cost margins on orders priced and received over the previous two years, given the recent rises in steel, material, and labor costs. Further price increases of about 8% this year could mean yards will be paying up to $1,200 per tonne for steel plate compared with $500 per tonne in 2020. One yard source estimated that shipyards could run up losses amounting to as much as 20% of the contract price on an aframax tanker ordered in 2020 and delivered this year. Contractually, it is also difficult for the yards to renegotiate the price of orders won in previous years to reflect the current high-cost base.

The expectation among analysts is that the South Korean shipbuilders will continue to rack up losses over the next three quarters until the higher vessel price levels start to affect earnings more positively. DSME said that by focusing its production largely on gas carriers, tankers, and container ships, it could cut costs. “Simplifying the product line and the repetition of construction methods will maximize profitability,” it added. The yards are also seeing healthy contracting levels for dual-fuel and other eco-friendly ships at higher prices, although some analysts question how long this will continue, given the global economic uncertainty caused by the Ukraine conflict. DSME has already secured $4.61bn of new orders this year, more than half its annual target; HHI has $5.2bn of orders, or about 46.5% of its annual goal; while SHI has won $2.2bn in the first quarter.