Korea Shipbuilding & Offshore Engineering Vice Chairman Ka Sam-hyun, left, and then Trade, Industry and Energy Minister Sung Yun-mo hold up a construction capacity reservation agreement signed between three Korean shipyards and QatarEnergy at a ceremony in Seoul in this June 2020 file photo. Yonhap

Korean shipbuilders struggle to avoid deterioration in profits

By Park Jae-hyuk

QatarEnergy's previous order for around 100 liquefied natural gas (LNG) carriers collectively worth $19.2 billion ― which had once been regarded as a great win ― has become a major headache for Hyundai Heavy Industries (HHI), Daewoo Shipbuilding & Marine Engineering (DSME) and Samsung Heavy Industries, according to market analysts, Monday.


The top three Korean shipbuilders are facing growing concerns over the profitability of the orders, as Qatar's state-owned petroleum company has asked them to sell the tanker ships for around $180 million each in accordance with their deeds of agreement signed in 2020, even though soaring global raw material prices have increased the price of one LNG carrier up to $230 million.

Given that domestic steelmakers are set to raise the price of steel plates sharply again during the first half of this year, analysts expect the local shipbuilders to face difficulties in recovering their accumulated losses, if they agree to the Qatar company's price demand.

"Their profitability will be worsened, although they may not suffer losses this year," Daishin Securities analyst Lee Dong-heon said.

The analyst anticipated that the shipbuilders will not be able to sell their ships at the adjusted market price.

"Both buyer and shipbuilders will make compromises during the ongoing negotiations," he said. "The final contracts will be signed in the near future."

In the shipbuilding industry, buyers usually tend to accept requests from shipbuilders to raise contract prices, in the event of a significant rise in construction costs.

QatarEnergy, however, is said to have taken action to block the Korean shipbuilders from raising their prices, taking advantage of a recession in the shipbuilding industry at the time when they signed the confidential agreement.

Although Korea's Trade, Industry and Energy Minister Moon Sung-wook sent a letter recently to the Qatari government asking it to try to resolve the price squabbles, the Middle Eastern country's state-run enterprise has postponed signing the final contracts with the Korean shipbuilders, according to foreign news outlets.

"We are in talks with the buyer, as ship prices have soared since QatarEnergy reserved the slots of Korean shipyards," a DSME spokesman said. "From the viewpoint of the shipbuilders, it is burdensome to sell their ships at the price of two years ago."

The spokesman added that the deal's profitability depends on how many ships the company will ultimately order.

A spokesman from Korea Shipbuilding & Offshore Engineering (KSOE), the parent firm of HHI, said that his company is making every effort to reach an agreement with the buyer, although he remained cautious in mentioning details about the confidential agreement.

KSOE also dismissed concerns of a deterioration in profit during a conference call last Thursday on its first-quarter performance, emphasizing that a short-term situation cannot determine the profitability of the long-term project.

"We can overcome this difficulty by coming up with countermeasures for each situation," a KSOE official said.