The exchange rate of the Korean won against the U.S. dollar is soaring in the 1400 won range, leading major shipbuilders to forecast operating profits that exceed expectations in the fourth quarter of last year (October-December). If the won exchange rate rises (the value of the won decreases) from the time of order to the time of delivery for a shipbuilding contract, they can gain foreign exchange profits.
According to the shipbuilding industry and the Bank of Korea on the 17th, the average exchange rate of the won against the dollar in the fourth quarter of last year was recorded at 1398.75 won. It fluctuated from an average of 1329.40 won in the first quarter of last year to 1371.24 won in the second quarter, then 1358.35 won in the third quarter, before skyrocketing in the fourth quarter. Following the election of former U.S. President Donald Trump and due to the domestic state of emergency and impeachment crisis, the won exchange rate nearly soared to 1500 won last month. The high exchange rate in the 1400 won range is the fourth occurrence after the 1997 International Monetary Fund (IMF) currency crisis, the 2008 global financial crisis, and the 2022 shock from high interest rates in the U.S.
For shipbuilders that sign contracts in dollars, a rise in the won exchange rate acts as a boon to their performance. When the exchange rate rises at the time of delivery after a contract for a ship is signed, the amount received in won from the remaining payment after the advance payment is made increases. Thanks to the strong dollar, the burden of raw material payments also decreases, thereby enhancing profitability. Additionally, as the ship new building price increases in won, the contract amount in won also rises, leading to improved profits.
HD Hyundai Heavy Industries primarily secured major ships delivered last year between May 2021 and January 2022. According to MERITZ Securities, the average exchange rate in the fourth quarter of last year was 15.9% to 24.6% higher than the average exchange rate of 1100 to 1200 won from the second quarter of 2021 to the first quarter of 2022.
Bae Gi-yeon, an analyst at MERITZ Securities, estimated that "the exposure to the exchange rate for HD Hyundai Heavy Industries, HD Hyundai Mipo, and HD Hyundai Samho is estimated at 15-20%, and their operating profits are expected to exceed the consensus (average forecast) by 14.9%, 47.0%, and 12.6%, respectively (based on HD Korea Shipbuilding & Offshore Engineering, which reflects the results of HD Hyundai Samho)."
Hanwha Ocean is mentioned as the shipbuilder that will most effectively benefit from the high exchange rate. Hanwha Ocean is estimated to have turned to profit with sales of 2.95 trillion won and operating profit of 115.4 billion won in the fourth quarter of last year compared to the fourth quarter of 2023. Korea Investment & Securities estimated the increase in Hanwha Ocean's operating profit due to the 45 won rise in the average exchange rate in the fourth quarter compared to the third quarter of last year to be at least 33.4 billion won. Samsung Heavy Industries, on the other hand, hedges its total order amount, making it nearly unaffected by the impact of exchange rate fluctuations on performance.
An industry insider noted, "Hanwha Ocean was lagging behind the HD Hyundai group in profitability, but the impact of the high exchange rate is expected to narrow that gap."
The shipbuilding industry views that the strong performance of shipbuilders is not only due to exchange rate effects but also results from the boom in the shipbuilding industry and the anticipated increase in orders for liquefied natural gas (LNG) carriers.