South Korean shipbuilders grappling with dwindling orders may see a flurry of new ship orders from shipowners later this year thanks to the strengthening Korean currency against the U.S. dollar that could hasten their ship purchase before Korean won-based vessel prices rise further.
According to multiple sources from the shipbuilding industry on Thursday, Korean shipbuilders are likely to benefit from the recent favorable foreign exchange rate trend with the Korean won value strengthening against the U.S. dollar.
In general, Korean shipbuilders and their foreign clients negotiate vessel contracts based on Korean won-denominated vessel prices. Because of this, the stronger won, the higher ship prices. Therefore, foreign shipping companies tend to place ship orders before won-based vessel prices hike further from the strengthening won.
The Korean won value weakened to 1,280 won per U.S. dollar in March due to high risk aversion during the Covid-19 peak. The won-dollar exchange rate remained stable, hovering 1,200 won per U.S. dollar until July on the back of large-scale stimulus by the U.S. Federal Reserve and other countries. But since last month the won’s strengthening against the greenback has accelerated, reaching 1,150 won per dollar. On Thursday, the Korean won closed at 1,155 won per U.S. dollar.
Industry sources expected the latest won-dollar rate trend would prompt new ship orders from foreign shipping companies. In fact, local shipbuilders have recently started to a jump in new ship orders since late last month.
On Sept. 30, Hyundai Mipo Dockyard signed an 89.2 billion won deal with an African ship owner to build two liquefied petroleum gas (LPG) carriers. The shipbuilder plans to deliver the vessels by September 2022.
Last month, Korea Shipbuilding & Offshore Engineering Co. also clinched a deal with a European shipping company to build four very large crude oil carriers. Samsung Heavy Industries also won a contract to build two S-Max tankers.
Park Moo-hyun, an analyst at Hana Financial Investment, said it is generally the case that Korean shipbuilders see a rise in the number of orders on a strong won, and the recent won-dollar rate trend seems to have led ship owners to bring forward their original ship purchase plans.
Korean shipbuilders are also hoping to win additional orders later this year in the favorable foreign exchange rate environment as some of the world’s biggest shipowners are lining up to join Russia and Mozambique projects that require many liquefied natural gas (LNG) carriers.
According to U.K.-based industry tracker Clarkson Research Services, the global order backlog stood at 68.06 million CGTs as of the end of September, the lowest since the end of December 2003 at 65.98 million CGT. The dwindling orders are due to an overall drop in global cargo volume amid the protracted trade conflict between the world’s two-biggest economies the United States and China as well as the prolonging pandemic that has restricted business activities across the globe.
By country, China had the largest order backlog of 24.65 million CGTs, accounting for 36 percent of the total, followed by Korea with 18.42 million CGTs (27 percent), and Japan with 9.05 million CGTs (13 percent).