South Korea's big three shipbuilders on track for record 10 trillion won profit

Combined operating profit forecast nears 9 trillion won this year

Order backlog tops 150 trillion won

High-value vessel orders from past 2-3 years now flowing into earnings

Premium ship orders continue this year

China's growing presence poses threat

SMR-powered vessels among new developments to stay competitive

A 174,000-cubic-meter LNG carrier built and delivered by Hyundai Heavy Industries [HD Korea Shipbuilding & Offshore Engineering]

South Korea's three major shipbuilders — HD Korea Shipbuilding & Offshore Engineering, Hanwha Ocean and Samsung Heavy Industries — are on course to post a combined operating profit of 9 trillion won ($5.79 billion) this year, which would be a first in history. Earnings have surged as high-value vessel orders secured over the past two to three years begin flowing through to results. With an existing order backlog already exceeding 150 trillion won, analysts say the trio could break the 10 trillion won mark in the near future.

Industry data show the three companies' combined operating profit forecast for this year stands at 8.97 trillion won, up 51.2 percent from 5.93 trillion won last year. It would be the first time South Korean shipbuilders have come close to posting annual combined operating profit of 9 trillion won.

HD Korea Shipbuilding & Offshore Engineering is forecast to post annual operating profit of 5.64 trillion won, up 44.5 percent from 3.9 trillion won last year. Hanwha Ocean and Samsung Heavy Industries are expected to see their operating profits rise 56 percent and 74.9 percent year-on-year to 1.82 trillion won and 1.51 trillion won, respectively.

The record earnings reflect an aggressive ordering push over the past two to three years, with a selective strategy focused on high-value vessels boosting profitability. A high exchange rate environment has also contributed, as most domestic shipbuilders sign contracts in US dollars, meaning a weaker won directly lifts earnings.

Some analysts believe the three companies could reach 10 trillion won in combined operating profit in the near term, pointing to a continued focus on premium vessel orders this year. The shipbuilders have in particular secured a large volume of crude oil carrier orders, demand for which surged following the outbreak of a Middle East war in late February.

An LNG carrier built by Hanwha Ocean [Hanwha Ocean]

HD Korea Shipbuilding & Offshore Engineering has already secured orders for 133 vessels worth $15.72 billion this year, including 17 LNG carriers, 11 crude oil tankers and 33 petrochemical product carriers. Hanwha Ocean has won orders for 15 very large crude carriers and six LNG carriers. Samsung Heavy Industries last month signed a contract for the first-ever floating liquefied natural gas production facility project in US history, worth $2.9 billion, and has also booked orders for 13 LNG carriers and eight crude oil tankers, among others.

The steady stream of new orders means the pipeline of work yet to be reflected in earnings is overflowing. As of the end of March, the combined order backlog held by the three shipbuilders exceeded 150 trillion won.

Despite the impressive growth, China's rising profile in the global market remains a serious concern. Chinese yards are challenging South Korea on price competitiveness. According to Clarkson Research, a British shipbuilding and shipping analytics firm, China held a 68 percent share of the global new-order market on a cumulative basis through May, leading the field, while South Korea trailed at 21 percent.

An aerial view of Samsung Heavy Industries' shipyard in Geoje [Samsung Heavy Industries]

China is also making inroads into the LNG carrier segment, where South Korea has long held a commanding lead. Foreign media reports indicate Chinese yards captured more than 40 percent of LNG carrier orders in the first half of this year. China has also begun construction of a 271,000-cubic-meter LNG carrier, which would be the largest of its kind in the world.

South Korean shipbuilders plan to respond by doubling down on the development of high-value vessels that China has yet to bring to market, aiming to maintain their lead in the most technically demanding segments.

HD Korea Shipbuilding & Offshore Engineering is developing vessels powered by small modular reactors. Early last month, it received approval in principle from Lloyd's Register for the concept design of a large car carrier equipped with a molten salt reactor, one type of SMR. Hanwha Ocean and Samsung Heavy Industries, meanwhile, are accelerating the commercialization of ammonia-fueled vessels.

yeongdai@heraldcorp.com