Steel-Shipbuilding, Struggle Over 'Thick Plate Prices'

Steel "Need to Raise Plate Prices Due to Soaring Iron Ore Costs"
Shipbuilding "Order Cliff from COVID-19, No Demand Makes Price Increase Impossible"

[Image source=Yonhap News]

[Asia Economy Reporter Hwang Yoon-joo] A prolonged tug-of-war continues between the steel industry and the shipbuilding industry over the prices of shipbuilding thick plates. The steel industry insists that the prices of thick plates, which were lowered last year, cannot cover the sharply rising raw material costs, and that prices must be raised in the second half of the year. On the other hand, the shipbuilding industry appeals that it would be difficult to endure if product prices rise amid the order cliff crisis caused by the COVID-19 pandemic.

According to the steel and shipbuilding industries on the 3rd, negotiations on thick plate prices for the second half of the year are underway. Thick plates, mainly used in shipbuilding, undergo price negotiations twice a year. The industry started price negotiations for the second half of this year at the end of May but has yet to reach a conclusion. This is because both sides are firmly opposed to each other’s positions.

Both POSCO and Hyundai Steel are determined to raise product prices this year. Both companies are producing at a loss, and there is a sense of crisis as the recent sharp rise in iron ore prices has increased the deficit.

Last week, iron ore prices reached up to $104 per ton, a 29% surge since May. This was due to the production halt caused by 200 mine workers at Vale, a Brazilian iron ore producer accounting for about 20% of global iron ore production, testing positive for COVID-19. Raw material costs, which had risen to $60?80 per ton in the first quarter, have increased by more than 30% at the very least.

Shipbuilding thick plates account for about 30% of the product group. Considering costs, a price increase of 80,000 KRW per ton is reasonable, but it is known that an increase of 30,000 to 50,000 KRW is being considered. A steel industry official said, "We have frozen prices for several years in the spirit of coexistence with the shipbuilding industry facing an order cliff, but it is now difficult to endure any longer," adding, "We expect the second-quarter performance to be quite challenging."

On the other hand, the shipbuilding industry argues that there is no demand for thick plates due to the impact of COVID-19. Orders from Qatar have not been formally contracted, and under the heavy-tail contract method, 80% of the payment is received upon delivery of the ship. Besides this, orders for offshore plants and others have sharply declined.

Hyundai Heavy Industries merged its shipbuilding and offshore divisions as of the 1st, effectively entering restructuring. Through this, it plans to reduce 20% of all departments. Daewoo Shipbuilding & Marine Engineering has been under the management of KDB Industrial Bank since 2016, and Samsung Heavy Industries recorded an operating loss of 47.8 billion KRW in the first quarter of this year. Large shipping companies are in a relatively better situation. Hanjin Heavy Industries and STX Offshore & Shipbuilding are accepting voluntary retirement applications from all employees.

The shipbuilding industry’s reluctance to accept thick plate price hikes can be summarized in two reasons. The direct reason is the order cliff crisis caused by COVID-19. Coupled with the sharp drop in international oil prices, the offshore plant sector is facing an order cliff. Hyundai Heavy Industries has secured only one order since 2015, and Samsung Heavy Industries did not secure any orders in the first quarter of this year.

The second reason is the judgment that it could negatively affect the large-scale ship orders scheduled in the future. The shipbuilding industry is counting on the formal contracts for ship orders from Qatar and Mozambique this year and orders from Russia as an escape route. An industry insider said, "The biggest factors affecting shipbuilders’ performance are exchange rates and thick plate prices," adding, "With orders cut off due to COVID-19, if thick plate prices also rise, it will be disadvantageous for signing MOUs and will weaken our negotiation position in upcoming order battles."

Another shipbuilding industry official said, "Due to COVID-19, there is no demand for shipbuilding, making it difficult to raise product prices," and added, "While we understand the steel industry’s difficulties due to their performance, the shipbuilding industry is in an even tougher situation, so thick plate prices are expected to remain frozen in the second half of this year."

This content was produced with the assistance of AI translation services.