[Click eStock] Due to Steel Price Increase... Korea Shipbuilding & Offshore Engineering Posts 2Q Loss of 900 Billion Won 'Earnings Shock'

Poor Performance Due to Early Reflection of Steel Price Increase in Second Half
"Future Price Increase Is Key... Must Raise at Least 14.1%"

Sea trial of a 174,000 cubic meter-class LNG carrier built by Hyundai Heavy Industries. (Provided by Korea Shipbuilding & Offshore Engineering) [Image source=Yonhap News]

[Asia Economy Reporter Minwoo Lee] Korea Shipbuilding & Offshore Engineering recorded an 'earnings shock' in the second quarter of this year, falling short of expectations. This was due to the pre-reflection of steel price increases in the second half of the year. The extent of future price increases will be a key factor in the recovery of performance.

On the 22nd, KB Securities analyzed Korea Shipbuilding & Offshore Engineering's second-quarter performance accordingly. According to the Financial Supervisory Service's electronic disclosure system, Korea Shipbuilding & Offshore Engineering posted consolidated sales of 3.7973 trillion KRW and an operating loss of 897.3 billion KRW in the second quarter of this year. Compared to the same period last year, sales decreased by 3.3%, and operating profit turned positive. In particular, the scale of the operating loss was significantly below the market consensus of 191.3 billion KRW.

This is interpreted as the effect of a sharp increase in steel prices in the second half being reflected in the second-quarter results in the form of construction loss provisions. The steel price increase effect reflected in the shipbuilding division's second-quarter performance amounted to a total of 1.1031 trillion KRW, including 184.2 billion KRW in construction loss provisions for new orders and 916.2 billion KRW in expected steel price increase effects on existing order backlogs. Excluding this, the second-quarter operating profit was around 205.8 billion KRW.

KB Securities researcher Yudong Ahn explained, "POSCO is demanding shipbuilders to raise the price of steel plates in the second half to 1.15 million KRW per ton, about 60% higher than in the first half," adding, "Since most ships have fixed prices at the time of contract, any subsequent rise in raw material prices is borne by the shipbuilders."

Since the annual order target has been virtually achieved early, attention is focused on how much the future orders will exceed the target. Korea Shipbuilding & Offshore Engineering's new orders in the first half amounted to 12.79 billion USD (approximately 14.7661 trillion KRW) in shipbuilding, 1.2 billion USD in offshore plants, and 1.29 billion USD in engine machinery, totaling 15.3 billion USD. This is 91.4% of the initial business plan target of 16.75 billion USD. Due to strong new orders, the order backlog based on shipbuilding sales reached 25.14 billion USD at the end of last month, up 32.2% compared to the end of last year.

The key issue is the extent of price increases. For ultra-large crude carriers (VLCC), about 40,000 tons of steel are used. If the steel price rises by 400,000 KRW per ton, the cost burden increases by 16 billion KRW. Researcher Ahn stated, "To pass this on, ship prices in the second half must rise by more than 14.1%," explaining, "Considering that the recent new VLCC price is around 105 million USD, it must be at least 114.67 million USD to maintain current profitability, and to improve profitability, prices must rise even further."

Against this backdrop, KB Securities maintained its investment opinion of 'Buy' and a target price of 160,000 KRW for Korea Shipbuilding & Offshore Engineering. The closing price the previous day was 128,000 KRW.

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