Daewoo Shipbuilding: High Material Costs May Weigh On 2011 Profitability

SEOUL (Dow Jones)–Daewoo Shipbuilding & Marine Engineering Co. (042660.SE) said high raw material costs may weigh on its profitability this year due to potential supply constraints following the March 11 earthquake and tsunami in Japan.

“As shipbuilding plates account for 13%-14% of our manufacturing costs, an increase in material costs will be the biggest burden to operating profit (this year),” Daewoo Shipbuilding’s senior executive vice president Kim You-hun told Dow Jones Newswires in a recent interview.

Kim said the world’s second-largest shipbuilder by order value will “have no option but to raise the prices of new ships” to pass on high materials prices to clients. But he didn’t provide a specific timetable for the price revision.

To meet the possible shortfall, domestic steel makers such as Posco (005490.SE) are increasing production at the request of shipbuilders. A significant proportion of the steel needed by Korean shipbuilders is sourced from Japan.

Analysts say shipbuilders will inevitably raise prices for new vessels given the high prices for heavy plates and a strong won, which brings less income when U.S.-dollar payments to shipbuilders are converted.

Daewoo Shipbuilding has set an operating profit target of KRW1 trillion ($916 million) for this year on sales of KRW12 trillion.

Despite the pressure from material costs, the company can still meet its profit target due to strong demand for high-end offshore facilities, such as drill ships and liquefied natural gas-floating production storage & offloading units, said Kim who also serves as chief financial officer.

Last month, shipbuilders asked Posco, South Korea’s top steel maker, to produce an extra 200,000-300,000 metric tons of shipbuilding plates, or heavy thick plates, as a hedge against a possible shortage from Japan.

Daewoo Shipbuilding has sufficient inventories to meet the production needs of its Geoje-based shipyard for up to two months. “We expect no impact on production due to the earthquake for now,” said Kim.

On the broader outlook, Kim said the shipbuilding industry hasn’t bottomed out yet and is still in the recovery phase.

“Container carriers will take the lead in the recovery of the commercial ships market, while we expect very strong demand in offshore facilities this year,” said the executive.

Daewoo Shipbuilding is aiming to clinch an order from A.P. Moeller-Maersk AS (MAERSK-B.KO) to build 10 additional container ships in the first half of the year. In February, the company secured a KRW2 trillion contract to deliver 10 container carriers by 2014 to the Danish company, with an option for an additional 20 vessels worth KRW4 trillion.

As part of its diversification process, Daewoo Shipbuilding is targeting to grow its very large container ship business to become a major segment alongside LNG carriers and oil-exploring offshore facilities.

The shipbuilder has received new orders totaling $3.4 billion as of Tuesday, or 31% of the $11 billion target this year.

-By Kyong-Ae Choi, Dow Jones Newswires