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Hyundai Merchant Marine Expresses Concern with Soaring Bunker Fuel Prices

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February 28, 2012

SEOUL (Dow Jones)–Hyundai Merchant Marine Co. (011220.SE), South Korea’s second-largest shipping firm by sales, expects the U.S. dollar to weaken against the Korean won toward the end of the year but doesn’t see any major impact on the balance sheet from the won’s strength, a company official said Monday.

If the won strengthens against the dollar towards the end of the year, it may eat away at the bottom line as the won’s strength increases operating costs such as won-denominated wages for Korean employees.

“But the portion is so small for a company (Hyundai Merchant) where most of income and spending are being paid in dollars that the won’s strength won’t deal a blow to the bottom line,” Cho Sung-min, deputy general manager of the company’s strategy development team, told Dow Jones Newswires in an interview.

The company adopted the dollar as functional currency in 2008 and more than 95% of its income is dollar denominated.

As for currencies excluding the dollar and the won, it will hedge swings from the currencies through “income-expense management” and forward contracts.

“To deal with 90% of volatility in non-dollar currencies such as the euro and the yuan, we are matching income and expenses in a natural hedge,” Cho said. “The remaining 10% is being hedged through forward contracts.”

The company, which drew up business plans based on KRW1,050 against the dollar and bunker-C oil of $530 per metric ton last year, didn’t provide the corresponding figures for the year.

On Monday, the dollar was at KRW1,129.10 and bunker-C oil traded at $742.5 a ton in the Singapore market.

As the company expects soaring bunker fuel prices to be one of the biggest concerns this year, “it will continue to hedge a portion of bunker fuel purchases” by buying the fuel in cheaper markets such as Singapore and Rotterdam, he said. To cope with the sharp rise in fuel costs, it will continue to adopt slow-steaming to cut fuel costs by 15%-20%, he added.

In 2012, Hyundai Merchant is considering buying second-hand bulk ships at cheaper prices to prepare for a high-demand season. But the company doesn’t have a plan to place an order for a new vessel even though it has budgeted KRW369.4 billion for vessel purchases.

Shipping companies predict slow speeding will ease an increase in vessel supply and more scrappage due to slow market and high bunker price this year.

Hyundai Merchant hopes a general rate increase, or GRI, planned after March on U.S. and European routes will help improve profitability after it hits bottom in the first quarter, said Cho.

For the whole of 2012, Hyundai Merchant aims to turn around by achieving an operating profit of KRW130.8 billion on sales of KRW7.765 trillion. On a non-consolidated basis, the company posted an operating loss of KRW367 billion last year from an operating profit of KRW598 billion a year earlier. Sales fell 9.9% from a year earlier to KRW7.188 trillion.

It earns 65%-70% of its overall revenue from its container business, with the remainder from its non-container operations including its bulk business.

-By Kyong-Ae Choi, Dow Jones Newswires

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