STX Offshore to Hedge 70% of Client Payments, Demand for LNG on the Rise [INTERVIEW]

SEOUL (Dow Jones)–STX Offshore & Shipbuilding Co. (067250.SE) expects the dollar to average KRW1,100 this year and will continue to hedge 70% of the dollar-denominated income it receives as payment from overseas clients primarily through forward dollar sales and some currency swaps, an official said.

The shipbuilder will use the remaining unhedged 30% of its overseas income to buy equipment and materials such as vessel engines and shipbuilding plates that are typically priced in the greenback, Lee Bum-soo, director of STX Offshore’s foreign exchange management team, told Dow Jones Newswires in an interview.

The Jinhae, South Korea-based shipyard receives most of its revenue from overseas orders in U.S. dollars, although a small portion of the payments consist of other currencies such as the euro or the won. But these are of marginal significance, Lee said, and the company’s overall hedging strategy is based on most payments being made in dollars.

“The dollar-won exchange rate is likely to show a moderate downward bias towards the end of the year but it will likely to remain volatile depending on new developments involving the euro-zone debt crisis,” Lee said. STX Offshore has based its plans on expectations that the dollar will be at KRW1,100, unchanged from the past two years.

The dollar averaged KRW1,153.30 in 2011, while it traded at KRW1,129.00 on Thursday.

STX Offshore set its global order target at $15 billion this year, sharply up from last year when actual orders totaled $8.2 billion. It expects liquefied natural gas carriers and offshore facilities to account for a large portion of the orders this year as oil prices surge.

In its recent report, Norway’s Pareto Securities forecast there will be 40 orders for LNG ships each year through 2020. Demand for LNG is on the rise in the wake of stricter regulations on environment pollution and the nuclear power plant incident caused by the earthquake and tsunami in Japan last year.

As of Feb 24, STX has an accumulated order backlog of $23.4 billion, or 277 ships, which will keep its shipyards in South Korea, China and Europe busy for the next three years.

So far this year, the company has received orders valued at $900 million globally, or 3.8% of the annual order target. In major contracts, it will build two LNG ships worth $400 million for Russia’s Sovcomflot by early 2015 and six product carriers valued at $210 million for Europe-based John Fredriksen by the end of 2013. The ships will be built in the Jinhae yard.

“We have not received the initial payments for the two separate orders from the clients (Sovcomflot and John Fredriksen) but we expect they will make a down payment soon,” Lee said, without disclosing the remaining payment schedules for the contracts.

He said as overseas customers still suffer from financing problems due to the euro-zone debt crisis, they prefer to make a bigger payment at a later stage in a “heavy tail” deal. “It is a buyer’s market though we expect the number of heavy-tail contracts to decrease if the Europe debt crisis eases.”

The company’s competitiveness stems from the fact that it manufactures ships at locations around the world, unlike its local rivals, which mostly have facilities in Korea.

The world’s fourth-largest shipbuilder by order backlog makes small- and medium-sized commercial ships in its shipyard in Dalian in China, high-end large ships in Jinhae, and luxury cruise ships and offshore support vessels in Europe.

-By Kyong-Ae Choi, Dow Jones Newswires