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Thursday, September 20, 2018

Currency impact on shipbuilding

The weakening of the dollar is causing problems for the world, in particular Asia, including shipbuilders in Japan and South Korea. However, the situation has developed quite differently in each of these countries because their currencies have developed differently relative to the USD.

In fact it appears that South Korea wants the Won to depreciate against the Japanese Yen, ending the unofficial link between the two currencies. This would help South Korea's exports and give a boost to the country's economy. Comments to this effect from Kim Jin-pyo, Finance Minister of South Korea, were made as the Won closed earlier this week at its lowest level against the Yen for nearly two years, suggesting that the two currencies are diverging, according to an article in the Financial Times.

 

 

Exchange rate end month

VLCC price

Period

Won/ USD

Yen/USD

Million USD

Million Yen

Million Won

Dec-91

764

126

110

13,860

84,018

Oct-95

765

102

84

8,589

64,294

Oct-96

828

114

83

9,432

68,724

Oct-97

964

120

84

10,097

81,001

Feb-98

1630

129

80

10,320

130,400

Oct-98

1321

137

73

10,001

96,433

Oct-99

1200

124

70

8,695

84,000

Feb-00

1130

110

70

7,688

79,100

Oct-00

1140

109

76.5

8,338

87,210

May-01

1290

120

76.5

9,211

98,685

Oct-01

1298

122

73

8,905

94,783

Oct-02

1235

123

62.5

7,684

77,156

Oct-03

1185

110

67.5

7,397

80,008

The table shows the exchange rates of the Won and Yen to the USD and the VLCC price in USD and converted to Yen and Won. Besides showing the price development in the period from October 1995 to October 2003, the table also includes some months which were turning points. (For details of the full time series showing development of the relationship between the USD, Won and Yen, please contact Erik Ranheim.)

The table shows that at the beginning of the Asian crisis in October 1997 the VLCC price stood at USD 84 million, YEN10 billion and Won 81 billion, compared to the current price of USD 67.5 million, YEN 7.4 billion and Won 80 billion. One year earlier the prices were just over 1.2% lower in USD, 6.6% lower in yen and 15.2% lower in Won.

This shows that South Korea has increased the price level compared to the pre-Asian crisis level, whereas prices in USD and Won have fallen. The development can be better viewed by converting the prices into indices with October 1997 as the base or zero level (see graph above).

It is today said that shipyards are fully booked until 2007. This only means, however, that the yards are operating at full short-term capacity. With higher sustainable prices, yards in Japan in particular will probably be able to increase the building of large tankers considerably. However, taking on and training extra manpower will take some time and yards will only do that if they see a sustainable price increase.