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Monday, July 16, 2018

POINTS OF VIEW - Weakening dollar threatens to erode shipbuilders’ profits

The weakening of the US dollar this autumn against Japan’s yen is worrying Japan’s shipbuilders as dollar equivalent ship prices increase 10% at the same time as they contemplate upward pressure on steel prices.

From a relatively steady Yen120/US$, the exchange rate started slipping downwards end August until earlier this month when it went below Yen110/US$ for the first time in almost three years. In practice this means that a Yen5bn ship cost US$41.7m in August but costs US$45.9 today.

Few Japanese shipbuilders have made forward exchange contracts to cover the rest of the current fiscal year, according to sources familiar with the industry. That leaves many yards still to make exchange deals to cover ships due for completion in the second half of the fiscal year. They are concerned that the stronger yen could erode a substantial part of their second half profit.

While many of Japan’s shipbuilders have an orderbook stretching forward three years and are marketing berths with delivery in 2007 and later, enquiry is strong on the back of buoyant dry bulk spot rates and volatile tanker spot rates. However, many shipbuilders are going slow on taking new orders. Some who were keen on filling berths with 2008 deliveries are now having second thoughts, accepting orders only if the price covers increased steel costs and the yen’s appreciation.

With Japan’s shipbuilders mindful of their experiences when the yen appreciated to record levels in the 1990s causing serious damage to their industry, yen-denominated contracts may be back in vogue.

The South Koreans are facing a similar situation. From Won1250/US$ this March, exchange rates slipped down past 1200 in May and 1150 at end September. This means that a Won52bn newbuilding which cost US$41.6m in March costs US$45.2m today.

Both Japan and South Korea might do well to keep an eye on China’s expanding shipbuilding industry. China’s Yuan Renminbi has so far remained at a steady CYR8.28/US$ all year.

However the exchange rate problem could get worse. Standard & Poor said recently that the US dollar has been overvalued for five years and that it anticipates a period of undervaluation. It expects the US dollar to fall to Yen90/US$, with the US need for foreign capital highlighted as the main reason. At that level, the Yen5bn/Won52bn newbuildings that cost US$45-46m today would cost over US$55m. Where does that leave the Japanese and South Korean shipbuilders?