Shipyards in Asia, especially Japan, are struggling to get their heads around the extreme appreciation of the US dollar.
In the last 12 months, the Japanese yen has depreciated by nearly 30% against the dollar. To put this another way, a ship paid for in yen is 30% cheaper for a dollar buyer than it was a year ago..
The yen is now at its lowest level since the Asian financial crisis with the central bank deciding last week to intervene and to begin selling dollars for the first time since the late 1990s.
“The incentive to talk to Japanese yards is clear,” commented Mark Williams, the founder of UK consultancy Shipping Strategy.
Meanwhile the Korean won has fallen 20% against the greenback over the last 12 months, breaching 1,400 to the dollar for the first time since the global financial crisis of 2008.
South Korea’s finance minister, Choo Kyung-ho, said last week that the central bank would seek to stabilise short term volatility in the currency. This presents a problem for Korean shipbuilders, who tend to quote in dollars. They do not enjoy the same forex benefit as their Japanese competitors, though they have suffered similar levels of input cost inflation in 2022.
The Koreans must also compete with the Chinese, whose central bank allows the currency to trade within only a limited band against the dollar. Even so the renminbi has breached the 7:1 level against the dollar this month, a level reached last in February 2020 as the pandemic spread worldwide. Before then, the renminbi was last this cheap back at the time of the global financial crisis of 2008.
Looking at the currency concerns for the world’s top three shipbuilding nations, Williams from Shipping Strategy told Splash: “Japanese shipyards might enjoy their weak yen benefit, but more than half their orders are for domestic buyers now, so the benefit is limited. Korean shipyards have forex hedging in place. Chinese yards benefit from a relatively stable and definitely under-priced currency, supporting exports.”
Thomas Bracewell, who heads up newbuilding research at brokers Arrow Group, said the weaker Asian currencies would support builders’ bottom lines for vessels under construction. However for new contracts yards need to price in the risk of their own currency appreciating against the dollar through to delivery.
“This risk is quite significant and indeed somewhat expected to happen over the coming years as one would hope the global politico-economic situation normalises,” Bracewell said.
It’s probably very difficult to quote any price right now as there is so much uncertainty about costs
Bracewell also pointed out that the Japanese have majority yen-based costs, so managing currency volatility is critical. Korean and Chinese builders have greater dollar cost bases. For example, Korean builders’ steel purchase contracts are almost all dollar contracts.
“It’s probably very difficult to quote any price right now as there is so much uncertainty about costs in the near future,” commented Ralph Leszczynski, global head of research at Banchero Costa, citing global inflation, and rising energy and workforce outlays, which yards are having to contend with. The one bonus for yards, Leszczynski said, is in the form of declining steel plate prices, which are now down by 25% year-on-year.