Bloomberg News

Hyundai Heavy Gains as Surging Yen Squeezes Japan Yards: Freight

May 15, 2012

A 1600 ton crane, right, stands at the Hyundai Heavy Industries Co. shipyard in Ulsan, South Korea. Photographer: SeongJoon Cho/Bloomberg

A 1600 ton crane, right, stands at the Hyundai Heavy Industries Co. shipyard in Ulsan, South Korea. Photographer: SeongJoon Cho/Bloomberg

With the Japanese yen up 50 percent against the dollar in five years, shipbuilder Tsuneishi Holdings Inc. says the nation’s shipyards may find it impossible to make money as South Korean and Chinese rivals increase market share.

“Given the yen’s current level, a situation could occur in which no domestic shipyards can make a profit,” Chairman Yasuharu Fushimi said in an interview last month near Tsuneishi’s office in Hiroshima, Japan.

For Tsuneishi, Japan’s second-largest shipbuilder, the solution is to move most production to the Philippines and China, where wages are also lower. Others may have to follow to escape a yen whose increase has outpaced all other currencies against the dollar. A smaller 22 percent rise in the yuan and a 20 percent slide in the won have buoyed Chinese and South Korean shipbuilding.

South Korean shipyards received $50.8 billion of contracts last year and those in China garnered $21.1 billion, compared with just $6.1 billion in Japan, according to Clarkson Plc, the world’s biggest shipbroker. Cost competitiveness is one reason why shares in South Korean shipbuilders such as Hyundai Heavy Industries Co. (009540), Samsung Heavy Industries Co. (010140) and Daewoo Shipbuilding & Marine Engineering Co. (042660) are worth buying, according to Seoul-based Tong Yang Securities Inc.

The pain extends beyond shipyards, hurting exporters such as Honda Motor Co. (7267) and Sony Corp. (6758) that helped spur Japan’s development following the end of World War II. The currency’s jump is adding to the nation’s struggle to escape a legacy of deflation and depressed growth after asset bubbles burst in the early 1990s. Lawmakers this year have intensified pressure on the Bank of Japan to increase the supply of yen to weaken it.

‘Exceptional’ Won Slide

“Most Asian currencies have depreciated against the yen, but the Korean won is exceptional because it has depreciated so much more,” said Robert Feldman, head of Japan economic research at Morgan Stanley in Tokyo and former International Monetary Fund economist. “Japan basically has to work on two fronts: to improve the productivity of the economy as a whole and to correct this misalignment of nominal exchange rates.”

The won is down 47 percent against the yen in the past five years.

Japanese yards make an average 15 percent loss on each ship built, while Korean companies earn a 5 percent profit, Lee Jae Won, an analyst at Tong Yang, said last week.

He predicted Ulsan, South Korea-based Hyundai Heavy’s share price will jump 61 percent to 430,000 won in the next 12 months, with stock in Samsung Heavy, which is based in Seoul, rising 27 percent to 48,000 won. Daewoo Shipbuilding, headquartered in Seoul, will advance to 38,000 won, he said.

Overseas Allure

The global market share of Japanese shipyards has almost halved to 14.5 percent since 2005 as measured by new orders, according to data compiled by the Shipbuilders’ Association of Japan. Japan lost its title as the biggest shipbuilder to South Korea in 2000 and fell behind China into third place in 2009.

Closely held Tsuneishi Holdings has responded by shifting about two-thirds of shipbuilding volume abroad, with yards in the Philippines’ Cebu province and in Zhoushan, Zhejiang Province, on China’s east coast.

The company, which plans a third overseas site, is the sole Japanese yard manufacturing ships abroad on its own, the Shipbuilders’ Association of Japan said.

“It’s going to be difficult for companies to only build ships domestically if the yen remains strong,” said Masaya Sudo, section chief at the Shipbuilding and Ship Machinery Division of the Maritime Bureau in Japan’s transport ministry. “There should be more consolidation in the industry to prevent a situation where work stops coming in.”

Industry Consolidation

That’s a strategy embraced by IHI Marine United Inc., a unit of IHI Corp. (7013) It is due to merge in October with JFE Holdings Inc. (5411)’s Universal Shipbuilding Corp. to create Japan’s biggest shipbuilder, leapfrogging Imabari Shipbuilding Co. IHI Marine United says every one-yen appreciation in the dollar exchange rate cuts profits by “several hundred million” yen.

JFE Holdings’ profit from shipbuilding operations declined 29 percent to 12.2 billion yen ($153 million) in the financial year ended March 31 after it made provisions for losses on construction projects.

The merged firm will target annual revenue of 500 billion yen by 2017, according to Shinjiro Mishima, who will be president of the new entity. It will speed up development of fuel-efficient and cost-competitive ships, focusing on container vessels, bulk carriers and oil tankers, he said in a February interview.

Another option is to compete for more complex vessels, such as liquefied natural gas tankers, to draw on Japan’s technological savvy. Even here, data on new orders last year show South Korean competitors overwhelming Japanese peers, said Kunio Sakaida, an analyst at Barclays Plc in Tokyo.

Nuclear Impact

As the yen soared and exporters faded, Japan’s economy failed to grow in three of the past four years. Gross domestic product contracted 0.7 percent in 2011, when output was also hurt by an earthquake, tsunami and nuclear disaster and the impact of Europe’s protracted debt crisis on global growth.

Last month, the Bank of Japan expanded its plan for government-bond purchases by 10 trillion yen, as part of its efforts to end deflation in the world’s third-largest economy. This asset-purchase fund has been the main policy tool since the benchmark interest rate was brought to near-zero in the wake of the worsening of the global financial crisis in 2008.

“The only reliable channel through which the government and BOJ can achieve a nominal growth rate of 3 percent is through the exchange rate,” Naohiko Baba, chief economist at Goldman Sachs in Tokyo and former Bank of Japan analyst, said in an interview. “The BOJ and government need to weaken the yen further and further down to the 95-100 yen level.”

Postwar High

The yen reached a postwar high of 75.35 against the dollar last year, prompting action by the government to restrain its appreciation. The currency has weakened 4 percent so far in 2012 as the BOJ boosted yen supply by easing monetary policy.

Economic expansion may benefit in the first half of this year as the government’s more than 20 trillion yen in reconstruction spending filters through, according to RBS Securities Japan. The bank estimates 3.7 percent annualized growth in the first quarter.

The risk is that the bump in growth will peter out as the rebuilding drive wanes, bringing the strength of the yen to the fore again.

Carlos Ghosn, chief executive officer of Yokohama, Japan- based Nissan Motor Co. (7201), Japan’s second-largest automaker, said in April the currency is the unpredictable “1,000-pound gorilla” that makes all Japanese car manufacturers suffer.

“Japanese shipbuilders’ prospects are pretty dim if the yen stays at the current level of 80 yen,” said Sakaida of Barclays Capital. “Customers, especially European ship owners, prefer vessels built by Korean yards to Japanese ships.”

To contact the reporters on this story: Andy Sharp in Tokyo at asharp5@bloomberg.net; Masahiro Hidaka in Tokyo at mhidaka@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net


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