Fx hedges split Korea’s shipbuilding big three profitability

The three major shipbuilders in South Korea - Hyundai Heavy Industries, Hanwha Ocean, and Samsung Heavy Industries - all reported double-digit operating margins in the second quarter, indicating improved profitability. This is primarily due to the recognition of revenue from high-priced ships, such as liquefied natural gas carriers, that were ordered several years ago.

HD Hyundai Heavy Industries and Hanwha Ocean posted operating margins of around 15%, while Samsung Heavy Industries had a slightly higher margin of about 10%.

The difference in operating margins among these shipbuilders is attributed to their foreign exchange hedging strategies. While HD Hyundai Heavy Industries and Hanwha Ocean have mixed levels of hedging, Samsung Heavy Industries uses a 100% FX hedging strategy. This strategy, which locks in exchange rates at the time of contract signing, prevented Samsung Heavy Industries from benefiting from the persistently strong dollar (weak won) since the fourth quarter of 2024. As a result, the company missed out on potential exchange rate gains.

Analysts note that Samsung Heavy Industries' profitability is lower than its competitors due to this hedging strategy. Once the volumes from contracts signed in 2024-2026, when exchange rates were around 1,400-1,500 won, begin to reflect in revenue, the relative weakness in Samsung Heavy Industries' profitability is expected to be resolved.

The shipbuilding and securities industries show varying levels of FX hedge ratios, with HD Hyundai Heavy Industries estimated at about 75% and Hanwha Ocean at around 10%. Hanwha Ocean reported a record-high operating margin of 22.7% in the merchant ship institutional sector, largely due to the absence of hedging and cost improvements from productivity gains and design optimization.