Marriages are usually times of joy and celebration. While the shareholders of Hyundai Heavy Industries (HHI) and Daewoo Shipbuilding & Marine Engineering (DSME) might be celebrating the proposed merger between the South Korea shipyards, I think the marriage would be a poor match for LNG carrier shipowners.
One reason I think this is because the HHI and DSME merger would have a dominant position in the lucrative LNGC newbuild market, with a total orderbook valued at US$12.86Bn. The next nearest rival in LNGC construction would be fellow South Korean shipyard Samsung Heavy Industries (SHI), with an orderbook value of US$4.69Bn, according to UK-based ship evaluation firm VesselsValue.
This would most likely lead to newbuilding price increases. LNGC shipowners would essentially have two major choices for ordering their newbuilds, the merged HHI-DSME conglomerate or SHI. This South Korean duopoly would have the ability to control the market and newbuild pricing. The price of a newbuild LNGC, which averages US$175M apiece, would surely go up.
South Korea’s Hana Financial Group analyst Moo-hyun Park said as much in his analysis of the merger saying it would create “obvious cartels for raising newbuilding prices. As the merger deal will be the monopolistic and oligopolistic behaviour harming fair competition, it seems that shipowners will claim this violation to the international anti-trust authorities.”
I’m not saying that the merger does not make sound commercial sense for HHI and DSME. Far from it. Both shipyards suffered from loss-making commercial shipbuilding and offshore projects over the last few years during the downturn in the global shipping markets. If I were an executive at either HHI or DSME I would want to corner the LNGC newbuild market, too.
It is a particularly smart play because the controversial merger comes at a time when global demand for clean-burning natural gas is on the upswing for power generation in China, South Korea, Japan and southeast Asia and the carriage of LNG is increasing, creating plenty of demand for new LNGCs.
Qatar Petroleum (QP), for example, has already announced its plans to build 60 LNGCs valued at US$12Bn to serve new LNG customers once it ramps up its annual capacity from the current 77 mta to 110 mta after building four liquefaction trains by 2024. South Korea has built QP’s Q-Flex and Q-Max ships in the past and would be called upon again to bid on this latest series of vessels.
VesselsValue senior analyst Court Smith provided some further key insight into the merger. He told LNG World Shipping, “The growth in export projects, production, and now fleet capacity will bring a new vibrancy to the LNG markets. LNG isn’t a perfect energy source, but it is far preferable to coal or residual oil for power generation, both in terms of particulate emissions and CO2. The sudden growth in orders will help bring liquidity to the LNG spot market and help new trade routes develop. The South Korean yards are shoring up to protect [market] share against Chinese yards which have been gaining interest from owners in the past several years.”
The merger however faces stiff opposition from the powerful labour unions at both HHI and DSME, which fear massive job losses. The unions are so opposed, in fact, that they have vowed to block the merger.
HHI is set to sign a formal agreement in March to acquire the Korea Development Bank’s 55.7% stake in DSME. The merger could then face intense scrutiny from the World Trade Organisation and the European Union, which will likely weigh in on the merger because of its implications for fair competition in the global shipbuilding market.
With the credible threat it poses to the market and those standing in opposition to the merger, the likelihood of the merger surviving the international trading bodies’ approval process is slim.
There is good news underlying all the controversy the proposed merger is causing however: this monopoly power play would not be happening in a weaker or less mature LNG market.