The proposed merger between Hyundai Heavy Industries (HHI) Co. and Daewoo Shipbuilding and Marine Engineering (DSME) Co. is expected to double the value of their outstanding orders for LNG ships to over US$12 billion, industry data showed on Tuesday.
Hyundai Heavy, the world’s largest shipbuilder, is set to formally sign a deal early next month to buy a controlling stake in Daewoo Shipbuilding from state-run Korea Development Bank. KDB is Daewoo Shipbuilding’s main creditor, with a 55.7 percent stake in the company.
According to the data compiled by ship evaluator VesselsValue, the orderbook for LNG ships by Daewoo Shipbuilding is estimated at $6.85 billion, with the corresponding figure for Hyundai Heavy being $6.01 billion.
Samsung Heavy Industries Co., a local rival, came in third with outstanding orderbook of $4.69 billion, the data showed.
“The HHI group is already the dominant shipyard in terms of value on order, but the addition of the DSME orders would further cement their position as the world’s leading builder. A combined Samsung remains a significant competitor in the LNG newbuild segment though, attracting orders from three of the largest buyers of newbuild tonnage,” it said.
“Natural gas will become an increasingly important part of the global energy mix for decades to come and maintaining a market leading position in the construction of these vessels will be important for the world’s largest yards,” it added.
The ship evaluator said the consolidation of yards will help improve pricing power overall and should reduce loss-making projects that the yards undertook in the past five years or so.
“It remains to be seen if the merger will occur, but if it does, it will have reverberations in the newbuild market,” VesselsValue said.
South Korean shipbuilders, once a cornerstone of the country’s economic growth and job creation, had been reeling from mounting losses in the past few years, caused by an industrywide slump and a glut of vessels amid tough competition with Chinese rivals.
The government has been hoping that the local shipbuilding industry can be overhauled in a way that two major players can dominate the sector to better compete against Chinese rivals and tackle sectoral ups and downs.
Daewoo Shipbuilding ended a debt rescheduling program in August 2001 after being told to streamline operations in August 1999. Its parent, Daewoo Group, collapsed under heavy debt in the wake of the 1997 financial crisis.
In 2009, KDB put Daewoo Shipbuilding back on the block after scrapping a deal to sell a controlling stake in the shipyard to Hanwha Group.
The combination of the two shipbuilders would create an unrivaled player in the sector. As of last year, Hyundai Heavy had an order backlog totaling 11.14 million compensated gross tons (CGTs), the largest among others in the sector. The comparable figure for Daewoo Shipbuilding was 5.84 million CGTs.
Their combined order backlog accounts for 21.2 percent of the total around the globe.
VesselsValue data also showed that their combined orders reached $35 billion, to build a total of 350 ships.
But industry sources said the takeover may face some hurdles, such as labor unions’ strong opposition to the deal and regulatory approval.
The labor unions at Hyundai Heavy and Daewoo Shipbuilding fiercely opposed the deal, claiming it could lead to massive layoffs.
In addition, the combination of the two major shipyards could reshape the global shipbuilding sector, which means regulatory approval can be key to the completion of the mega deal.