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Shipping & Shipbuilding

Hyundai Heavy uneasy ahead of EU decision despite $2.5 bn orders

EU unlikely to approve Hyundai’s acquisition of Daewoo; little immediate impact seen despite concerns over losing competitiveness

By Jan 11, 2022 (Gmt+09:00)

An LNG-powered container ship built by Hyundai Heavy Industries Group (Courtesy of KSOE)
An LNG-powered container ship built by Hyundai Heavy Industries Group (Courtesy of KSOE)

South Korea’s Hyundai Heavy Industries Group grew more concerned ahead of the European Union’s decision on the combination of the world’s two largest shipbuilders – Hyundai Heavy Industries Co. and Daewoo Shipbuilding & Marine Engineering Co. – even as the group bagged $2.5 billion orders in the first ten days of the year.

The EU Commission is scheduled to conclude whether to approve Hyundai’s acquisition of Daewoo by Jan. 20 and the commission is likely to veto the proposed deal due to monopoly concerns, according to South Korea’s government and industry sources.

The potential rejection is unlikely to hurt the world’s biggest shipbuilding group much since it continued to win major orders, but the group may miss opportunities for the economy of scale, the sources said.

SWEEPS ECO-FRIENDLY SHIP ORDERS

Korea Shipbuilding & Offshore Engineering Co. (KSOE), Hyundai Heavy Industries Group’s intermediate holding company, said on Monday that it signed a total of 1.3 trillion won ($1.1 billion) contracts. It is set to build four 16,000 twenty-foot equivalent unit (TEU) container ships with dual-fuel engines, a 174,000-cubic-meter liquefied natural gas (LNG) carrier and three 2,500 TEU container ships.

KSOE has secured $2.5 billion deals so far this year, a 14.3% of its target of $17.4 billion for 2022, with 1.7 trillion won orders inked last week for 10 vessels including such an LNG tanker. That defied global market researcher Clarkson Research Service’s forecast that new ship orders will decline 23.3% to 36 million compensated gross tonnage (CGT).

Most orders won by KSOE are for eco-friendly vessels. The shipbuilder is slated to build 10 large container ships of 16,000 TEU and all of them will be equipped with dual-fuel engines that use diesel, as well as LNG and methanol to reduce greenhouse gas emissions.

“Shipping companies are advancing their order plans since prices of eco-friendly ships are expected to keep rising,” said a KSOE source.

WORRIED ABOUT EU VETO

A series of major orders failed to ease Hyundai Heavy Industries Group’s worries since the EU’s decision will put its acquisition of Daewoo at risk of collapse. Hyundai in 2019 signed an agreement to acquire a 55.7% stake in Daewoo from the state-run Korea Development Bank (KDB) for 2 trillion won, alongside a pledge to inject 1.5 trillion won into Daewoo to buy the latter’s new shares.

The EU is likely to veto the tie-up or approve it only with conditions, for now, industry sources said. The authority is concerned that the combination will lead to monopoly problems such as price hikes since the two shipbuilders already dominated the global eco-friendly ship market with a combined market share of 60%.

Europe will be unhappy with the creation of a mega-shipbuilder since the region is home to container shipping giants including Maersk and MSC, as well as major ship parts makers such as MAN.

The EU was known to have made some requests to Hyundai Heavy Industries Group such as downsizing its LNG business.

“It is hard to accept such conditions,” said an industry source.

A potential collapse of the deal is unlikely to have an immediate impact on the two shipbuilders’ management, sources said. Hyundai will be able to use 1.5 trillion won set aside for Daewoo for new business such as autonomous ships and ammonia-powered vessels. Daewoo is, however, forced to seek help from creditors or find a new owner.
Daewoo Shipbuilding & Marine Engineering's shipyard
Daewoo Shipbuilding & Marine Engineering's shipyard

South Korea’s shipbuilding industry is expected to lose competitiveness in the long term if the EU does not approve the acquisition.

“The chronic overheated competition among Korean shipbuilders will not be resolved in the end,” said an executive at a domestic shipbuilder. “It will become difficult to improve bargaining power through economies of scale since we rely on Europe for source technology on core parts.”


Write to Jung-hwan Hwang at jung@hankyung.com

Jongwoo Cheon edited this article.
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