Qatar LNG Ship Second Order Called "Dumping," What Is the Truth?

HD Hyundai Heavy Industries recently signed a memorandum of agreement (MOA) to build 17 new LNG (liquefied natural gas) carriers for Qatar. If the official contract is secured, it is expected to become the first shipbuilder to win the second phase of Qatar's LNG project in the second half of this year. However, Hanwha Ocean has raised objections, claiming that the contract was rushed at a low price, disrupting market order when there was an opportunity to negotiate more favorable pricing. Samsung Heavy Industries, another contracting party in Qatar's LNG project, also evaluated that it missed the chance to increase the contract price. What is happening ahead of the approximately 12 trillion won second phase order from Qatar?

HD Hyundai Heavy Industries Signs MOA Last Month with Qatar for LNG Carrier Construction...Price Lower and Quantity Higher Than Market Expectations

On the 27th of last month, QatarEnergy, the state-owned energy company, announced that it had signed a memorandum of agreement (MOA) with HD Hyundai Heavy Industries to build 17 LNG carriers with a total capacity of 174,000㎡ for $3.9 billion (about 5.28 trillion won). The price per vessel is $229 million (about 310 billion won). Compared to the recent newbuilding price of $265 million (about 355 billion won), this is 13.6% lower and falls short of market expectations. Youngsoo Han, a researcher at Samsung Securities, said, "The price per vessel is somewhat lower than market expectations." On the other hand, the quantity is 7 vessels more than expected by the market.

An MOA is a memorandum confirming mutually agreed terms but is not an official contract, so contract conditions may change later. The signing ceremony held at a location in Seoul was attended by Ga Samhyun, Vice Chairman of HD Korea Shipbuilding & Offshore Engineering, and Saad Sherida Al-Kaabi, Qatar's Minister of State for Energy Affairs and CEO of QatarEnergy.

Vice Chairman Ga Sam-hyun of HD Hyundai Heavy Industries (left) and Al-Kaabi, Qatar's Minister of State for Energy Affairs, signed a Memorandum of Agreement (MOA) for the construction of 17 LNG carriers on the 27th of last month.
[Image source=Qatar Energy]

2020 Slot Reservation Contract for Over 100 Vessels...In Last Year's First Phase Project, Korea Secured 54 Vessels, China 12

In June 2020, the three major Korean shipbuilders signed a slot reservation contract with Qatar Petroleum (QP), Qatar's state-owned oil company, to reserve construction space for over 100 LNG carriers until 2027. This was the largest scale ever, exceeding 23.6 trillion won. It was a much-needed relief for the shipbuilding industry, which was struggling due to the order drought and the COVID-19 pandemic. Qatar, the world's largest LNG producer, plans to increase its annual LNG production from the current 77 million tons to 126 million tons by 2027. As LNG production increases, more carriers are needed to transport it.

In the first phase project that started last year, Qatar ordered a total of 66 LNG carriers from Korean and Chinese shipbuilders. Korean shipbuilders secured 54 vessels: Hanwha Ocean 19, Samsung Heavy Industries 18, and HD Korea Shipbuilding & Offshore Engineering 17. Qatar is currently negotiating purchases with Korean and Chinese shipbuilders for the second phase project, with an expected order of about 40 LNG carriers (worth 12 trillion won).

Hanwha Ocean and Samsung Heavy Industries: "No Need to Rush...Could Have Raised Prices Further"

Hanwha Ocean complains that HD Hyundai Heavy Industries set the first contract price, which could serve as a guideline for other domestic shipbuilders, too low. They argue that there was no need to rush and that shipbuilders could have prolonged price negotiations with Qatar until the deadline of the second phase order to raise prices further, but that opportunity has disappeared.

A Hanwha Ocean official said, "If there were no construction slots available, it would be understandable, but currently, the slots (space for building hulls and blocks) of the three shipbuilders are fully booked, and from Qatar's perspective, due to LNG supply issues from Russia and the LNG project, they must secure LNG carriers unconditionally." He explained, "The three shipbuilders as suppliers are not in a hurry." He added, "Although it was not possible to match the highest newbuilding price, favorable negotiations were possible, so it is regrettable that the deal was concluded early."

The newbuilding price refers to the price of newly constructed vessels. Samsung Heavy Industries also considers the MOA price agreed by HD Hyundai Heavy Industries to be very low. Even considering the large-scale long-term contract made with a long-term outlook, it is difficult to accept a price more than $30 million lower than the newbuilding price ($265 million). Samsung Heavy Industries is concerned that the competitor's low price agreement will weaken the momentum for price increase negotiations.

Due to the global increase in LNG demand, the LNG carrier market is experiencing an unprecedented boom. According to data from the UK shipping research firm Clarkson Research, the newbuilding price for LNG carriers reached $261 million in July this year, setting a new record since 1991 ($260 million). It was further raised to $265 million (about 350 billion won) in August and September this year.

HD Korea Shipbuilding & Offshore Engineering also secured an LNG carrier order in August for a record high price of $265 million from an African shipping company. An industry insider said, "Although the total number of ship orders has decreased this year compared to last year and the year before, prices continue to rise," adding, "Prices are rising despite decreasing demand because shipbuilders have already secured several years' worth of work, giving them an advantage in price negotiations."

Hanwha Ocean Geoje Plant Overview
[Photo by Hanwha Ocean]

HD Hyundai Heavy Industries: "Bulk Construction Discount Applied...Depends on Each Company's Internal Strategy"

HD Hyundai Heavy Industries explained that the reason for not matching the newbuilding price was due to a discount reflecting bulk construction. "During repetitive construction using the same design, cost reductions are possible in materials and other expenses, which lowers the price," and "this is also the case in other typical large-scale orders." Choi Kwangsik, a researcher at Daol Investment & Securities, said, "With this contract, the number of vessels HD Hyundai Heavy Industries is building repetitively increased from about 20 to 30. It is natural that the contract price is lower."

An HD Hyundai Heavy Industries official also said, "The timing of winning orders and contract amounts depend on each company's internal strategy and sales capabilities." Since each shipbuilder set an upper limit for price increases at a certain level during the 2020 slot contract, prices are set accordingly, so calling it a low-price order is incorrect.

Even in the first phase project last year, contracts were made at prices lower than the newbuilding price but higher than the existing contract price. During the 2020 slot contract, the three shipbuilders and Qatar set the price per LNG carrier at $190 million, the 2019 level. Around the start of the first phase order in the second quarter of last year, raw material prices surged, causing shipbuilding steel plate prices to soar, and the newbuilding price for LNG carriers rose to the $240 million range. Ultimately, Korean shipbuilders negotiated continuously with Qatar and raised the existing contract price by 13% to $215 million.

The sea trial of the 174K LNG carrier built by HD Hyundai Heavy Industries and delivered last year [Photo by HD Hyundai Heavy Industries]

Different from Past Low-Price Competition...A Healthy Fight for a New Leap Forward

Recently, the order competition among the three major shipbuilders has taken a different form from past low-price battles. Korean shipbuilders engaged in aggressive price-cutting sales to secure orders amid a drought starting in the early 2010s and low-price competition from Chinese shipbuilders. They competitively lowered prices to win contracts, which led to long-term profitability deterioration.

The situation has now changed. The shipbuilding industry has entered a super cycle (boom) for the first time in over a decade and secured 3 to 4 years' worth of orders. The docks are fully booked. This means they have the upper hand in price negotiations compared to shipping companies. Market forecasts even predict that the three Korean shipbuilders will simultaneously return to profitability in the third quarter of this year for the first time in 11 years.

An anonymous professor of naval architecture and ocean engineering said, "Since Chinese shipbuilders are involved in the Qatar bidding, HD Hyundai Heavy Industries may have found it difficult to raise prices further, but among items that have not increased in price despite rapid inflation, ship prices are one of them," adding, "The dispute currently underway among Korean shipbuilders to get higher prices is a healthy fight for a new leap forward during a good time."

This content was produced with the assistance of AI translation services.