EU's Conclusion Based on Poor Evidence
The European Union (EU) refused to endorse the combination of Korea Shipbuilding & Offshore Engineering (KSOE) and Daewoo Shipbuilding & Marine Engineering (DSME) on Jan. 13, expressing its concern that the merged company would monopolize the LNG carrier market.
The EU said the marriage of KSOE and DSME threatens its energy security. It believes that LNG will play an important role in its conversion from carbon energy such as oil to renewable energy to cope with climate change and environmental regulations, as LNG has relatively low pollutant emissions.
Europe imports most of the LNG it consumes from the outside. The European Commission judged that if a European shipping company has to pay a high price for an LNG carrier, it may consequently increase the cost burdened by European energy consumers. It believes that if the two Korean shipyards merge and their market share in the LNG carrier market increases, it may threaten a stable LNG supply to Europe.
Europe’s LNG demand has been on the decline since peaking 10 years ago but is on the uptick again. According to EU trade statistics, the EU’s LNG imports, which exceeded 60 million tons in 2011, fell to 26 million tons, less than half, in 2016. Then, it increased again to 56.29 million tons in 2019 and 41.36 million tons in 2020, when local energy demand decreased due to COVID-19. It reached 29.69 million tons by September 2021. It is expected to hit a level similar to that of 2020.
What stands out is a steep rise in LNG import costs. Europe’s LNG import cost rose 57 percent from 258 euros per ton in 2020 to 407 euros (an average from January to September) in 2021. In September alone, it more than doubled to 599 euros per ton.
The rise in LPG prices is ascribed to a combination of various factors, but the main factor is related to LNG supply and demand situations. Russia, the main LNG exporter for Europe, reduced LNG supply. A rumor had it that Russia did it for political reasons. It was also blamed on climate that humans cannot control. Some point out that cold weather in the winter of early 2021 fueled demand for LNG, and demand for gas was further driven up by insufficient renewable energy generation.
On the other hand, it is not clear how LNG transportation costs affected LNG prices. As of the end of the third quarter of 2021, the spot transportation fare for 160,000-cubic-meter LNG was US$77,750 a day, up 24 percent from a week ago. However, compared to the beginning of 2021, it fell about 27 percent. LNG transportation fares usually show high seasonal variations. However, by year, the degree of variation falls. It fell from US$100,000 in 2018 to US$91,000 in 2019 and then rose to US$145,500 in 2020. Since then, it slid to the early US$140,000 range by the end of last year.
This illustrates that LNG price fluctuations are more related to supply and demand than transportation. Furthermore, it is virtually more difficult to examine ship prices’ impact on LNG transportation costs. In particular, EU competition authorities can exercise some control over the maritime LNG transportation costs.
This is why some experts point out that the EU only focused on the interests of shipowners in examining the business combination between KSOE and DSME. LNG carrier prices had remained low for years before starting to rise gradually last year and surpass the US$200 million mark. An LNG carrier cost around US$200 million 10 years ago. This is why the EU's conclusion seems to be based on poor evidence, even though it came out after two years of deliberation.