Shipowner breaches contract? Daewoo Shipbuilding cancels order for 2 expensive LNG carriers

According to International Ship Network, the North American liquefied natural gas (LNG) export project Mexico Pacific Limited LLC (MPL) located on the west coast of Mexico has entered the construction and operation phase and is expected to be operational in 2024. Upon completion, MPL will become a leading LNG export facility on the North American west coast, offering advantages such as lower costs, more diverse geographical coverage, and a more resilient supply chain to its Asian partners. Due to its location on the west coast, it not only shortens the transportation distance to Asia but also gains access to low-cost US natural gas resources. Considering these favorable factors, this project is bound to bring the lowest LNG landing cost to Asia.

According to International Ship Network, Daewoo Shipbuilding & Marine Engineering has canceled two LNG carrier construction contracts this year. Due to the outbreak of the Russia-Ukraine conflict and the subsequent financial sanctions imposed by Western countries on Russia, including the removal of Russia from the SWIFT international payment system, Novatech was unable to make payments, triggering a contract crisis for South Korean shipbuilding companies. On May 18 this year, Daewoo Shipbuilding & Marine Engineering announced that it had unilaterally decided to terminate the construction contract for the No. 1 vessel in the Arctic LNG 2 project, which involved three ice-breaking LNG carriers under contract with Novatech; on July 1, Daewoo Shipbuilding & Marine Engineering announced the termination of the construction contract for the No. 2 vessel in the same project.

South Korean industry insiders said that the termination of these construction contracts for vessels under construction will not immediately reflect in the losses of shipbuilding companies, and their ownership will temporarily belong to the shipbuilding companies. However, because they are not yet fully completed, according to enterprise accounting standards, they will be treated as inventory assets (work in progress) of the shipbuilding companies. However, what is worrying is that these ice-breaking LNG carriers sailing the Northern Sea Route are special equipment custom-made by Russia for the transportation of oil and gas resources near the Arctic Ocean, so it is very difficult to find third-party shipowners and resell them. Ultimately, these vessels with terminated contracts are very likely to become "malignant inventory" for Daewoo Shipbuilding & Marine Engineering.

Relevant South Korean industry insiders said: "Although the LNG carrier market has entered a period of super prosperity in recent years, the only demand side for ice-breaking LNG carriers is Russia, which has Arctic routes. Therefore, it is difficult for the three major shipbuilders to resell these new vessels to shipowners in other countries. If sanctions against Russia are prolonged, the losses of South Korean shipbuilding companies will be unavoidable."

However, just a few days after the termination of the construction contracts for these two LNG carriers, Daewoo Shipbuilding & Marine Engineering received an order for six large LNG carriers from Qatar's "100-ship plan." Including this order, Daewoo Shipbuilding & Marine Engineering has received orders for 42 new vessels and offshore equipment this year, with a total contract value of approximately US\$9.4 billion, exceeding its annual order target of US\$8.9 billion and completing its annual order target ahead of schedule. This includes 34 LNG carriers, 6 container ships, 1 piece of offshore equipment, and 1 equipment base-level repair vessel. Notably, the number of LNG carrier orders received by Daewoo Shipbuilding & Marine Engineering this year has more than doubled the 15 vessels received last year.

Meanwhile, the European energy crisis triggered by the Russia-Ukraine conflict is fermenting globally, with European countries scrambling to transport energy, pushing global LNG shipping rates to record highs. At the same time, the number of LNG carriers available for spot trading is very limited, with almost all LNG fleets locked into long-term charter contracts.

Frode Mørkedal, a Clarksons Securities analyst, said in a report: "According to brokers, shippers can now achieve 'multi-party benefits,' meaning they can receive compensation not only for regular round-trip voyages but also for directional voyages. Therefore, daily round-trip revenue is expected to be around US\$500,000." "LNG carriers are achieving higher freight rate targets, and spot prices have reached dazzlingly high levels."

As of Monday, Clarksons Research set the average voyage rate for the most efficient LNG carriers at US\$313,000 per day. The rate assessment for operators of diesel engines (TFDE) is US\$276,700 per day. Pareto analyst Eirik Haavaldsen's prediction is even more exaggerated, with Haavaldsen predicting that LNG carrier freight rates may exceed US\$1 million per day in the fourth quarter. (Wang Chu)