Daewoo Cancels Second LNG Carrier Order Linked to Sovcomflot
South Korean shipbuilder Daewoo Shipbuilding and Marine Engineering (DSME) has canceled a second order for an LNG carrier as part of an order placed in 2020 with an unnamed European shipowner. The widely anticipated move followed a similar action in mid-May. The contact is believed to be part of the order DSME received from Russian state shipping company Sovcomflot for three LNG carriers plus additional vessels to be operated by Japan’s Mitsui O.S.K. Lines as part of Russia’s planned expansion of its gas operations.
In a stock exchange filing dated June 30, DSME reported, “As the ship owner did not pay the shipbuilding price for one LNG carrier within the due date, the company notified the contract termination. The contract has conditions that the shipowner must fulfill, and if the conditions are not met, the contract may be canceled.” Without providing details, they reported that a deadline had been missed on the contract forcing the shipyard to cancel the order to protect its rights under the contract.
The original contract was valued at nearly $850 million but reduced after the May cancelation of the first vessel to approximately $520 million. The remaining third vessel of this contract is valued at $260 million, but the company warns that if conditions are not met, they may also cancel that vessel. Each vessel represented about four percent of the shipbuilder’s annual revenue.
Sovcomflot has been unable to proceed with payments since the spring of 2022 after western sanctions against the state-owned shipping company were tightened in the wake of the invasion of Ukraine. Sovcomflot remains in technical default on two interest payments on its Eurobonds saying that the agents were unable to accept the funds and that it was seeking alternatives to make the payments. The company, however, also sold vessels in the spring as western banks and financial institutions were required to reduce their holdings as part of the sanctions.
While DSME continues to report strong orders, the loss of the vessels nonetheless comes as a difficult blow to the company. It is facing mounting operating costs especially related to the price of steel. LNG carriers are a higher value vessel due to their more technical nature and provide greater contributions to the company’s profit versus other tankers and containerships.
DSME did not announce when the next progress payments would be due for the third vessel, but it is anticipated that they will cancel that order and the entire contract at that time. The vessels ordered in October 2020 were due for delivery by July 31, 2023. It is unclear if the vessels for the Japanese operators will proceed.
South Korea’s exposure to Russia extends beyond DSME. Rival shipbuilder Samsung Heavy Industries also is working in partnership with Russia’s Zvezda shipyard. In March 2022, Samsung reported that it had completed a delivery to Sovcomflot without detailing how the payment had been received. The shipyard, however, has another tanker that is nearing delivery and three additional hulls on order.