The European Union has ruled against a planned $1.8bn merger between two of South Korea's largest shipbuilding groups.

The EU competition authorities said a merger of Daewoo Shipbuilding & Marine Engineering and Hyundai Heavy Industries Holdings (HHIH) would dominate the market for LNG carrier newbuildings.

Competition commissioner Margrethe Vestager said that would lead to fewer suppliers and higher prices for LNG carriers. She said Europe needed to protect its interests in securing gas supplies.

"LNG contributes to the diversification of Europe's source of energy and therefore improves energy security," she said.

"The merger between HHIH and DSME would have led to a dominant position in the global market for the construction of large LNG vessels, for which there is significant demand from European carriers."

Vestager hinted that the decision may have been influenced by high energy prices and gas supply issues in Europe. LNG carriers, she said, allowed the EU to procure supplies outside Europe.

"Today's energy situation in Europe reminds us forcefully that the diversification of sources of supply is fundamental. About a quarter of all of the EU's energy consumption is accounted for by natural gas, most of which is imported, including in the form of LNG," she said.

The EU valued the LNG newbuilding market over the past five years at €40bn ($45.9bn) and said European buyers accounted for half of the market.

Dominant position

Hyundai Heavy Industries is a major LNG carrier shipbuilder. Photo: Hyundai Samho Heavy Industries

It estimated that the combined DSME and HHIH shipbuilding group would control 60% of newbuilding orders, and said both companies are still increasing market share.

According to Vestager, the decision was strongly influenced by feedback from buyers of LNG newbuildings and rival shipbuilders.

"These companies were concerned that the transaction would create a company with a dominant position in the worldwide market for the construction of large LNG carriers, reduce competition and increase prices for these vessels," she said.

The ruling makes the merger unworkable as, under EU competition law, the new yard entity would be prevented from doing business in Europe.

The EU pointed out it that went ahead with its decision to block the merger after neither DSME nor HHIH offered a remedy to the problem.

According to reports in late 2021, the EU asked HHIH to make remedial proposals by 7 December, including the sale of part of a shipyard, that could mitigate European Commission concerns over the share of the LNG carrier newbuilding market the combined yard entity would control.

The planned merger, which was unveiled in March 2019 and would see HHIH take a 55.72% stake in DSME, has already received approval from China, Singapore and Kazakhstan.

The Korea Fair Trade Commission, which is also looking at the merged company's hold on shipbuilding materials and parts, is expected to make a decision on the merger after hearing from the EU.