JFE and IHI to form Japans biggest shipbuilder

JFE Holdings Inc. and IHI Corp. will start talks to combine shipbuilding operations to create Japan’s biggest shipyard, challenging South Korean and Chinese rivals. The Tokyo-based companies will discuss details including the merger ratio at a later date, according to a joint statement to the city’s stock exchange today. IHI said its board will consider combining wholly owned IHI Marine United Inc. unit with JFE’s 85% controlled Universal Shipbuilding Corp. subsidiary.

The merger would create the world’s sixth-largest shipbuilder with annual sales of 345 billion yen ($3.4 billion) behind South Korean rivals including Hyundai Heavy Industries. South Korea overtook Japan as the world’s largest shipbuilding nation in 2000, while Chinese yards surpassed Japan based on new orders in 2006.

“Things will be tough in the longer term,” said Yoku Ihara, head of equity research at Tokyo-based Retela Crea Securities Co. “The two companies need to expand the size of their shipbuilding operations as neither of their businesses alone is big enough.” IHI, Japan’s third-biggest maker of heavy machinery, would be able to secure steel supplies from JFE, the world’s No. 3 steelmaker, as higher prices for the alloy raise costs. IHI expects expanded steel supplies will help save costs while the merger would benefit the shipbuilder in terms of resource sharing and development of new ships.

Expansion projects in China and South Korea will increase shipbuilding capacity by almost 20 % according to an industry analyst. That means Hyundai Heavy will be able to deliver about 20 additional vessels a year and Daewoo Shipbuilding as many as eight more. Hanjin Heavy Industries and STX Shipbuilding have expanded capacity overseas by setting up new yards in Subic in the Philippines and Dalian in China. China aims to double production by 2015 to overtake South Korea as the world’s biggest shipbuilding nation.