Sat, May 18, 2024 page9

• Cleaning up dirty shipping a lucrative business

  Eco-friendly vessels tend to require greater care, which is why HD Hyundai Marine is so confident that revenue will keep rising

  • By Tim Culpan / Bloomberg Opinion
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  South Korea’s tech-heavy stock market has found inspiration in an underappreciated sector of the nation’s sprawling economy. HD Hyundai Marine Solution Co raised more than US$500 million in its initial public offering (IPO) last week and immediately found momentum. The stock doubled in the first few days of trading, taking its market value past US$5.8 billion.

  It is not a chipmaker like Samsung Electronics Co nor an electric-vehicle (EV) battery supplier like LG Energy Solution Ltd. HD Hyundai Marine is in the ship-services business and investors have taken notice.

  The biggest winner from its meteoric first-week rise is its largest shareholder, South Korea’s Hyundai conglomerate. Private-equity firm KKR & Co is also counting its profits as it retains a 24 percent stake after the listing.

  

  Illustration: Tania Chou

  KKR, HD Hyundai Co and its slate of new investors are all betting that a global green movement that is taking hold in industries from server farms to automobiles will prove lucrative to the ocean transport sector.

  Regulations implemented by the International Maritime Organization in 2020, called IMO2020, mandate hitting reduction targets for sulfur dioxide emissions to reduce shore-side air pollution. That means using less, and cleaner, fuel. A separate set of goals for greenhouse gas emissions, called the 2023 IMO GHG Strategy, aims to cut carbon dioxide emission intensity 40 percent by 2030, including 10 percent of all fuels being zero-emission.

  There are a few ways these goals can be achieved. The first is to build entirely new ships with cleaner, more efficient engines. That is happening and is driving demand at ship builders. Another is to retrofit devices onto existing engines that filter exhaust air, make tweaks that ensure they run more efficiently, or convert them to dual-fuel so that they can use cleaner alternatives such as methanol or ammonia.

  Each of these choices requires a follow up-service, including checking and replacing components, as well as testing whether a ship is running at maximum efficiency. These ongoing costs will be an increasingly important part of marine-transport operations.

  It is also an opportunity for maintenance companies.

  HD Hyundai Marine’s business does both: retrofitting and after-market support for ships. It also provides fuel supply for maritime vessels, known as bunker service.

  Among the deals it has struck is a contract to help Greek operator Thenamaris LNG implement reliquefaction on at least one of its carriers, a process that returns evaporated gas back to their tanks. This cuts wastage and carbon emissions. The business also installs treatment systems to clean up ballast water, a common cause of ocean pollution, to make ships meet stricter environmental regulations.

  These eco-friendly vessels tend to require greater care — the engines are often more complex and the parts more expensive. That is why HD Hyundai Marine is so confident that revenue will keep rising.

  Splintering of supply chains and logistics will also be a driver.

  According to the company, HD Hyundai Maritime’s annual turnover includes 50,000 purchase orders and 80,000 deliveries with warehouses in Busan, South Korea; Rotterdam, the Netherlands; Houston, Texas; Singapore; and soon Dubai. As global manufacturing diversifies away from China, more factories will open in Vietnam, India, Mexico and eastern Europe. Rather than replacing China, supply chains will require ships making calls in more ports and with more frequency.

  To keep up, the firm will have to grow. IPO proceeds will go toward expanding shipyards in Southeast Asia, increasing warehouse capacity and developing technologies for making vessels more green, HD Hyundai Maritime chief executive officer Lee Ki-dong said in an interview with Bloomberg News last week.

  Each of these moves will add cost and complexity, but if executed efficiently will also offer competitive advantages.

  The firm is not alone in the space. Alfa Laval AB of Sweden and Norwegian Kongsberg Gruppen ASA, named as peers in its prospectus, offer a similar collection of services. A handful of Chinese names are also in the mix, but HD Hyundai Marine’s biggest advantage is its parentage, including its affiliation with the world’s biggest shipbuilder, HD Hyundai Heavy Industries Co.

  Simply acting as Hyundai Heavy’s after-market sales and service business would be enough to give it an advantage over rivals and it will definitely leverage that relationship, but in the long term, sustainable growth needs to come from building a reputation as a reliable provider of greening services.

  There are myriad ways companies like HD Hyundai Marine can mess up. Expanding too fast and overspending on new facilities is a big risk. Failing to keep up with industry trends or the market itself suffering a downturn are others. Right now, investors do not seem concerned. Their love for this exciting new category of company might wane when the EV market picks up again or the smartphone sector finally returns to growth, but for now, ship maintenance is exciting.

  Tim Culpan is a Bloomberg Opinion columnist covering technology in Asia. Previously, he was a technology reporter for Bloomberg News. This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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