Antonio Jose Llago Hermida, CEO of naval outfitting specialists Gabadi, discusses capitalizing on opportunities in LNG, the company’s recent Joint Ventures in China and Singapore, its outstanding partnership with French GTT, and the uncertainty around clean energy regulations.
Could you please start off by introducing Gabadi’s operations?
Gabadi operates, mainly, in three shipbuilding sector fields, including the supply of all types of materials, specializing in military vessels. Currently, we have a global presence and a very strong partnership with the French company GTT (Gaztransport & Technigaz), which is a leading engineering firm, specialized in containment systems for the transport and storage of LNG in cryogenic conditions. In fact, we have projects in North America, South America, Europe and Asia. Our main goal is to provide customers with the most suitable products in the right place, working together with shipyards. The first line of business Gabadi focuses on is the development of container solutions and maintenance services for energy related businesses. The membrane technology we use applies to 90 percent of gas carrier vessels in the world and it is patented by GTT. In fact, Gabadi holds the honor of being the very first outfitting company that is not a shipyard to be granted approval by the GTT. One of the key elements in our business is, actually, finding the right balance between the service quality and the necessary time to execute the work. There can be no mistakes made in repairs and the speed of execution is vital. Vessels being out of order or delays, in regard to the schedule, imply significant financial losses for the client and every day counts. Therefore, it is tremendously important that we are sensitive to this aspect.
Our second line of business concerns LNG-powered transport shipbuilding. Along with the increasing demand for fully LNG-powered construction, we witness more and more shipyards trying to obtain GTT approval for the construction of such vessels. In the world, there are only five companies which count with GTT approval for the construction of LNG vessels and Gabadi is one them. At the moment, a USD 5.5 million new project is about to get started in Singapore, which will last around six months.
The third line of business is the outfitting of offshore and military vessels. The offshore sector is not doing especially well lately, due to the decrease in upstream margins. To improve our cost efficiency in the offshore business, we have developed modular living quarters, adapted to 40ft size containers, which are really common in the industry. This innovation allows more people to be living in the quarters themselves and improves the flexibility of our service. The reason is simple. Now we are dealing with the size of a standard container, instead of the much larger flotels previously deployed, which posed a great number of difficulties to maneuver.
In fact, the Mexican company McDermott recently won a tender for a Pemex platform project, against other offshore repair suppliers, making use of our innovative living quarters. Moreover, harnessing a standard size of containers allows us to manufacture them anywhere in the world and it facilitates transportation from one project to another.
Military vessels outfitting is also performed globally nowadays. As a Spanish company, we started our activity in our home country, but we have been able to reach markets all over the world. For example, some of our operations now are in Ecuador, Canada, India, Thailand, Norway and Australia, among other countries. Through the years, Gabadi has gained in competitivity and it is well-known within its sector, having the ability to keep on being awarded new projects globally. Lastly, we also supply all types of materials to naval constructors, such as STX in France.
What activities are most in demand at the present moment?
The materials supply is the most predictable line of business, because it involves long-term planning and investments. Unfortunately, this business offers low profit margins and it is unlikely to experiment a significant growth in the foreseeable future, since shipyard capacity is already full.
Repair services, on the other hand, are volatile, short-term and very profitable projects. There are very few companies operating in this sector, because it involves challenges in regard to logistics, coordination and hiring specialized manpower, since these needs must be satisfied with effect of immediately. Unfortunately, trends within this field are hard to be predicted. Nonetheless, we have found successful repair projects to give Gabadi high credibility, which is positive for all our lines of business.
Offshore tendencies depend mostly on the oil price and upstream margins. Therefore, forecasts are also hard to make. One last aspect which I see as an opportunity for the LNG sector to grow and, subsequently, for Gabadi as well, is the IMO ship pollution regulations.
How are you going about preparing Gabadi for future performance?
In the outfitting industry, establishing smooth running operations and keeping up with the trends in market demand is of vital importance. Our current shipyard agreements are profitable and aligned with current market conditions. However, the market is clearly shifting towards a transition phase. Indeed, South Korea used to be the most important player for LNG, but the country has been experiencing difficulties lately. Instead, China and Singapore seem to be the key locations for the future of the sector.
For this reason, Gabadi incorporated a new company in China and we are in process of establishing a Joint Venture in Singapore too. These locations will be the core of the new shipbuilding industry and of the LNG sector. We chose the JV model with local players to gain local knowledge, marketing capabilities, as well as to comply with the regulations of these countries. On our side, we can help build trust between the client and inexperienced shipyards. We have recently signed agreements with China Merchant – a Hong-Kong based government company – and HRDD – a shipyard aiming to enter the repair business.
How exactly did the terms of this exceptional relationship with GTT start and how has this partnership affected recent developments?
GTT is a partner of ours in several projects. Actually, GTT was our supervisor on a repair project at the Navantia shipyard already in the late 1990s. When the European ship repair industry entered a crisis, GTT suggested a partnership to open a repair shipyard elsewhere in the world. In the end, GTT and Gabadi joined forces to open a TSA approved shipyard. Currently, we share the development of a 2Bar LNG membrane tank prototype, which could be used offshore. More specifically, we designed the tank together and Gabadi will be responsible for its construction and tests performance, in cooperation with other companies, such as Reganosa or Hamm. It is scheduled for the tests onshore to get started in A Coruña, at the beginning of 2018.
You seem to be employing a very forward-looking strategy…
Absolutely, being versatile and flexible enough to adapt to the changing context around us is one of our hallmarks and this allows us to remain at the top of our game. Every two years, we scan the market for product development opportunities. This leads to the decision of prototype building, like the aforementioned 2Bar membrane LNG tank we are developing in collaboration with GTT. In Gabadi, we try to concentrate on manpower and on bringing added value to the market, especially in highly specialized fields. It generally takes up to four years to recover the initial investment. I see opportunities in LNG and it is a sector in which we are very consolidated. One aspect I consider utterly positive is that, even if the current demand for LNG propelled vessels is mainly for large buildings, the international regulatory framework promotes cleaner transport at all stages. Therefore, I am expecting smaller scale shipyards to work with LNG compatible shipbuilding in the near future.
To what extent is Spain, as a whole, ready to adapt to these shifting dynamics in the global LNG market?
The oil crisis and changes in regulations have caused a sense of uncertainty in the stakeholders from the energy industry. Investment decisions are partially on hold and players in the sector are waiting for LNG propulsion to become compulsory. LNG compatibility regulations for ports are unlikely to be implemented before 2025. Spanish port capacities are far ahead of what is necessary today, but companies are still unsure on whether they should be investing in this field or not. Certain managers want to strengthen their European relationships, while others call for overseas opportunities in South America, for example. As I see it, South America could be a good market for Spanish EPC companies, but South America still lacks the necessary infrastructure to import LNG.
The pollution-free areas regulation affects the strategy of shipbuilders. It is interesting to see companies enforcing different policies to cover demand. Reganosa is betting on large investments, while Cepsa is investing less. There are three possibilities to respect the rules, which can be implemented: scrubber catalysts, clean fuel and LNG. Among them, LNG is the cheapest option available. Government infrastructure investments are also affected by this uncertainty. For example, there is Petronas’ project for LNG export from Canada, which has not been approved yet, due to the need of investing in building many new infrastructures, such as roads, apart from the strong opposition they are encountering from the aboriginal community living in the area. In this case, it would be executed within the area of British Columbia and it would be one of the most important ones in the country, but there are several other LNG export project plans in Canada.
Where do you see the competition coming from and how are you planning to differentiate yourself?
Due to its long history in LNG vessels manufacturing, South Korean companies and their manpower are very skilled. They used to be our main threat. Recently, clients have started to doubt of whether South Korean companies use Chinese subcontractors for the construction of new vessels. Apart from that, the North Korean issue has started to deter customers from dealing with South Koreans. Our clients prefer to focus on getting the job done, without taking risks and we have taken advantage of that situation.
You are a Galician-headquartered company with a global footprint. What does being Galician mean to you?
If you look back at our roots, we started as a family company, mending furniture for ships. We keep the family ethos and we became a specialized company, concentrating our efforts on few projects at a time. One of our main advantages is that we have benefited from the long tradition and experience at the naval sector, characteristic of the area of Ferrol, where our headquarters are, which dates back to the 19th century, when one very strong shipyard started to operate. Additionally, the rich history within the shipbuilding sector, not only in the North of Spain, but also in major cities of the country, allows as to find contemporary naval architects and extraordinary talent. Gabadi tries to take advantage of its privileged location and to recruit the best possible team.
What do your five-year ambitions for Gabadi look like?
I will be seeking to consolidate the company’s presence in China, Canada, Singapore, Malaysia, and Indonesia. We have already started in-depth operations in Canada by opening a company there, which already counts with ongoing projects that will last seven more years. Apart from that, our joint ventures in China and Singapore should help us to consolidate our position in these important markets in the future. Eventually, we will be vigilant, regarding the economic, legal and political framework in Indonesia, since I have high hopes for this country.