JFE Holdings Inc.'s shipbuilding unit, the nation's second-largest by output, said plunging demand will force it to prolong its evaluation of the merger planned with IHI Corp., 19 months after the tieup was proposed.

"We'd like to complete an assessment of the shipbuilding integration as soon as possible," Shinjiro Mishima, chief executive officer of the Kawasaki-based unit, Universal Shipbuilding Corp., said. "But if we make the assessment too quickly we could also overlook a risk" of holding excess capacity when there isn't enough demand.

JFE and IHI started talks in April 2008 to combine their shipbuilding units to counter competition from Asian rivals. The financial crisis has since dried up demand for new ships, with orders at Japanese yards falling 75 percent this year. Global shipbuilders are set to deliver vessels equivalent to about 40 percent of the shipping fleet currently in operation, based on order books, according to the transport ministry.

"We will need to monitor the market," Mishima, 60, said Friday without specifying a time frame for a decision. "It hasn't been clear how many vessels shipowners will need in future."

Universal Shipbuilding was created in 2002 when NKK Corp., now part of JFE, and Hitachi Zosen Corp. merged shipbuilding operations. JFE raised its stake in the venture to 85 percent from 50 percent just before the company and IHI agreed to start talks on merging shipbuilding operations.

Shipbuilding accounted for 5 percent of JFE Holdings total sales of ¥3.9 trillion for the year ended March 31.

"Both our company and IHI's shipbuilding unit want to pursue the integration, as we expect benefits," Mishima said.

The merger would bring the total number of domestic yards to seven and add the partner's container ships and liquefied natural gas tankers to Universal's fleet such as very large crude carriers, or VLCC, and large bulk carriers. The combined shipbuilding sales at JFE and IHI would have totaled ¥363 billion last fiscal year. Japan's largest yard is closely held Imabari Shipbuilding Co.

Mishima expects the merger would enable the combined unit to cut costs and strengthen new ship development by relocating workers, increasing purchasing power and more efficiently using yards, he said, without specifying the value of the benefits.

Japan lost its title as the world's largest shipbuilding nation to South Korea in 2000. China overtook Japan as the second-largest shipbuilder by new orders in 2006.

"To really fight against rivals, the current size of our business wouldn't be enough," Mishima said.