COMMISSION OF THE EUROPEAN COMMUNITIES
COM(2002) 205 final
FIFTH REPORT FROM THE COMMISSION TO THE COUNCIL
ON THE SITUATION IN WORLD SHIPBUILDING
Article 12 of Council Regulation (EC) No 1540/98 of 29 June 1998 establishing new rules on aid to shipbuilding1 requires the Commission to present to the Council a regular report on the market situation and assess whether European yards are affected by anti-competitive practices. Accordingly, the Commission has presented to the Council four previous reports on the situation in world shipbuilding2, outlining the serious difficulties the shipbuilding sector is facing and providing detailed information on the unfair commercial practices of Far East competitors. This fifth report is in continuity with the approach and the findings of the first four reports.
The world shipbuilding market continues to face serious difficulties, due to an imbalance of supply and demand. Past expansion of shipyards, mainly in Korea, but now increasingly also in China3, has led to price depression. Thanks to a historically high level of ordering in 2000, prices recovered to some extent, but the significant drop in orders in 2001 has led to a new reduction in prices.
The year 2001 has been very problematic for the maritime industries world-wide: The recession in the US and the terrorist attacks of 11 September have decreased the demand for sea trade and cruises, respectively. The decline in ordering affected the sectors of containerships and cruiseships most, leading to a drop in overall market share for Korea and the EU which are particularly strong in these segments.
Only the segment of Liquified Natural Gas carriers (LNG) saw an increase in absolute order volume. However, this is still a niche market. Korean yards took most of the orders for LNG carriers. They hold 65 % of the relevant world orderbook, and 79 % of the new orders placed in 2001 went to Korean yards, despite the fact that Korea is a relative newcomer in the field and the building yards do not hold patents on the key technologies. Market analysis suggests that Korean yards made inroads in this area due to very low offer prices. Their ability to supply a large number of vessels at an early delivery date may have been important in getting a large amount of orders also.
The detailed cost investigations undertaken by the Commission show that certain Korean yards continue to price ships below cost while others are trying to improve their bottom line. Most major Korean yards managed to show a profit for 2001, thanks to the high sales volumes and the related advance payments received, although in some instances, certain one-off measures aimed to improve the yards' financial situation also played a role.
Despite various rounds of talks with Korea, the Commission did not manage to convince Korean authorities and yards to fully implement market principles and allow a shake-out of non-viable companies. An improvement in the market situation is therefore not likely and consequently the Commission has proposed measures to the Council, namely the preparation of a request to the WTO for dispute settlement and a Regulation concerning a temporary defensive mechanism to shipbuilding.
The present report confirms the findings from the previous four Commission reports, i.e. that the world shipbuilding market is characterised by a strong imbalance of supply and demand, that over-expansion of shipbuilding capacity in Korea has led to very low offer prices in most market segments and that the resulting losses for Korean yards, in some cases, have been compensated through financial restructuring which, in the view of the Commission, is not in line with applicable WTO rules. The Commission will continue its market monitoring and cost investigations and report its findings to the Council as foreseen in Article 12 of Regulation (EC) No 1540/98.
Article 12 of Council Regulation (EC) No 1540/98 of 29 June 1998 establishing new rules on aid to shipbuilding4 requires the Commission to present to the Council a regular report on the market situation and assess whether European yards are affected by anti-competitive practices. Accordingly, the Commission has presented to the Council four previous reports on the situation in world shipbuilding5, outlining the serious difficulties the shipbuilding sector is facing and providing detailed information on the unfair commercial practices of Far East competitors. This fifth report is in continuity with the approach of the first four reports. Therefore this report should be seen in conjunction with key elements of the earlier reports, in particular regarding
- the longer term supply and demand analysis for merchant ships;
- general remarks on the nature of shipbuilding contracts and on the underlying study work;
- the analysis of the financial sector in South Korea;
- details of certain investigated shipyards;
- the description of the applied methodology;
- the analysis of the shipbuilding industry in the People's Republic of China; and
- the historical background of aid to EU shipyards.
Nevertheless, the information contained in the first four reports is updated in the present report as appropriate, and essential elements are repeated where necessary. This concerns in particular the detailed cost investigations for shipbuilding orders awarded to Asian yards as the underlying cost model is re-run whenever new or better information is obtained. Cost investigations which have been reviewed are marked in the reference table.
This fifth report follows the structure used in the fourth report and updates information on market shares and price developments. Moreover, six new cost investigations for specific orders placed in South Korean yards have been undertaken since the last report and the results are presented in this report.
The Commission's shipbuilding reports have been used to support political initiatives with the objective to find solutions to the persistent problems in the sector. Whilst the imbalance of demand and supply in world shipbuilding has been an issue for many years, hard evidence of resulting unfair trading practices has been difficult to provide due to the nature of shipbuilding contracts (see the related chapter in the first report COM(1999) 474 final) and the economic globalisation which is a typical feature of the maritime industries. Traditional trade policy instruments such as custom tariffs and quotas are not applicable here, leaving policy makers with a very limited set of options. Therefore direct or indirect state support has for a long time been the instrument of choice. As the Commission is convinced that state aid is in principle distortive and does not necessarily help the industry to improve its competitiveness, the Commission has pursued a policy aiming at the reduction of state aid in the sector. There is wide consensus in the EU shipbuilding industry that this approach will benefit EU shipbuilding in the long run.
However, these efforts were seriously undermined when the Asian crisis of 1997/1998 allowed shipyards in South Korea to radically lower prices and win significant market shares in important market segments, to the detriment of EU competitors. While in general the competitive advantages from the ensuing Won devaluation had to be recognised, it turned out that the significantly lower newbuilding prices did not recover when the Won started to appreciate again. Furthermore, the costs stemming from the high level of foreign-currency denominated debt of Korean shipbuilders (which were needed in order to finance the massive expansion of Korean yards in the early 90's) appeared not to be included in their cost calculations. The resulting losses led to serious problems in South Korean yards. Nevertheless, all Korean yards (including those which had to seek court protection) continued to produce ships and offer them in the world market at very low prices.
The resulting market distortions became so apparent that the Commission decided to award a study in order to establish basic facts, such as the actual cost base in Korea and the impact of the policies of the Korean Government with regard to shipbuilding. The shipbuilding market monitoring study, now in its third year, has provided a wealth of data on market developments and the underlying industrial policies. The study deals with shipbuilding in the Far East in general, but due to the market developments most activities have focussed on Korean shipbuilding. The shipbuilding market monitoring study underpins this report and the previous four.
Based on the findings provided in the first four Commission reports, the Commission tried, up to May 2001, to engage South Korea in talks with the aim to stabilise the world shipbuilding market through market instruments. These efforts took place on a bi-lateral level and in the OECD. However, despite a number of negotiation rounds, no progress was achieved, as the Korean Government claimed that it had no influence on the shipyards and the financial institutions supporting them, and it was convinced that business was conducted along free market principles.
Based on a complaint by the EU shipbuilding industry under the Trade Barrier Regulation (TBR)6 the Commission undertook a detailed investigation of Korean trading practices in shipbuilding. The investigation concluded that "substantial subsidies have been granted to Korean shipyards through both export and domestic programmes which contravene the WTO's 1994 subsidies agreement"7. The investigation also concluded that "there. is evidence that the subsidies have caused adverse effects to EU industry within the meaning of the WTO Subsidies Agreement and are, therefore, actionable"8.
Consequently the Commission decided to follow a two-pronged approach in order to address the problem9. On the one hand it would immediately pursue the matter with the Korean authorities in order to obtain the immediate withdrawal of the subsidies or the removal of the adverse effects. Unless a solution was achieved amicably by 30 June 2001, the Commission would proceed with the initiation of a procedure within the framework of the WTO (which it has not done so far). At the same time the Commission would propose a temporary support mechanism, which would be introduced in parallel with the initiation of the WTO procedure. As several rounds of talks with the Korean Government did not yield any tangible results the proposal for a temporary support mechanism was made and submitted to the Council10.
The Industry Council of 5 December 2001 did not reach a decision on the Commission proposal and it was decided to continue the discussion during the Spanish Presidency which has expressed its intention to conclude the matter during its tenure. The EU shipbuilding industry in the meantime requested an extension of the investigative period for the TBR investigation, in order to cover the market developments in the period December 2000 to December 2001 as well. The investigation is on-going.
This present fifth shipbuilding report describes the recent developments in the world shipbuilding market as required in Article 12 of Regulation (EC) No 1540/98.
1 OJ L 202 of 18.7.1998, p. 1.
2 COM(1999) 474 final of 13.10.1999, COM(2000) 263 final of 3.5.2000, COM(2000) 730 final of 15.11.2000, COM(2001) 219 final of 2.5.2001. These reports are available on internet (in English only): http://europa.eu.int/comm/enterprise/maritime/shipbuilding_market/index.htm.
3 Most of the larger Chinese yards are currently undertaking significant investment projects for new or extended dry docks and for additional crane capacity which will boost their output and productivity (see for example Lloyd's List of 5 and 14 February 2002).
4 OJ L 202 of 18.7,1998, p.1.
5 COM(1999) 474 final of 13.10.1999, COM(2000) 263 final of 3.5.2000, COM(2000) 730 final of 15.11.2000, COM(2001) 219 final of 2.5.2001
6 Council Regulation (EC) No 3286/94 of 22 December 1994 laying down Community procedures in the field of the common commercial policy in order to ensure the exercise of the community's rights under international trade rules, in particular those established under the auspices of the World Trade Organization, Official Journal L 349, 31.12.1994, p.0071-0078.
7 Press release IP/01/656, 8.5.2001.
8 Press Memo 00/176, 8.5.2001.
9 Press release IP/01/656, 8.5.2001.
10 COM(2001)401 final, 25.7.2001, see also press release IP/01/1078, 25.7.2001. The Commission proposal foresees to authorise contract related aid of up to 14 % for those shiptypes for which it has been demonstrated that the EU shipbuilding industry has suffered considerable injury through unfair Korean trading practices.