Fourth Report from the Commission to the Council on the situation in world shipbuilding
Date: 2001-05-02
Institutions: European Commission
Subjects: competition, international market, market research, market supervision, shipbuilding

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 2.5.2001
COM(2001) 219 final

FOURTH REPORT FROM THE COMMISSION
TO THE COUNCIL

ON THE SITUATION IN WORLD SHIPBUILDING

FOURTH REPORT FROM THE COMMISSION
TO THE COUNCIL

ON THE SITUATION IN WORLD SHIPBUILDING

TABLE OF CONTENTS

Executive Summary ............................................................................................................... 3

1.

2.

2.1.

2.2.

2.3.

3.

3.1.

3.2.

4.

5.

Introduction.............................................................................................................. 4

Market analysis ........................................................................................................ 5

Market shares ........................................................................................................... 5

Price developments................................................................................................... 9

Detailed price analysis............................................................................................ 11

Detailed cost investigations .................................................................................... 13

Update of previous investigations ........................................................................... 13

New investigations ................................................................................................. 16

Conclusions............................................................................................................ 19

References.............................................................................................................. 20

2

EXECUTIVE SUMMARY

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 appraise whether European yards are affected by anti-competitive
practices. Accordingly, the Commission has presented to the Council three 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 fourth report is in continuity with the approach and the findings of the first
three reports. A separate Commission report will be issued in May 2001 on the alleged
the TBR examination procedure initiated on
subsidisation of Korean shipyards under
2 December 20003.

The year 2000 has seen a significant expansion in orders for new ships. Nearly 56 % more
orders were placed as compared to 1999. The larger part of this increase in ordering has been
to the benefit of South Korean shipyards which have seen market share increase again. EU
yards also benefited considerably from the higher demand for ships, although orders for cruise
ships may have played a dominant role here. In 2000, South Korea has consolidated its
position as the largest shipbuilding country/region in the world, accounting for more than
35 % of all tonnage ordered world-wide.

The market share for the EU shipbuilding industry has remained stable in 2000 as losses in
some market segments were compensated by additional orders for cruise ships. Half of the
volume (in compensated gross tons - cgt) produced in Europe in 2000 concerns these ships for
which there is as yet no Far East competition. However, only a limited number of EU yards
produce cruise ships. The largest part of the EU shipbuilding yards continue to compete
against Far East yards on standard merchant vessels. Including cruise ships, the market share
for the EU and Norway is ca. 18 % (in cgt). If orders for cruise ships are excluded from the
overall figures, the market share of EU yards for new orders in 2000 is below 10 %.

In 2000 prices for new ships were reported to recover in certain market segments from the
very low levels seen after the Asian crisis in 1997. To gain a more accurate picture and
confirmation of these reported developments, prices in South Korean shipyards have been
monitored on a contract by contract basis. The analysis clearly shows that the upward
tendency of prices seen in autumn 2000 was not sustained, leading to the conclusion that
overall price levels have not recovered and are still significantly lower than before the Asian
crisis of 1997. There are no indications that Korean shipbuilders managed to raise price levels
across the board as repeatedly announced by Korean sources. Therefore the Commission
maintains its view that significant over-capacities in South Korean shipbuilding, combined
with an ongoing need to generate new orders in order to assure sufficient cash flow, prevent a
recovery of prices and the market in general.

1

2

3

OJ L 202 of 18.7.1998, p. 1.
COM(1999) 474 final of 13.10.1999, COM(2000) 263 final of 3.5.2000, and COM(2000) 730 final of
15.11.2000.
OJ C°345 of 2.12.2000.

3

Since the Commission's last report seven more detailed cost investigations for orders placed in
Korean yards have been undertaken. In no case it has been concluded that any of the contracts
examined has been priced at an economically viable level, i.e. covering operating costs,
profits and debt repayments. Losses, calculated in this way, on these newly investigated
orders are 14 % on average.

The Commission will continue its market monitoring and cost investigations.

1.

INTRODUCTION

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 appraise whether European yards are
affected by anti-competitive practices. Accordingly, the Commission has presented
three previous reports on the situation in world shipbuilding5,
to the Council
outlining the serious difficulties the shipbuilding sector is facing and providing
detailed information on the unfair commercial practices of Far East competitors. This
fourth report is in continuity with the approach and the findings of the first three
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;

general remarks on the nature of shipbuilding contracts and on the underlying
study works;

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 three 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.

This fourth report updates information on market shares and price developments.
Moreover, 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.

4

5

OJ L 202 of 18.7.1998, p. 1.
COM(1999) 474 final of 13.10.1999, COM(2000) 263 final of 3.5.2000, and COM(2000) 730 final of
15.11.2000.

4

2.

MARKET ANALYSIS

2.1.

Market shares

The year 2000 has seen a significant expansion in orders for new ships. Nearly 56 %
more orders were placed as compared to 1999, bringing the total volume of new
orders to 29,7 Mio. cgt. The larger part of this increase in ordering has been to the
benefit of South Korean shipyards which have seen market share increase again. The
following graph presents market shares for new order volume based on cgt in the
main shipbuilding regions, comparing 2000 with previous years. It should be noted
that the data for 2000 is based on available figures which, due to a delay in reporting,
are not yet fully consolidated.

Fig. 1 - Market shares in new orders in percent and based on cgt, 1997-2000

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

1997

1998

1999

2000

Rest of World

EU + Norway

South Korea

Japan

15,05%

17,90%

29,16%

37,89%

16,28%

25,82%

24,90%

33,11%

23,52%

17,18%

33,29%

25,97%

20,97%

17,54%

35,59%

25,90%

Source: Lloyd's Register of Shipping.

5

This shows that in 2000, South Korea has consolidated its position as the largest
shipbuilding country/region in the world, accounting for more than 35 % of all
tonnage ordered world-wide. Therefore the trend described in the previous reports
continues. The latest expansion of Korean market share in the period in question has
been mainly to the detriment of the "Rest of the World", although affecting different
shiptypes (and thus different shipyards) in different ways, while previous expansion
of Korean market share had been to the detriment of Japanese and European yards.
At the same time South Korean yards face a situation in which ship prices have not
recovered from their historical low in 1998/99 and profits are difficult to achieve. To
fill the over-capacities in Korea (and recover at least part of the massive investments
needed for physical expansion), yards actively seek to generate a high rate of new
orders, while at the same time they target higher-value market segments such as gas
carriers, containerships or ferries. With all major Korean yards following the same
approach, depressed prices now affect all market segments where Korean yards are
active. Moreover the fierce internal competition in Korea has led yards to expand
capacity even further (e.g. through converting repair facilities into newbuilding
facilities as in the case of Hyundai Mipo or lengthening of docks as undertaken by
Daewoo), hoping to achieve increased economies of scale and thus a competitive
advantage. Consequently, there are no signs that Korean yards will act to stabilise the
market and raise prices to commercially viable levels, in particular as yard closures
in Korea are politically difficult to implement, and yards continue - as they did in the
past - to rely on support from the Government-controlled financial sector when their
situation becomes critical.

The fact that, despite the increased Korean market share, the market share for the EU
shipbuilding industry (including Norway) has not further deteriorated in 2000 has to
be seen in the light of the still booming cruise ship industry. Half (50,1 %) of the cgt
volume produced in Europe in 2000 concerns these ships for which there is as yet no
Far East competition. Nevertheless, the highly visible efforts of Samsung Heavy
Industries to enter the cruise ship market, with some 200 staff assigned to the task,
were used by some cruise lines as a leverage to negotiate and obtain lower contract
prices with EU yards. While the added value generated by the building of cruise
ships may be significant for the EU economy, and the efforts of the EU shipbuilding
industry to develop a sound alternative portfolio deserve recognition, it should be
kept in mind that only a very limited number of EU yards produce cruise ships. The
largest part of the EU shipbuilding yards continues to compete against Far East yards
on standard merchant vessels. The situation of some individual yards, in particular
those outside the Euro-zone, has become very critical and has resulted in partial
closures with significant staff redundancies in 2000 (for example in the UK at
Harland & Wolff and at Cammell Laird). Moreover, more and more indications
emerge that the current cruise ship boom may soon be over. Over-capacities in the
cruise sector already have an impact on prices for cruises, hurting the profits of the
cruise companies and making them more reluctant
to order new tonnage. The
situation of this industry very much depends on economic conditions in the USA
(where most of the demand for cruises is located) which now shows signs of
weakening. If demand in the cruise sector should falter, this important segment of
EU shipbuilding activities will be seriously affected also.

6

If orders for cruise ships are excluded from the overall figures, the market shares for
new orders in 2000 (in cgt) are as follows:

–

–

–

–

Korea 39,62 %

Japan 26,95 %

EU

9,96 %

Rest of World 23,47 %.

Another important factor in considering market shares in 2000 is that, in accordance
with Council Regulation No 1540/98, operating aid in the EU has been abolished for
shipbuilding contracts signed as of 1 January 2001. This deadline has led to a great
number of orders placed in EU yards in the last weeks of 2000. Indeed, the overall
volume of new orders placed at EU yards in 2000 increased by 64,5 % as compared
to 1999, exceeding the overall growth in the world market (56 %). Consequently, and
in line with expectations, ordering has been very slow in the first two months of
2001. Only longer term statistics will reveal whether additional orders have been
placed or whether, as expected, future demand was simply brought forward. In Japan
where domestic demand has always been an important factor, shipyards profited
from some new orders from Japanese owners,
in particular bulk carriers.
Nevertheless,
the Japanese shipbuilding industry is currently undergoing a
restructuring process with closures of some smaller facilities and mergers between
the big shipbuilding groups. The Japanese Government aims to reduce the number of
major shipbuilding groups in Japan from seven to three or four. At least two mergers,
between Hitachi Zosen and NKK Corp., and between Mitsui Engineering and
and Ishikawajima-Harima Heavy
Shipbuilding, Kawasaki Heavy Industries
Industries, have in the meantime been undertaken or are being concretely discussed,
respectively. More restructuring is expected as Japanese yards have been the main
victim of aggressive Korean pricing practices, luring away European owners who
have traditionally ordered in Japan.

Restructuring efforts also continue in the EU. The two large shipbuilding groups in
Spain have been merged, the largest Italian shipbuilder is undergoing privatisation
and, in Germany, efforts are being made to consolidate parts of the shipbuilding
industry through mergers as well.

When analysing the market shares for the important segment of containerships,
which dominate long-distance liner shipping between the world's main economic
centres and which are mainly operated by European shipping lines, the situation is as
follows.

7

Fig. 2 - Market shares in new orders for containerships in percent and based on cgt,
1997-2000

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

1997

1998

1999

2000

Rest of World

16,30%

19,30%

10,90%

24,41%

EU + Norway

South Korea

23,90%

15,10%

15,30%

44,10%

14,10%

11,50%

64,80%

52,09%

Japan

44,60%

21,30%

10,20%

12,00%

Source: Lloyd's Register of Shipping.

The findings from the previous three shipbuilding reports are confirmed. Korean
yards dominate the segment of very large containerships ("Post-Panamax"), leaving
only smaller tonnage, for which Korean yards are not well suited due to their size, to
EU competitors whose market share in the containership sector has shrunk further. It
should be noted that the trend towards much larger ships automatically triggers
demand for smaller ships. These smaller ships are needed to supply cargo to the large
vessels operating between major hubs. This additional demand has mainly benefited
non-EU yards, e.g. in Poland and Croatia, which explains the big market share
increase for the "Rest of the World". The commercial volume of these orders is small
compared to the volume created by the initial demand for the very large ships. In
summary, EU yards lost further market share in the containership segment, while
Korea stabilised its leading position, although at a slightly lower level.

8

2.2.

Price developments

In the second and third quarter of 2000 prices in certain market segments started to
recover from the very low levels seen after the Asian crisis in 1997. This mainly
to some extent,
concerned liquid and dry bulk carriers, gas carriers and,
containerships. With improved freight rates due to a higher oil price or expanding
trade, respectively, owners were willing to pay a premium, in particular when early
delivery of the vessels could be secured.

Market analysts such as Clarkson Research report prices for main shiptypes on a
monthly basis. This information has become something of a benchmark, in particular
for ship brokers, although other sources of prices are available such as from Lloyds
Shipping Economist. It should be noted that Clarkson information is extensively used
by the Korean Shipbuilders Association as evidence for a recovering market. The
latest
taken from the
December 2000 issue of "Clarkson World Shipyard Monitor". The tables compare
prices at the end of 1999 with those prevailing in November 2000 firstly for bulk
shiptypes and secondly for other shiptypes (referred to as specialised vessels by
Clarkson Research).

summarised in the following tables,

information is

Table 1 - Clarkson Research price data for bulk shiptypes (to November 2000)

Shiptype

Price (Mio. USD)

1999

2000

Tankers

VLCC

300 000 dwt

Suezmax

150 000 dwt

Aframax

110 000 dwt

Panamax

68 000 dwt

Handy

47 000 dwt

Bulkers

Capesize

170 000 dwt

Panamax

75 000 dwt

Handymax

51 000 dwt

Handysize

30 000 dwt

69,0

42,5

33,0

31,0

26,0

35,0

22,0

20,0

15,5

76,0

52,0

41,0

35,5

29,0

40,0

22,0

20,5

15,0

Change

10,1 %

22,4 %

24,2 %

14,5 %

11,5 %

14,3 %

0,0 %

2,5 %

-3,2 %

9

Table 2 - Clarkson Research price data for specialised shiptypes (to November 2000)

Shiptype

LNG carrier

LPG carrier

Container

Container

Container

Ro/Ro

Ro/Ro

138 000 m3

78 000 m3

400 TEU

1 100 TEU

3 500 TEU

1 200 - 1 300 lm

2 300 - 2 500 lm

Tweendecker

15 000 dwt

Price (Mio. USD)

1999

165,0

56,0

8,5

17,5

38,0

21,5

32,5

13,0

2000

172,5

60,0

10,0

18,0

41,5

20,0

33,0

13,8

Change

4,5 %

7,1 %

17,6 %

2,9 %

9,2 %

-7,0 %

1,5 %

6,2 %

The tanker prices show considerable rises in the eleven-month period quoted. The
average for all the types shown is just above 16 %. However, detailed analysis of
the
contract prices undertaken by an independent consultant on behalf of
Commission shows that this is far too optimistic and does not reflect the actual level
of prices of contracts placed over this year. For example, the price level shown for a
Suezmax at 52,0 Mio. USD is far higher than any Suezmax price yet seen in South
Korean shipyards.

Bulk carrier price rises are generally indicated as rising less, with the overall average
rise being 3,4 % over the period shown. The biggest rise is shown for capesize ships
and again this is regarded as over-optimistic when compared with the results of the
detailed contract price analysis carried out for the Commission.

For the specialist shiptypes the most significant sector in relation to the South Korean
industry is container ship construction, where Clarkson Research indicates an
average price rise of just under 10 % over the year. Again, this does not concur with
the detailed analysis of contracts taken in South Korea, as discussed later in this
report. It should also be noted that Clarkson Research does not cover the segment of
the very large containerships where most of the market activity took place in 2000
and therefore the price information given by Clarkson Research has to be seen as
incomplete in that respect. The price level indicated by Clarkson Research for a LNG
tanker is difficult to understand in that no price at that level has so far been seen from
a Korean or any other shipyard.

In the search for explanations for the significant price drops for newly built ships
productivity increases which are estimated to be at maximum 5-7 % per year or by
break-through innovations as they can be observed, for example, in the IT industry,
cannot provide the answer. Ships are large scale capital goods with a life expectancy
of up to 30 years. Investments are carefully considered and technical innovation is in
general evolutionary,
i.e. the shipping industry rarely takes the risk to order a
completely untested design. Comparing the price levels before the Asian crisis of
1997 with today's levels shows that the price drop has not been recovered. The initial
justifications for the significantly lower prices given by Korea (WON depreciation,
lower wages, longer working hours, massive annual productivity increases) have
mostly lost their significance, leading the Commission to doubt that current price

10

levels are commercially viable. For comparison purposes, prices per shiptype as
found through the Commission's detailed price monitoring on a contract by contract
base are also available. As the following figures indicate, price levels in 2000 were
still significantly lower than before the Asian financial crisis.

Table 3 - Comparison of price levels in 1997 and 2000 for certain shiptypes

Panamax Container Carrier 3 500 TEU

1 100 TEU Container Carrier

Very Large Crude Oil Carrier (VLCC)

Suezmax Tanker

Capesize Bulk Carrier

Panamax Bulk Carrier

Liquid Natural Gas Carrier

Tweendecker 15 000 dwt

1997
(*)

End
2000 (*)

Change
in %

2000
(**)

Change
in %

53,0

20,0

83,0

52,0

40,5

27,0

230,0

16,5

41,5

18,0

76,0

52,0

40,0

22,0

172,5

13,8

-21,7

-10,0

-8,4

0,0

-1,2

-18,5

-25,0

-16,4

38,0

N/A

70,0

43,0

39,0

22,0

155,0

N/A

-28,3

-

-15,7

-17,3

-3,7

-18,5

-32,6

-

Source: Clarkson World Shipyard Monitor(*), Commission (**).

In summary the prices indicated in the Clarkson monthly report do not concur with
the findings of detailed research on a contract by contract basis undertaken for the
Commission. Details of this research are given below. A more specific critical
analysis of the approach used by Clarkson Research was already provided in the third
shipbuilding report and is not repeated here.

2.3.

Detailed price analysis

Prices in South Korean shipyards have been monitored on a contract by contract
basis to gain a more accurate picture of developments than is available from
commercially published statistics. The results are presented below in the form of
indices that compare current price levels with the average level prevailing in the
twelve months prior to April 2000 (index=100), or in other words comparing current
prices to the level prevailing prior to the signing of the "Agreed Minutes" between
the EU and South Korea.

The overall index is presented in Figure 3, showing average movement for all
shiptypes in all shipyards in South Korea.

11

Fig. 3 - Overall price index for South Korean shipyards

x
e
d
n
I

108
106
104
102
100
98
96
94
92

April

May

June

July

September
August

November
October

December

2000

The graph clearly shows that the upward tendency of prices seen in autumn 2000 was
not sustained. As already explained in the third report on shipbuilding, various
developments came together at the time: Tankers and bulk carriers benefited from a
healthy transport market, and the subsequent demand for new ships drove up prices.
This effect was more pronounced in the case of tankers, as the market had started to
anticipate the impact of the forthcoming new EU legislation and IMO rules on an
accelerated phasing-out of existing single hull tankers. A currently good market for
smaller tankers and the fear that, when the legislation has come into force, prices will
be significantly higher, has triggered demand with the result that yards have been able
to ask higher prices for these shiptypes. With limited availability of building slots for
early delivery in Korean yards and EU yards not able to compete at these still very
low, commercially non-viable price levels, owners need to pay a premium compared to
1998 and 1999. Prices for container ships increased in the first half of 2000, but have
since fallen back somewhat, partly because freight rates have not rebounded as is the
case with liquid bulk cargo, and the growth in vessel size provides a new economy of
scale which allows companies to operate at comparatively low freight rates. In the
meantime the freight rates in dry and liquid cargo shipping have also levelled off,
resulting in fresh downward pressure on prices.

The Commission also analysed price trends for individual Korean yards. Depending
on the typical product portfolio, the economic situation of the company and the
resulting pricing policy, a picture emerges which reflects the strengths and
weaknesses of the particular yard. While Samho Heavy Industries, now under
management control of Hyundai Heavy Industries, has managed to increase prices
significantly (although the previous price levels were extremely low and current
price levels are still under
the Korean average), Hyundai Heavy Industries
themselves, and in particular Hyundai Mipo, could not sustain higher price levels and
have actually fallen back behind the price levels of early 2000. Hanjin Heavy
Industries and Construction, already in previous reports considered a comparatively
prudent operator, managed to increase price levels in a sustained manner, indicating

12

that the selective intake of orders and the core business of providing ships for the
parent company, Hanjin Shipping, have paid off.

The Commission's detailed price analysis leads to the conclusion that overall price
levels have not recovered and are still significantly lower than before the Asian crisis
of 1997. There are no indications that Korean shipbuilders managed to raise price
levels across the board as repeatedly announced. Therefore the Commission
maintains its view that significant over-capacities in South Korean shipbuilding,
combined with a permanent need to generate new orders in order to assure sufficient
cash flow, prevent a recovery of prices and the market in general.

Not all major Korean yards have published their 2000 accounts yet. For those who
did massive drops in profits or even losses are reported. Officially Korean yards
claim high costs for disinvestment with regard to other chaebol subsidiaries (in
particular those in the automotive and the construction sector) as the reason for the
losses. It is, however, clear that the main reason has to be seen in very low order
prices in 1998 and 1999 while building and delivery of the vessels took place under
changed economic conditions in 2000 (wage increases, price inflation, WON
appreciation). This development was forecasted by the Commission in its previous
reports.

The allegations on Government intervention in the financing of the sector are being
investigated in the context of an examination procedure under the Trade Barriers
Regulation (Regulation 3286/94); a report to that effect will be submitted to the
Member States at the end of May 2001.

In general, it appears that the economic situation of Korean yards has not improved.
Daedong Shipbuilding Co. remains under court receivership, while Halla Heavy
Industries and Daewoo Heavy Industries have been transformed into new companies,
allowing them to restructure or shed their debts. The other major yards, Hyundai
Heavy Industries, Samsung Heavy Industries and, to a lesser extent, Hanjin Heavy
Industries and Construction, have seen their profits reduced in 2000, followed by
announcements that they will now focus on higher-value tonnage to make 2001 a
more profitable year.

3.

DETAILED COST INVESTIGATIONS

3.1.

Update of previous investigations

In order to collect the necessary data, the Commission has recourse to consultants
whose ongoing study has defined a cost breakdown model, including all relevant cost
components both of the direct ship production and the shipyard in general. The model
is based on cost elements covering direct costs (materials, labour, equipment, etc.)
and indirect costs (financing of the ship and of the production equipment, overhead,
insurance, etc.). The calculated building price also includes a 5 % profit margin.
More details of the cost model can be found in Annex I of the first report.

13

As the study develops, additional information is gathered and used to validate
previous cost investigations. Consequently, the 25 orders placed in Korea covered in
the first three reports have been recalculated and the updated findings are given
below. As already stated in the first report all parameters are based on a prudent
approach to ensure that calculated minimum costs for particular projects will be
difficult to challenge. The updated analysis includes assumptions on inflation. With
orders taken now but executed in the coming two to three years it is considered normal
business practice to assess future costs at the time of building up to delivery.

In the context of the first shipbuilding report nine orders placed at South Korean
shipyards were investigated. In addition to these orders, 9 more orders placed in Korea
have been analysed for the second report and 7 investigations were added in the third
report. The Commission ensured a balanced selection of shipbuilding contracts while
taking into account the overall objective of the exercise, the relative urgency of the
matter, and the availability of meaningful data for comparison. The Commission is
convinced that the information entered into the analysis is at present the best available
and reliable.

The following table summarises the updated findings for the 25 orders placed in
Korea.

14

Table 4 - Comparison of order prices and calculated construction prices for selected
new shipbuilding contracts (update)

Contract price
(Mio. USD)

Normal
price
(Mio. USD)

Loss/gain as %
of normal price

Shipyard

Shiptype

Owner

Daedong

35 000 dwt
tanker

Seaarland

Daedong

Panamax bulker Sanama

Daedong

46 000 dwt
chemical tanker

Cogema

(*) Daewoo

VLCC

(*)/(**) Daewoo

Ferry

Anangel

Moby

(*) Daewoo

Panamax bulker Chandris

Panamax bulker Diana

3 500 TEU

Detjen

Capesize bulker Cargocean

6 800 TEU

P&O Nedlloyd

5 600 TEU

K Line

(*) Halla

(*) Halla

(*) Halla

(*) HHI

(*) HHI

(*) HHI

(*) HHI

5 500 TEU

Yang Ming

Mipo

Cable layer

Ozone

Il Heung

3 700 dwt
chemical tanker

Naviera
Quimica

Samsung

5 500 TEU

Nordcapital

Samsung

3 400 TEU

CP Offen

Samsung

Ferry

6 250 TEU

5 608 TEU

Minoan

Conti

Conti

1 200 TEU

Rickmers

HHIC

HHIC

HHIC

(***) HHI

7 200 TEU

Hapag-Lloyd

HHI

Suezmax tanker Athenian Sea

Carriers

Daewoo

LNG carrier

Bergesen

Shina

Product tanker

Fratelli
D'Amato

21,5

18,5

24,5

68,5

74,3

22,5

18,9

38,0

32,0

73,5

54,3

25,8

26,1

30,1

73,6

89,0

23,5

31,0

52,8

45,8

81,0

59,3

56,0

37,3

10,5

55,0

36,0

69,5

62,0

58,0

19,5

72,0

43,0

64,6

46,8

13,0

71,5

59,2

94,9

62,7

59,1

20,4

81,0

50,8

151,1

21,7

148,3

24,1

LNG carrier

Bonny Gas

165,0

182,5

-17 %

-29 %

-19 %

-7 %

-17 %

-4 %

-39 %

-28 %

-30 %

-9 %

-8 %

-10 %

-13 %

-20 %

-19 %

-23 %

-39 %

-27 %

-1 %

-2 %

-4 %

-11 %

-7 %

+2 %

-10 %

(*)

These orders were also recalculated after new information on the debt situation of the
companies was received.

(**) This order was recalculated after the correct contract price was revealed in the owner's

account statement for 2000.

(***) This order was recalculated after the correct contract price was revealed in the press.

15

It should be noted that in no case has the model concluded that any of the contracts
examined has been priced at an economically viable level, that is to say covering
direct costs, plus an appropriate contribution to overhead costs, plus an appropriate
contribution to debt servicing (i.e. repayment of principal plus interest), plus an
element of profit. The order for an LNG carrier at Daewoo shows a marginal profit,
but only after the massive debt reduction of nearly 80 %, granted to the yard in
autumn 2000, was factored in.

In most of the contracts investigated, prices have also failed to reach the break-even
level (i.e. the normal price excluding profit). On average the losses taken by Korean
yards with regard to these orders are ca. 16 % of the actual building costs, when
inflation is factored in. Some orders may be close to profitability, but these concern
shipyards that have been able to reduce their debts, either through the issuing of new
shares (HHI) or through debt restructuring (deferred repayments, moratoria on
interest, write-offs, debt-equity swaps) as it
is the case with Daewoo and
Halla/Samho. The Commission is examining the compatibility of the new debt
situation with WTO provisions in the context of the separate TBR investigation.

3.2.

New investigations

Since the Commission's last report seven more detailed cost investigations for orders
placed in Korean yards were undertaken. The aim of these investigations was to cover
as much of the Korean shipbuilding industry as possible, looking at specific orders that
would have been of interest to EU yards. The following orders were investigated:

–

–

–

–

–

–

–

Ferry (series of 2), 39 600 cgt, to be built at Hyundai Heavy Industries (HHI);

7 400 TEU containership (series of 2), 57 850 cgt, to be built at Samsung
Heavy Industries (SHI);

Suezmax crude oil (series of 6), 38 250 cgt, to be built at Hyundai Heavy
Industries (HHI);

2 500 TEU containership (series of 3), 20 844 cgt, to be built at Daedong
Shipbuilding Co. Ltd.;

Chemical tanker (series of 4), 20 800 cgt, to be built at Hyundai Mipo;

Aframax crude oil tanker (series of 4), 26 650 cgt, to be built at Samho Heavy
Industries (SHI);

Ultra Large Crude Oil Carrier (series of 4), 70 500 cgt, to be built at Daewoo
Shipbuilding and Marine Engineering (DSME).

Table 5 summarises the findings from the new cost investigations.

16

Table 5 - Comparison of order prices and calculated construction prices for selected
new ships (new investigations)

Shipyard

Shiptype

Owner

HHI

SHI

HHI

Ferry

7 400 TEU

Stena

OOCL

Suezmax tanker

Jebsen

Daedong

2 500 TEU

EF Shipping

Mipo

SHI

Chemical tanker Bottiglieri

Aframax tanker Chartworld

DSME

ULCC

Shipping

Hellespont

Contract price
(Mio. USD)

Normal
price
(Mio. USD)

Loss/gain as %
of normal price

70,0

79,7

43,0

30,0

24,5

33,5

85,0

88,4

94,1

51,5

31,4

27,3

41,3

94,0

-21 %

-15 %

-17 %

-4 %

-10 %

-19 %

-10 %

Losses taken for these newly investigated orders are on average 14 %, as compared to
average losses of 16 % for the previously investigated orders. The reasons for this
"improvement" are to be found in slightly higher contract prices, in particular for
tankers, and, most of all, in a significant restructuring of the company debts, leading
either to lower debt levels or to longer repayment periods, thus stretching the debts
over more contracts. As stated in the third report, the recognition of these changes in
company debts does not mean that the Commission accepts the new debt situation as
such in terms of its compatibility with WTO provisions.

Concerning the order for a ferry at Hyundai Heavy Industries (HHI), the cost
evaluation concluded that the price had been set below operating cost level. Even
without taking inflation into account, the contract would make a considerable loss at
the operating level and no provision is included for debt repayment. This is likely to
be a significantly loss-making contract for HHI. Stena has in the past been an owner
who ordered vessels, including ferries, with a number of yards in the EU and in Far
East. Ships similar to the one investigated were in the past ordered by Stena in
Korea, in Finland and in Spain. Therefore, and given that at least one EU yard
actually tendered for the contract, it can be concluded that this order should have
been within reach of EU shipbuilders and it was the very low price which ultimately
brought the contract to Korea. Consequently this contract has to be seen as injurious
to EU shipyards.

For the containership of 7 400 TEU to be built at Samsung Heavy Industries the
model calculation concludes that the contract is priced at the operating cost level
(including provision for inflation), and makes no contribution to below the line
expenses, in particular servicing debt. It should be noted that the amount calculated
for servicing debt includes provision for interest payment only and does not provide
for the generation of cash to repay principal. It has been assumed that Samsung will
continue to refinance (i.e. roll over) debt
in this situation, rather than making
repayments as planned. It is therefore concluded that the price of the contract does
not meet two of the aims of the company, as outlined in Samsung's plans set out in
February 2001 in a document from Samsung Securities. Firstly the company
losses
forecasts a return to substantial profitability in 2002, following forecast

17

in 2001. The price does not support that forecast. Secondly significant reduction of
debt is also forecast and again the results do not support that forecast.

With regard to the order for six Suezmax tankers at Hyundai Heavy Industries the
results of the cost evaluation confirm previous results for HHI, i.e. that the price does
not include sufficient provision for inflation and makes no contribution to debt
servicing. The implications of this conclusion are that
the profitability of the
company is likely to continue to decline, rather than recovering as forecast by
Hyundai. It is possible that further refinancing may be needed in future if HHI is
unable to meet its debt commitments. Seven other orders of this shiptype at around
this price were placed at HHI over the first six months of the current monitoring
phase.

For the containership order at Daedong Shipbuilding Co. Ltd. the cost evaluation
concludes that the contract has not been taken on a profitable basis, and may only
reach the break-even level. This indicates a slight departure from previous contracts
examined at Daedong which were highly loss-making. The shipyard has been
specifically helped to achieve this improved result by a number of factors:

–

–

–

–

Following bankruptcy the shipyard is operating under a moratorium on the
servicing of debt that effectively means the cost of facilities is very low;

the ships are for delivery in this year or mid 2002, and inflation effects are
therefore limited;

the shipyard operates at a significantly lower level of overhead than the larger
yards in South Korea;

Daedong has modern purpose-built facilities that
performance.

lead to a high level of

In addition to these specific factors it also has to be said that the price of the ship is
relatively good, in particular in relation to the larger container ships being pursued by
the larger shipyards. It should also be noted that Daedong, still being under court
receivership, is obliged to accept only, as a matter of principle, profitable contracts in
order to recover its economic viability.

Concerning the order for chemical tankers placed at Hyundai Mipo yard the cost
evaluation gave the result that the price covers operating costs and inflation, but will
make no contribution to debt servicing. Whilst the level of debt at Hyundai Mipo is
lower
than the large South Korean shipyards, a considerable debt has been
accumulated in developing shipbuilding facilities (the yard has previously been
active in ship repair only). At this price level it is likely that re-financing will be
required. Future profitability is doubtful, bearing in mind that this result will be
typical of the shipyards orderbook and that early contracts in this series were taken at
a lower price and are therefore likely to be loss making.

With regard to the order for Aframax tankers, placed at Samho Heavy Industries,
results of the cost evaluation reveal that the price taken for this ship is better than
those previously examined but that it is still below an economically viable level and
makes no contribution to servicing Samho's debts. Previous analysis for contracts at
Halla/Samho concluded that whilst massive debt restructuring had enabled the

18

shipyard to reduce contract costs by about 6 %, the prices of contracts remained far
below an economically viable level. Even given the higher price negotiated by HHI
for the two optional contracts (34 Mio. USD), the price falls marginally below the
calculated operating cost, and the contract does not appear to include any provision
for debt servicing. It should also be noted that no provision is included for
management fees for HHI and this will increase the operating loss further.

In the case of the Ultra Large Crude Oil Carrier, ordered by Hellespont at Daewoo
Shipbuilding and Marine Engineering, the cost evaluation concludes that the price
covers operating costs only, without making a significant contribution to debt
servicing commitments of the company following restructuring. This confirms
previous conclusions for Daewoo that the price of contracts is insufficient to generate
an operating profit and to service the company's debt commitments, even after
significant
restructuring. This is despite assumptions for very high levels of
performance at Daewoo.

4.

CONCLUSIONS

This fourth report confirms the findings of the first three reports.

The year 2000 has seen a significant expansion in orders for new ships. Nearly 56 %
more orders were placed as compared to 1999. The larger part of this increase in
ordering has been to the benefit of South Korean shipyards which have seen market
share increase again. EU yards also benefited considerably from the higher demand
for ships, although orders for cruise ships may have played a dominant role here. In
2000, South Korea has consolidated its position as the largest shipbuilding
country/region in the world, accounting for more than 35 % of all tonnage ordered
world-wide.

The market share for the EU shipbuilding industry has remained stable in 2000 as
losses in some market segments were compensated by additional orders for cruise
ships. Half of the volume (in cgt) produced in Europe in 2000 concerns these ships
for which there is as yet no Far East competition. Including cruise ships, the market
share for the EU and Norway is ca. 18 % (in cgt). If orders for cruise ships are
excluded from the overall figures, the market share of EU yards for new orders in
2000 is below 10 %.

In 2000 prices for new ships were reported to recover in certain market segments
from the very low levels seen after the Asian crisis in 1997. Prices in South Korean
shipyards have been monitored on a contract by contract basis by the Commission.
The analysis clearly shows that the upward tendency of prices seen in autumn 2000
leading to the conclusion that overall price levels have not
was not sustained,
recovered and are still significantly lower than before the Asian crisis of 1997. There
are no indications that Korean shipbuilders managed to raise price levels across the
board as repeatedly announced by Korean sources. Therefore the Commission
maintains its view that significant over-capacities in South Korean shipbuilding,
combined with an ongoing need to generate new orders in order to assure sufficient
cash flow, prevent a recovery of prices and the market in general.

19

Since the Commission's last report, seven more detailed cost investigations for orders
placed in Korean yards have been undertaken. In no case it has been concluded that
any of the contracts examined has been priced at an economically viable level, i.e.
covering operating costs, profits and debt repayments. Losses, calculated in this way,
on these newly investigated orders are 14 % on average.

The Commission will,
in line with its obligations arising from the reporting
requirements in Council Regulation (EC) No 1540/98, continue its market
monitoring and cost investigations.

5.

REFERENCES

Council Regulation (EC) No 1540/98 of 29 June 1998 establishing new rules on aid to
shipbuilding, Official Journal L 202, 18.7.1998 p. 0001-0010

Report from the Commission to the Council on the situation in world shipbuilding,
COM(1999) 474 final of 13.10.1999

Second Report from the Commission to the Council on the situation in world
shipbuilding, COM(2000) 263 final of 3.5.2000

Third Report from the Commission to the Council on the situation in world
shipbuilding, COM(2000) 730 final of 15.11.2000

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

OECD "Agreement Respecting Normal Competitive Conditions in the Commercial
Shipbuilding and Repair Industry", Final Act signed in December 1994 by the
Commission of the European Communities, and the Governments of Finland, Japan,
the Republic of Korea, Norway, Sweden and the United States

OECD "Understanding on export credits for ships", 1994.

20