Fifth Report from the Commission to the Council on the situation in world shipbuilding
Date: 2002-04-30
Institutions: European Commission
Subjects: competition, international market, market research, market supervision, shipbuilding

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 30.4.2002
COM(2002) 205 final

FIFTH REPORT FROM THE COMMISSION
TO THE COUNCIL

ON THE SITUATION IN WORLD SHIPBUILDING

FIFTH 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 ............................................................................................................ 7

Market developments and market shares ..................................................................... 7

Price developments .................................................................................................... 10

Detailed price analysis ............................................................................................... 12

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

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

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

Conclusions................................................................................................................ 18

References .................................................................................................................. 19

2

EXECUTIVE SUMMARY

Article 12 of Council Regulation (EC) No 1540/98 of 29 June 1998 establishing new rules on
aid to shipbuilding 1 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 shipbuilding 2, 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 China 3, 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

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,  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.
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).

3

                                                
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.

1.

INTRODUCTION

Article 12 of Council Regulation (EC) No 1540/98 of 29 June 1998 establishing new
rules  on  aid  to  shipbuilding 4  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  shipbuilding 5, 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

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,  COM(2000) 730  final  of
15.11.2000, COM(2001) 219 final of 2.5.2001

4

                                                
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.

5

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 problem 9. 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 Council 10.

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.

6

7

8

9

10

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.
Press release IP/01/656, 8.5.2001.
Press Memo 00/176, 8.5.2001.
Press release IP/01/656, 8.5.2001.
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.

6

                                                
2.

MARKET ANALYSIS

2.1.

Market developments and market shares

The  year  2001  was  particularly  difficult  for  the  world  shipbuilding  industry.  The
surge in new orders recorded in 2000, triggered by very low prices and making 2000
a  record  year  in  the  history  of  shipbuilding  with  new  orders  reaching  the  level  of
more than 29 Mio. cgt (compensated gross tonnes), proved to be unsustainable. Total
orders  were  21 %  lower  in  2001  compared  to  2000  (based  on  cgt),  as  market
segments  reached  saturation  and  even  lower  offer  prices  failed  to  cause  additional
speculative ordering.

This development was further accelerated by the abolition of operating aid in the EU
from 1 January 2001, bringing forward orders to EU yards, the world-wide economic
slump, lowering the demand for transport services and thus depressing freight rates
and  consequently  newbuilding  demand,  and  the  effects  of  the  terrorist  attacks  of
11 September 2001.

While the decline in the world’s major economies mainly affected the liquid bulk and
the container segments, the events of 11 September had a strong impact on the cruise
industry  which  saw  three  bankruptcies  and  a  significant  drop  in  bookings.  Cruise
operators  then  took  a  reluctant  stand  and  consolidated  operations  (e.g.  by  pursuing
mergers  or  departing  from  certain  cruise  areas)  rather  than  aiming  for  further
expansion.  Consequently  almost  no  orders  for  cruise  ships  were  recorded  in  2001
(the  only  orders  placed  concerned  some  smaller,  specialised  ships  for  Antarctic
cruises  where terrorist threats  are  considered  low  and  customers in general  are  less
prone  to  cancellations).  On  the  contrary,  some  orders  for  new  cruiseships  were
postponed and options for additional ships were not exercised.

As  a  result  the  maritime  industries  in  general  are  facing  a  bearish  mood.  Although
many shipyards are still well occupied with the orders placed in 2000 (and earlier),
there  is  an  increasing  uneasiness  about  the  situation  after  2003  when  most  of  the
previous  orders  will  have  been  completed.  This  concerns  in  particular  those
companies  which  have  technical  constraints  (dock  size,  design  capabilities)  and
therefore a narrow product focus, which are already highly specialised with regard to
shiptypes  built,  which  cannot  count  on  the  creation  of  new  demand,  e.g.  through
domestic  orders  or  which  are  not  in  the  position  to  develop  a  naval  shipbuilding
portfolio  as  an  alternative 
these
characteristics  apply  to  the  majority  of  yards  in  the  EU  and  in  the  European
Economic Area.

to  merchant  shipbuilding.  Unfortunately 

The  delays  in  the  publication  of  ordering  statistics  do  not  allow  to  give  a  final
analysis of 2001 yet, but the Commission undertook significant efforts to consolidate
available information and develop it into a longer time series. The result is presented
in the graph below.

7

Fig. 1  -  Market  shares  in  new  orders  in  percent  and  based  on  cgt,  all  shiptypes,
1992-2001

1 0 0 %
9 0 %
8 0 %
7 0 %
6 0 %
5 0 %
4 0 %
3 0 %
2 0 %
1 0 %
0 %

1 9 9 2 1 9 9 3 1 9 9 4 1 9 9 5 1 9 9 6 1 9 9 7 1 9 9 8 1 9 9 9 2 0 0 0 2 0 0 1

C h in a

J a p a n S  K o re a E U O th e r

Year

China

Japan

South Korea

1992
1993
1994
1995
1996
1997
1998
1999
2000
2001

7 %
3 %
3 %
5 %
7 %
5 %
4 %
10 %
7 %
11 %

37 %
31 %
40 %
31 %
34 %
38 %
33 %
26 %
26 %
33 %

12 %
24 %
18 %
22 %
22 %
29 %
25 %
33 %
36 %
30 %

EU

22 %
22 %
19 %
22 %
19 %
15 %
24 %
16 %
19 %
13 %

Other

23 %
20 %
21 %
20 %
18 %
12 %
15 %
14 %
12 %
12 %

Source: Lloyd's Register/Fairplay – European Commission

It can  be  seen  that  in  2001  South  Korea  and  the  EU  saw  decreasing  market  shares
while Japan and China (PRC) managed to increase their respective shares. This can
be  explained  by  the  developments  described  above:  Korean  yards  had  very  much
focussed on the market for tankers and containerships, and EU yards are strong in the
construction  of  cruise  ships.  All  these  segments  were  massively  affected  by  the
effects mentioned earlier, and shifts in product focus (South Korean yards turning to
the  construction  of  LNG  carriers,  EU  yards  expanding  their  ferry  and  Ro/Ro
portfolios) were not at all sufficient to compensate for the overall decline in orders.
Nevertheless South Korea still maintains a market share significantly higher than the
one it had in the year before the Asian crisis. On the other hand Japan saw a surge in
domestic  orders  and  benefited  from  a  weaker  Yen  compared  to  the  USD,  while
China  became  a  prolific  builder  of  product  tankers  through  low  offer  prices  and
improved quality. Nevertheless the situation in all major shipbuilding regions is seen
as problematic as newbuilding prices decline further and profits are very difficult to
achieve  (see  next  chapter).  Therefore  the  bottom  line  for  many  yards  is  to  stay  in
business and minimise losses as far as possible.

8

In  order  to  give  an  impression  about  the  shipbuilding  market  in  general,  the  graph
below provides a breakdown of new orders during the last five years by shiptype.

Fig. 2 – Change in distribution of orders based on cgt, 1997-2001

%
sha
re

30%

25%

20%

15%

10%

5%

0%

Bulk

Chem/oil

Crude oil

Container

Ferry

Cruise

LPG

LNG

Shiptype

1997

1998

1999

2000

2001

Source: Lloyd's Register/Fairplay – European Commission

Four  main  volume  ship  types  dominate  the  market:  bulk  carriers,  chemical/oil
products  tankers,  crude  oil  tankers  and  container  ships.  Together  these  ship  types
accounted  for  73 %  of  the  total  order  intake  in  2001  (in  cgt).  Other  market  sectors
effectively  make  up  niche  markets,  the  largest  of  which  are  the  cruise  and  LNG
sectors.  The  decline  of  the  cruise  sector  and  growth  of  the  LNG  sector  are
particularly marked in the above chart.

LNG carriers are the only market segment that saw an absolute increase in ordering
for new ships in 2001. Although LNG carriers represent a niche market in terms of
volume (less than 2 % of the number of ships on order is for LNG carriers; in terms
of cgt the share of LNG carriers is ca. 8 % of the existing order volume), the ships
are  highly  sophisticated  and  comparatively  expensive,  with  unit  prices  of  ca.
170 Mio. USD. Key patents for the cargo containment systems are held by European
companies.

Fifty  LNG  carriers  are  currently  on  order  world-wide,  with  28  more  options.  The
confirmed  orders  represent  nearly  36 %  of  the  currently  existing  fleet  of  LNG
carriers (in number of ships). Korea holds 65 % of these orders (by cgt), with Japan
taking ca. 25 % and the EU 10 %. Of the 30 new orders placed in 2001 (there were
only orders for four ships world-wide in 1998), Korea took an even greater share (by
cgt):  79 %,  compared  to  14 %  for  Japan  and  7 %  for  the  EU.  This  means  that  this
segment  which  was  dominated  by  Japanese  and  European  yards  (mainly  in  France
and Finland) before the Asian crisis, is now mostly controlled by Korean yards. The
sector  has  seen  tremendous  growth  in  2001,  but  prices  for  LNG  carriers  have
declined  from  190 Mio. US  Dollars  per  ship  in  1998  to  less  than  170 Mio. US
Dollars in 2001 which can hardly be explained by productivity increases or technical
progress  alone.  Some  orders  in  Korea,  placed  in  late  2000  at  the  beginning  of  the
market  expansion,  were  even  reported  to  be  priced  below  145 Mio. US Dollars.  It
appears  that  Korean  shipbuilders  see  the  LNG  sector  as  the  next  growth  area  in

9

which they try to gain market shares.  In particular Daewoo has been very active in
this sector, taking most of the orders placed in Korea. It should be noted that Daewoo
underwent  a  complete  restructuring  in  2000,  during  which  the  largest  part  of  the
company’s debts were forgiven or converted to equity held by the main creditor, the
Government-controlled Korean Development Bank (KDB).

While there is some reason to believe that the shipment of natural gas will increase in
the future due to environmental concerns and the needs of emerging economies such
as China, it should also be noted that some orders for LNG carriers were  related to
the  energy  crisis  in  the  USA  in  early  2001  which  in  the  end  proved  to  be  of
temporary  nature.  Furthermore  some  orders  related  to  Enron  Corp.  and  probably
these may now be reviewed.

2.2.

Price developments

The  issue  of  newbuilding  contract  prices  is  one  of  the  most  non-transparent  in  the
shipbuilding industry. Neither shipowners nor shipyards are very open when it comes
to  reporting  prices.  This  is  mainly  due  to  the  fact  that  shipbuilding  is  about  large
individual  orders,  fostering  a  close  relationship  between  yard  and  customer.  While
the yard may wish to attract certain customers through competitive pricing (and/or a
particularly  high  specification),  the  owner  typically  does  not  want  to  reveal  a
favourable  purchase  as  this  may  lead  his  customers  to  ask  for  equally  favourable
terms  with  regard  to  charter  terms  or  freight  rates.  Therefore,  reliable  pricing
information is difficult to come by.

The source mostly referred to is H. Clarkson  Ltd. 11 and its various subsidiaries  (in
particular Clarkson Research). While Clarkson is a well recognised company in the
field and their data is also used by international organisations such as the OECD, the
Commission  sees  a  number  of  problems  with  regard  to  the  information  provided.
Clarkson price information is related to certain standard shiptypes (with a number of
important  shiptypes  such  as  Post-Panamax  containerships  or  passenger  ships  being
absent), not to actual contracts concluded. The complexity of ships ordered in terms
of  technical  specification,  series  production  and  financing  terms  is  not  reflected  in
the  single  figure  given  for  each  subtype.  Finally,  Clarkson  also  acts  as  a  broker
which may influence positively their view on the market.

Indeed, the Commission’s detailed price investigations for specific contracts showed
that in almost all cases the prices reported by Clarkson for a comparable ship  were
higher than the ones found through direct investigations. Suezmax tankers may serve
as  an  example:  Clarkson  reports  the  price  for  a  standard  Suezmax  tanker  of
150 000 dwt  as  46,5 Mio USD  (end  2001)  and  Fearnleys  indicates  a  price  of
48,0 Mio USD, while the Commission’s market monitoring observed several orders
at a price of 43,0 Mio USD, i.e. 7 to 10 % lower than reported by those companies.
Nevertheless,  this  report  continues  to  present  price  information  as  provided  by
Clarkson  as  the  most  important  source,  but  reserves  the  right  to  complement  this
information with its own findings.

11

http://www.clarksons.net/.

10

                                                
Table 1 - Clarkson Research price data for bulk shiptypes

Shiptype

Price (Mio. USD)

End-1999

End-2000

End-2001

Tankers

VLCC

300 000 dwt

Suezmax

150 000 dwt

Aframax

110 000 dwt

Panamax

68 000 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

35,0

22,0

20,0

15,5

76,0

52,0

41,0

35,5

40,0

22,0

20,5

15,0

70,0

46,5

36,0

32,0

36,0

20,5

18,5

14,5

Table 2 - Clarkson Research price data for specialised shiptypes

Shiptype

Price (Mio. USD)

End-1999

End-2000

End-2001

138 000 m3

165,0

172,5

165,0

78 000 m3

400 TEU

1 100 TEU

3 500 TEU

1 200 - 1 300 lm

2 300 - 2 500 lm

15 000 dwt

56,0

8,5

17,5

38,0

21,5

32,5

13,0

60,0

10,0

18,0

41,5

20,0

33,0

13,8

60,0

8,9

15,5

36,0

19,0

31,0

13,8

LNG carrier

LPG carrier

Container

Container

Container

Ro/Ro

Ro/Ro

Tweendecker

The  information  provided  by  Clarkson  Research  confirms  the  general  downward
trend in ship prices. This applies to all standard shiptypes and reflects the generally
negative sentiment in the market, despite rising costs stemming from inflation, wage
increases and higher prices for raw materials priced in USD in all major shipbuilding
regions.  This  trend  is  equally  confirmed  through  information  provided  by  the
Norwegian  company  Fearnleys 12,  as  published  by  their  subsidiary  Fearnresearch.
Fearnleys uses a slightly different breakdown of shiptypes with variations in size and
specification.  An  overview,  indicating  slightly  higher  price  levels  for  most  of  the
major shiptypes, is given below.

12

http://www.fearnleys.com/.

11

                                                
Table 3 - Fearnresearch price data for various shiptypes

Tankers

Bulkers

Container

Shiptype

VLCC

Suezmax

Aframax

Panamax

Capesize

Panamax

Handymax

Handysize

Gearless

Gearless

Geared

Geared

280 000 dwt

150 000 dwt

105 000 dwt

68 000 dwt

170 000 dwt

75 000 dwt

53 000 dwt

30 000 dwt

3 500 TEU

2 750 TEU

1 700 TEU

1 000 TEU

Price (Mio. USD)

End-2001

72,0

48,0

37,0

n/a

36,5

20,0

18,0

n/a

37,0

32,0

22,5

16,0

2.3.

Detailed price analysis

Prices  in  South  Korean  shipyards,  which  are  considered  the  price  leaders  for  most
shiptypes 13, are monitored by the Commission on a contract by contract basis to gain
a more accurate picture of developments. This information is used in order to assess
the pricing policies of individual Korean yards and the shiptypes in their portfolio. A
full presentation of this analysis would be too detailed and thus go beyond the scope
of this report.

Price information has been accumulated and price developments are presented below
in the form of an index with the price level of 1987 equalling an index of 100. The
index is based on published information from brokers and other sources and it shows
the long term price trend as analysed by the Commission’s consultant. The index is
continuously  updated  with  the  information  contained  in  the  monthly  monitoring
reports.

13

Chinese yards can be considered the price leaders for general cargo ships (tweendeckers) and product
tankers  with  low  specification;  Japan  has  recently  become  very  competitive  again  for  standard  bulk
carriers (for which it has specialised yards that benefit from serial production) after the recent decline in
the Yen/USD exchange rate. However, for all commercial shiptypes which would be in the range of EU
yards, Korean yards set the prices.

12

                                                
Fig. 3 - Newbuilding price index (1987=100)

Source: European Commission

The  index  clearly  shows  the  massive  drop  in  prices  following  the  Asian  crisis  of
1997/98  and  the  subsequent  efforts  to  increase  prices  along  the  ordering  boom  in
2000. The (not very pronounced) trend towards better prices stopped in late 2000 and
for the  year 2001 the trend was reversed as had to be  expected with the number of
incoming  orders  falling.  It  is  noteworthy  that  2001  price  levels  are  only  ca.  20 %
higher than they were in 1987, i.e. prices did not keep pace e.g. with inflation.

With  very  limited  ordering  expected  for  2002,  price  recovery  will  be  difficult  to
achieve,  although  yards  may  be  inclined  to  look  for  orders  in  those  segments  that
have been less affected by  price  erosion. Past experience has, however,  shown that
this  behaviour  does  not  improve  the  financial  results  of  yards,  but  rather  leads  to
additional price erosion in the targeted sectors, as long as the market is characterised
by over-supply.

The  Commission  will  continue  its  price  monitoring  and  will,  in  accordance  with
market  developments,  put  increasing  emphasis  on  production  in  China.  Chinese
shipbuilders  have  expressed  their  intention  to  aim  for  a  large  scale  expansion  of
facilities,  quoting  South  Korea  as  an  example  to  follow.  This  is  likely  to  lead  to
further price decline, unless China herself  creates significant additional demand for
ships.  With  China  now  being  a  full  WTO  member,  this  issue  should  be  addressed
before more shipbuilding capacity enters the market.

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,

13

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.

As  the  study  develops,  additional  information  is  gathered  and  used  to  validate
previous cost investigations. Consequently, the 32 orders placed in Korea covered in
the  first  four  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.

Since the 4th shipbuilding report the analytical approach has been reviewed in order to
compare  investigation  results  based  on  the  initial  method,  namely  the  calculation  of
contributions  to  debt  servicing  (in  USD  per  cgt)  that  have  to  be  carried  by  the
individual  shipbuilding  project,  to  results  based  on  “costs”  stemming  from  facility
depreciation.  There  is  no  consistent  approach  to  depreciation  in  Korea,  i.e.  different
shipyards use different depreciation periods and calculation methods and it is therefore
very difficult to assign those costs to individual shipbuilding projects.

Nevertheless these alternative calculations have provided a clear picture: Yards, such
as Hyundai (HHI), Hanjin (HHIC) and Samsung (SHI), which have not benefited from
large  scale  debt  restructuring  and  which  operate  comparatively  “old”  facilities  show
(slightly) higher production costs under the debt-based methodology, while yards, such
as  Daewoo  (DSME)  and  Daedong,  which  benefited  from  debt  reductions  and
moratoria but operate comparatively “new” facilities show (slightly) higher production
costs when basing the investigations on the depreciation approach. The two approaches
give  very  similar  results  for  the  other  two  major  Korean  yards,  Hyundai  Mipo  and
Samho. Of course, results are also influenced by the financing terms of the individual
projects investigated. Large up-front payments allow the yard to collect interest while
tail-heavy  payment  terms  increase  financial  costs.  On  the  other  hand  these  payment
terms have no influence on depreciation. Delivery dates for individual orders may also
play a role, if for example debt moratoria have expired by then and the vessel needs to
contribute to the required debt servicing. In summary the differences between the two
approaches  are  insignificant  and  do  not  change  the  conclusions  from  the  individual
cost investigations.

In  the  context  of  the  first  shipbuilding  report  nine  orders  placed  at  South  Korean
shipyards  were  investigated.  In  addition  to  these  orders,  nine  more  orders  placed  in
Korea have been analysed for the second report and seven investigations were added in
the  third report. The  fourth report covered  seven  additional  orders.  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 32 orders placed in Korea. In order to be
consistent  with  the  previous  reports  and  as  differences  between  investigation
methodologies are in general not significant, all results presented are based on the debt
servicing approach.

14

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

Shipyard

Shiptype

Owner

Contract
price
(Mio.
USD)

(*) Daedong

Daedong

(*) Daedong

Daedong
(*) Daewoo
(*)/(**) Daewoo
(*) Daewoo

(*) Daewoo
Daewoo

(*) Halla

(*) Halla
(*) Halla

Samho
(ex-Halla)

(*) HHI
(*) HHI
(*) HHI
(*) HHI
HHI
HHI
(***) HHI
HHI

Hyundai
Mipo
Hyundai
Mipo
(*) HHIC
(*) HHIC
(*) HHIC

Il Heung

(*) Samsung
(*) Samsung
(*) Samsung
Samsung
Shina
(*)

35 000 dwt
tanker
Panamax
bulker
46 000 dwt
chemical tanker
2 500 TEU
VLCC
Ferry
Panamax
bulker
LNG carrier
ULCC

Seaarland

Sanama

Cogema

EF Shipping
Anangel
Moby
Chandris

Bergesen
Majestic
Shipping
Diana

Panamax
bulker
3 500 TEU
Capesize bulker Cargocean
Aframax tanker Chartworld

Detjen

Shipping
6 800 TEU
P&O Nedlloyd
5 600 TEU
K Line
LNG carrier
Bonny Gas
5 500 TEU
Yang Ming
Stena
Ferry
Suezmax tanker Jebsen
7 200 TEU
Hapag-Lloyd
Suezmax tanker Athenian Sea

Cable layer

Chemical
tanker
6 250 TEU
5 608 TEU
1 200 TEU
3 700 dwt
chemical tanker
5 500 TEU
3 400 TEU
Ferry
7 400 TEU
Product tanker

Carriers
Ozone

Bottiglieri

Conti
Conti
Rickmers
Naviera Quimica

Nordcapital
CP Offen
Minoan
OOCL
Fratelli D'Amato

21,5

18,5

24,5

30,0
68,5
74,3
22,5

151,1
85,0

18,9

38,0
32,0
33,5

73,5
54,3
165,0
56,0
70,0
43,0
72,0
43,0

37,3

24,5

62,0
58,0
19,5
10,5

55,0
36,0
69,5
79,7
21,7

Normal
price14
(Mio.
USD)
26,0

26,1

28,1

31,4
73,6
89,0
23,5

159,6
94,0

31,0

52,8
45,8
41,3

81,0
59,3
182,5
64,6
88,4
51,5
81,0
50,8

46,8

27,3

66,0
62,3
21,2
13,0

71,8
59,9
95,6
94,1
24,1

Loss/gain
as % of
normal
price

- 17 %

- 29 %

- 13 %

- 4 %
- 7 %
- 17 %
- 4 %

- 5 %
- 10 %

- 39 %

- 28 %
- 30 %
- 19 %

- 9 %
- 8 %
- 10 %
- 13 %
- 21 %
- 17 %
- 11 %
- 7 %

- 20 %

- 10 %

- 6 %
- 7 %
- 8 %
- 19 %

- 23 %
- 40 %
- 27 %
- 15 %
- 10 %

Ref. to
ship-
building
report no.
1

1

2

4
1
2
2

3
4

1

1
2
4

1
2
2
2
4
4
3
3

1

4

3
3
3
2

2
1
1
4
3

These orders were recalculated after new information on the debt situation of the companies
or on the specific order 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.

14

The normal price includes the cost elements covering direct costs (material, labour, equipment, etc.) and
indirect  costs  (financing  of  the  ship  and  the  production  equipment,  overhead,  insurance,  etc.).  It  also
includes a 5% profit margin.

15

                                                
3.2.

New investigations

Since the  last  shipbuilding report six more orders  (all placed in South Korea)  were
investigated in detail, in order to establish the actual building costs. The investigated
orders are:

– 

– 

– 

– 

– 

– 

VLCC, 48 120 cgt, to be built at Samho Heavy Industries;

LNG carrier (series of 5), 71 850 cgt, to be built at Daewoo Shipbuilding and
Marine Engineering Co. Ltd. (DSME);

LNG carrier, 69 675 cgt, to be built at Samsung Heavy Industries (SHI);

LNG carrier (series of 2), 88 500 cgt, to be built at Hyundai Heavy Industries
(HHI);

Suezmax crude oil tanker (series of 4), 30 800 cgt, to be built at Samho Heavy
Industries;

5 762 TEU  containership  (series  of  2),  42 835 cgt,  to  be  built  at  Samsung
Heavy Industries (SHI);

Table 5 summarises the findings from the new cost investigations.

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

Shipyard

Shiptype

Owner

Samho

DSME

SHI

HHI

VLCC

Oldendorff

LNG

LNG

LNG

Exmar

British Gas

Golar

Samho

Suezmax tanker Thenmaris

SHI

Containership

CP Offen

Contract price
(Mio. USD)

Normal
price15
(Mio. USD)

Loss/gain as %
of normal price

69,5

162,0

162,5

162,6

43,0

55,0

81,0

159,1

166,0

159,3

54,0

59,3

- 14,2 %

+ 1,8 %

- 2,1 %

+ 2,1 %

- 20,0 %

- 7,3 %

While  the  level  of  price  under-cutting  seems  to  diminish,  mainly  due  to  foreign
exchange  gains  in  2001  which  are  expected  to  be  eroded  by  forecasted  wage
increases and inflation 16, the investigations confirm certain known business patterns
of Korean  yards. As  mentioned before the  cost investigations and their  under-lying
assumptions  are  constantly  reviewed  in  order  to  take  into  account  the  latest

15

16

On the definition of normal price see footnote 14.
The Won weakened significantly against the USD in the  first  half of 2001, moving from a prevailing
level of around 1 130 Won to the USD to a level around 1 300. Annual wage increases are expected to
be around 10 % while inflation is still comparatively high at around 8 % per annum.

16

                                                
developments in the yards and in the Korean economy. Therefore debt restructuring
and  re-financing  efforts, as  well as  more  favourable conditions e.g. stemming  from
increased  cash  flow,  are  recognised  and  results  therefore  may  look  more  positive.
However,  the  Commission  concluded  in  its  TBR  report  that  most  of  these  efforts
cannot be considered compatible with WTO rules and Korean yards, despite coming
close  to  covering  their  operating  costs,  are  causing  material  injury  to  EU
shipbuilders.  Without  recognition  of  the  various  measures  undertaken  in  Korea  in
order  to  improve  the  yards’  financial  situation  the  results  of  the  cost  investigations
would  show  a  serious  gap  between  full  costs  and  offer  prices.  Samho,  like  its
predecessor  Halla,  continues  to  price  vessels  far  below  building  costs,  although
losses  of  up  to  40 %  of  actual  building  costs  as  in  the  past  are  no  longer  accepted
since the management of the yard was taken over by Hyundai. Samho also increased
production under the new management, nearly doubling it and focussing mainly on
tankers and thus achieving a better economy of scale. Prices at Samho are now seen
to  reflect  at  least  operating  costs,  although  there  is  still  no  provision  to  service  or
reduce the company’s debts.

DSME  has  become  the  leading  builder  of  LNG  carriers  in  the  world,  with  sixteen
ships  on  order,  giving  the  yard  an  economy  of  scale  unseen  before.  However,  the
detailed analysis undertaken revealed that for the construction of LNG carriers there
are  limits  to  the  improvement  in  efficiency  as  some  yard  equipment  needs  to  be
duplicated, leading to high up-front investment costs. Furthermore, DSME managed
to start as a new company in late 2000, shedding most of the debts of its predecessor.
Therefore  DSME  can  operate  a  very  large  state-of-the-art  shipyard  without  the
massive initial investment costs being reflected in their product prices. Nevertheless
DSME  still  stands  at  a  debt  to  equity  ratio  of  279 %  (estimated  for  2001),  and
although it is currently cash rich due to high order intake in 2001, this is likely to be
dissipated when those orders need to go into production and the actual building costs
begin to be incurred.

SHI  remains  burdened  with  a  comparatively  high  level  of  debt  (the  debt  to  equity
ratio for 2001 is estimated to be still more than 200 %) and this fact is  reflected in
their  cost  base.  SHI  also  suffers  from  a  lower  productivity  than  its  Korean
competitors, leading to higher wage costs. In addition SHI did not manage to attract
multiple orders as Daewoo and Hyundai did and this has to show in the unit costs.

After  being  able  to  dispose  of  some  non-performing  assets  stemming  from  HHI’s
previous engagement with other Hyundai subsidiaries, HHI seems now to be heading
towards profitability. HHI’s debt to equity ratio is assumed to reach 183 % in 2001,
but,  as  with  all  Korean  yards,  an  assessment  of  the  yard’s  financial  situation  is
difficult  to  make.  Very  few  meaningful  financial  figures  are  given  and  published
accounts are not very recent and have little or no annotations.

17

4.

CONCLUSIONS

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  China,  has  led  to  price  depression  which  became
particularly  pronounced  after  the  Asian  crisis  of  1997/98.  Although  a  number  of
Korean yards went bankrupt, capacity was not reduced and companies were allowed
to continue their operations. 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. Consequently ship owners have been
very reluctant to invest in new tonnage  and  yards basically live from orders placed
before  2001.  The  decline  in  ordering  affected  the  sectors  of  containerships  and
cruiseships  most,  leading  to  a  drop  in  overall  market  shares  for  Korea  and  the  EU
which are particularly strong in these segments.

Only  the  segment  of  LNG  carriers  saw  an  increase  in  absolute  order  volume.
However,  this  is  still  a  niche  market,  representing  only  ca.  8 %  of  world  orders  in
cgt. Korean yards took most of the orders for LNG carriers. They hold 65 % of the
world orderbook for LNG carriers 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, as
has  been  the  case  before  in  certain  tanker  segments  and  for  containerships.  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  counter-
measures to the Council.

The  present  report  basically  confirms  the  findings  from  the  previous  four
Commission reports in relation to the general market situation, the price trends and
the  detailed  cost  investigations.  The  Commission  will  continue  with  its  market
monitoring in line with the requirements laid down in Article 12 of Regulation (EC)
No 1540/98.

18

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

Fourth  Report  from  the  Commission  to  the  Council  on  the  situation  in  world
shipbuilding, COM(2001) 219 final of 2.5.2001

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.

19