Sixth Report from the Commission to the Council on the situation in world shipbuilding
Date: 2002-11-13
Institutions: European Commission
Subjects: economic statistics, industrial statistics, international competition, international market, intervention policy, shipbuilding

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 13.11.2002
COM(2002) 622 final

SIXTH REPORT FROM THE COMMISSION
TO THE COUNCIL

ON THE SITUATION IN WORLD SHIPBUILDING

TABLE OF CONTENTS

1.

2.

Introduction.................................................................................................................. 3

Market analysis ............................................................................................................ 4

2.1.

Key market developments............................................................................................ 4

2.1.1. Ordering activity and market shares ............................................................................ 4

2.1.2.

Price developments ...................................................................................................... 6

2.2.

Responses to market developments ............................................................................. 7

2.2.1.

Europe .......................................................................................................................... 7

2.2.2.

South Korea.................................................................................................................. 8

2.2.3.

Japan............................................................................................................................. 8

2.2.4. China ............................................................................................................................ 8

2.3.

Cost investigations ....................................................................................................... 8

2.3.1. Update of previous cost investigations ........................................................................ 8

2.3.2. New cost investigations ............................................................................................. 11

3.

Conclusions................................................................................................................ 13

2

1.

INTRODUCTION

This  sixth  report  from  the  Commission  to  the  Council  on  the  situation  in  world
shipbuilding  follows  the  Commission’s  obligation  to  report  on  the  situation  in  the
world  shipbuilding  market,  laid  down  in  Article 12  of  Council  Regulation  (EC)
No. 1540/981 and is in line with the previous five reports2. Moreover, it responds to
the request expressed by  the Council  during  its meeting on  6 June 2002,  namely  to
report  on  latest  developments  in  the  shipbuilding  sector  in  time  for  the  Industry
Council in November3.

The  Council  decided  on  27  June  2002  that  the  Commission  should  make  a  final
effort  to  solve  the  problems  stemming  from  certain  business  practices  by  Korean
yards and achieve an amicable agreement with South Korea by 30 September 2002 at
the  latest.  Should  the  Commission  report  the  failure  of  these  talks,  it  would  be
authorised to request a dispute settlement at the WTO. At the same time a temporary
defensive  mechanism4  should  be  authorised  for  certain  market  segments  and  for  a
limited period only.

Two  rounds  of  talks  with  the  Government  of  Korea  and  shipyard  representatives
were  conducted  by  the  Commission  (26-27 August 2002  in  Seoul  and  24-27
September 2002  in  Brussels),  but  positions  could  not  be  reconciled  and  the  talks
therefore failed.

In the  absence of  a negotiated solution, the  Commission  has  initiated  WTO  action.
The  Commission's  Decision  on  WTO  action  has  been  published  in  the  Official
Journal of 19 October and the request for bilateral consultations with the Republic of
Korea  has  been  introduced  on  21  October.  A  first  consultation  meeting  will  take
place before the end of November.

Given  that  fully  consolidated  market  data  for  the  year  2002  will  only  be  available
towards the end of the first quarter of 2003, this report is limited to the key market
developments in the first half of 2002.

In addition it provides an update of the previously undertaken cost investigations and
summarises  the  new  cost  investigations  made  since  the  presentation  of  the  fifth
report.

As with previous reports, certain underlying key elements, e.g. concerning scope and
methodology  of  the  market  monitoring  undertaken  by  the  Commission,  are  not
repeated  here.  Those  elements  are  covered  in  the  previous  reports  and  are  listed  in
the introduction to the fifth shipbuilding report.

1

2

3

4

OJ L 202, 18.07.1998, p1

COM(1999) 474 final; COM(2000) 263 final; COM(2000) 730 final; COM(2001) 219 final;
COM(2002) 205 final

Following the reorganisation agreed by the European Council in Seville, the relevant Council is now the
Competitiveness Council.

Council Regulation 1177/02, OJ L 172, 02.07.2002, p1

3

                                                
2.

MARKET ANALYSIS

2.1.

Key market developments

2.1.1. Ordering activity and market shares

The  global  shipbuilding  market  increasingly  feels  the  impact  of  the  past  over-
ordering, the US recession, the uncertainties in the world economy and the effects of
11 September.  Order  intake  in  2002  has  so  far  been  very  slow  and  selective.
Following a decade of almost continuous growth and a boom year in 2000, the rate
of  generation  of  new  orders  has  declined  sharply  (see  graph).  This  change  has
affected EU shipbuilding in particular.  In the absence of any significant cruise-ship
ordering activity, the volume of the order-book (i.e. the existing workload) within the
EU is shrinking quickly.

Quarterly rate of generation of new shipbuilding orders

T
G
C
n
o
i
l
l
i

M

8

7

6

5

4

3

2

1

0

1995

1996

1997

1998

1999

2000

2001

2002

Year

The rate of generation of new orders in the first half of 2002 was around 60 % below
the  peak  year  2000  (comparing  quarterly  figures)  and  has  reached  the  lowest  point
since 1992. Ordering at EU yards was 77 % below the level in 2000. The downturn
in ordering has been accompanied by a fall in prices of more than 15 % on average as
compared to the 2001 level, in general returning to levels last seen in 1999.

Most affected  by the deteriorating market  conditions are container  ships  and  cruise
ships.  Only  product  tankers  see  a  comparatively  stable  demand,  due  to  the
replacement  of  old  tonnage  following  new  EU  maritime  safety  regulations
(« Erika »).

The following table shows the total of orders placed in compensated gross tonnes –
cgt (Source: World Shipbuilding Statistics, LR).

NEW ORDERS IN 2000

NEW ORDERS IN 2001

NEW ORDERS IN 1ST HALF OF 2002

29 500 000

23 648 000

6 004 280

4

 
Looking  at  particular  shiptypes,  the  impact  of  the  developments  described  above
becomes even clearer (all figures in cgt; source: World Shipbuilding Statistics, LR).

SHIPTYPE

NEW ORDERS IN 2000

NEW ORDERS IN 2001

NEW ORDERS IN 1ST HALF
OF 2002

Container ships

Cruise ships

LNG carriers

Product/chemical
tankers

7 369 000

2 581 000

1 238 000

2 767 900

4 970 500

0

2 196 600

3 558 100

519 000

135 000

517 600

1 364 900

The market shares developed as follows (based on cgt):

2000

2001

1ST HALF OF 2002

South Korea

EU

Japan

China

36 %

19 %

26 %

7 %

33 %

12 %

34 %

8 %

30 %

10 %

37 %

9 %

Regarding  container  ships  even  more  tonnage  will  enter  the  market  in  the  coming
months  (reflecting  the  massive  ordering  for  this  shiptype  in  2000  and  2001),
probably leading to lower freight rates and thus a disincentive  to  place new  orders.
The expected economies of scale from ever bigger container ships are now seen to be
limited, due to restrictions in ports and the imbalances in cargo volumes on the major
trading routes.

Concerning cruise  ships the market sentiment is  still  to some  extent  suffering  from
the events of 11 September. Cruise ship operators have responded by shifting cruises
to  areas  closer  to  the  USA  (from  which  most  cruise  customers  still  originate),  and
reducing prices for cruises. Priority clearly lies with filling existing capacity, rather
than  striving  for  further  fleet  expansion.  The  resulting  reduced  revenue  provides  a
disincentive for new investments. The on-going discussions about merging some of
the  biggest  cruise  operators  have  also  contributed  to  a  reluctance  to  pursue  new
investment in this market segment.

Another  of  the  mainstays  of  world  shipbuilding,  oil  tankers,  is  suffering  from  low
freight  rates.  In  addition  there  are  now  fears  regarding  military  action  and  terrorist
threats to oil tankers in the Middle East, which could have various effects: Increasing
oil prices, leading to lower demand for oil shipments (through decreased demand and
procurement  from  sources  closer  to  the  main  markets,  thus  lowering  the  total
tonnage-miles) and increased use of other sources (oil by pipelines, alternative forms
of  energy).  Moreover,  insurance  premiums  would  sharply  increase  and  drive

5

operational  costs  up.  This  volatile  situation  makes  shipowners  reluctant  to  pursue
investment in new ships.

On  the  other  hand,  the  demand  for  dry  bulk  ships  in  a  certain  size  range  has  been
quite  strong,  due  to  increased  need  for  imports  of  coal  and  iron  ore  to  China  and
Japan.

In the segment of product tankers, where recent maritime safety legislation in Europe
has  triggered  the  need  for  replacement  of  old  ships,  demand  has  also  remained
comparatively stable.

The LNG market has not lived up to some of the optimistic forecasts made in 2000
and 2001 and ordering is well below the projections made then. The Commission, in
its fifth shipbuilding report, expressed caution regarding this segment, and although
there is a general trend towards cleaner energy and ordering for new ships is still well
above the average of previous years, market forecasts are now more conservative.

There  remains  a  significant  production  over-capacity  in  the  shipbuilding  sector,
estimated  to  be  at  least  20  to  30 %  above  the  levels  required  for  the  necessary
replacement of old tonnage and the accommodation of additional demand stemming
from  increased  sea-borne  trade.  This  over-capacity  continues  to  have  a  negative
effect on prices.

2.1.2.

Price developments

Ship  prices  have  declined  by  about  15 %  since  mid-2001,  affecting  almost  all
shiptypes.  The  biggest  drops  were  seen  for  container  ships  in  the  3500  TEU  range
(minus 20 %, comparing June 2001 to June 2002), large bulk carriers (minus 17 %)
and large oil tankers (minus 15 %). But also higher value ships saw prices receding
across the board (LNG carriers: minus 9 %, small container ships: minus 9 %). It is
notable that the market segments most affected were those where Korean yards have
their  traditional  product  focus,  indicating  that  the  need  to  fill  the  large  building
facilities in Korea leads to fierce competition between the major Korean yards for the
few remaining orders, keeping prices locked at a very low level or even indicating a
further decline.

The ship price index maintained by the Commission reflects these developments (see
graph). It shows that the price recovery in 2001, when ordering was strong, was not
sustained and price levels are the lowest for more than a decade.

6

Price index for ship newbuildings (1987 = 100)

200

180

160

140

120

100

80

198819891990199119921993199419951996199719981999200020012002

2.2.

Responses to market developments

Shipbuilding is still considered by many nations a strategic industry, which, in their
view,  they cannot  afford to  lose,  because  of  trade  and  defence  interests.  Therefore,
the  issue  of  over-capacities  is  hardly  addressed  and  various  measures  are  taken  in
order  to  maintain  shipbuilding  capacity  despite  lower  market  requirements.  In  a
generalised manner it can be said that market mechanisms only selectively apply to
the  world  shipbuilding  industry.  The  next  paragraphs  give  some  indications  on  the
policies  pursued  in  the  key  shipbuilding  regions,  in  response  to  the  current
problematic market situation.

2.2.1.

Europe

EU  shipyards  have  already  been  forced  for  a  longer  time  to  focus  primarily  on
market segments with a higher value added, where Asian shipbuilders have been less
active (passenger ships, specialised and smaller vessels), as they could not match the
very  low  offer  prices  from  Korean  yards  for  standard  ships.  EU  yards  face  a  very
difficult situation as the passenger ship market has significantly slowed down and an
alternative  market  segment  of  similar  importance  is  not  in  sight.  A  number  of
European  yards  (in  Germany,  Italy,  the  Netherlands,  Sweden,  Norway  and  Poland)
went  bankrupt  or  had  to  lay  off  workers  (in  Denmark,  Germany,  Finland,  the
Netherlands,  the  United  Kingdom  and  Poland)  since  the  date  of  the  Commission’s
last report. Very few yards have orderbooks stretching beyond 2003/2004.

EU  yards  are  undertaking  various  measures  to  improve  their  competitiveness
(increased  R&D,  product  and  process  innovation,  outsourcing  and  downsizing  of
their workforce, procurement of hulls for outfitting etc.), but may be running out of
time in the face of an almost flat market.

7

2.2.2.

South Korea

Korean yards seem to repeat past practices when facing a declining demand. On the
one hand they try to enter new market segments (gas tankers, offshore structures and
cruise ships), on the other hand they try to trigger more demand  in  their traditional
market segments (tankers and container ships). Both are done through lowering offer
prices,  despite  significant  cost  increases  in  Korean  production  over  the  past  12
months.  Wages  in  Korean  yards  have  increased  by  ca.  6 %,  material  costs  have
increased by ca. 5 % (steel, however, is up 10 %), inflation is ca. 8 % and the WON
has  appreciated  by  ca.  8 %  vis-à-vis  the  USD.  Labour  and  material  costs  together
account  for  ca.  90%  of  total  production  costs  in  shipbuilding  and  the  related  cost
increases are therefore significant.

Due  to  this  a  number  of  Korean  yards  could  be  heading  for  insolvency.
Unfortunately, neither the Korean Government nor the shipyards themselves seem to
consider  reducing  capacity,  e.g.  through  the  closure  of  non-profitable  shipbuilding
facilities.

2.2.3.

Japan

Japanese  shipbuilding  is  currently  undergoing  massive  restructuring,  bringing
together  a  number  of  shipyards  under  the  umbrella  of  a  few  large  groups.  The
resulting  synergies  have  helped  Japanese  yards  to  stay  competitive  (in  particular
regarding  the  series  production  of  bulk  carriers),  although  this  is  significantly
assisted by the fact that ca. 50 % of the order  intake  comes  from  domestic  demand
(currently mainly for bulk carriers). These orders by Japanese shipowners are almost
inaccessible  to  other  shipbuilding  countries  and  therefore  provide  a  captive  market
for Japanese yards.

2.2.4. China

Chinese yards enjoy a much lower labour cost base than the other main shipbuilding
countries, but still suffer from organisational problems, limited access to technology
and delivery delays. Market share of Chinese shipbuilders has continuously increased
over  the  past  years  (mainly  resulting  from  competitive  offers  for  simple  shiptypes)
and once the above problems can be overcome, China could become a major player
in  world  shipbuilding.  However,  there  are  concerns  that  shipyards  are  expanded
beyond  the  market  requirements  and  the  need  to  upgrade  existing  facilities.  The
Commission  will  carefully  watch  these  developments  and  try  to  engage  China  in  a
constructive  dialogue  on  these  issues,  in  the  framework  of  the  OECD  and  bi-
laterally.

2.3.

Cost investigations

2.3.1. Update of previous cost investigations

In  line  with  previous  reports,  this  report  contains  an  update  of  all  previous  cost
investigations undertaken by the Commission within its market monitoring exercise.
The  methodology  of  these  cost  investigations  has  been  described  in  the  first  two
shipbuilding reports  and  is  not  repeated  here.  The approach is  continuously  refined
and results appear to be very close to the real situation.

8

As shipbuilding projects take significant time to be completed, and actual costs may
change  until  delivery  of  the  vessel,  the  cost  investigations  have  to  be  based  on
forward  assumptions.  These  assumptions  are  continuously  reviewed  and  results  are
updated whenever new or better information is received. This is reflected in the table
below.  The  reference  to  the  shipbuilding  report  in  which  the  particular  order  is
covered  should  be  used  to  see  the  details  of  the  order  investigated.  As  the
Commission’s market monitoring progresses, ship orders previously investigated and
now  completed  can  serve  to  verify  the  cost  modelling.  So  far,  none  of  the  cost
investigations  has  been  found  to  deviate  significantly  from  the  factual  costs  of
production.

The abbreviations used refer to the following Korean shipyards:

DHI: Daewoo Heavy Industries

DSME: Daewoo Shipbuilding and Marine Engineering

HHI: Hyundai Heavy Industries

HMD: Hyundai Mipo Dockyard

HHIC: Hanjin Heavy Industries and Construction

SHI: Samsung Heavy Industries

The shiptypes appear as listed by Lloyd’s Register.

For  container  ships  the  container  carrying  capacity  in  TEU  (Twenty-Foot-
Equivalent-Unit) is indicated, with ships above 5000 TEU falling into the category of
the so-called Post-Panamax container ships.

LNG carrier stands for Liquefied Natural Gas carrier.

ULCC  stands  for  Ultra  Large  Crude  oil  Carrier,  VLCC  for  Very  Large  Crude  oil
Carrier.

The  terms  Aframax,  Suezmax,  Panamax  and  Capesize  indicate  certain  standard
dimensions and specifications for tankers and bulk carriers, respectively.

9

Daedong

Daedong

DHI

DHI

DHI

DHI

DHI

DSME
(ex-DHI)

Halla

Halla

Halla

Comparison of reported order prices and calculated construction prices for selected
new shipbuilding contracts (update August 2002)

SHIPYARD

SHIPTYPE

OWNER

Daedong

Product tanker

Seaarland

Panamax bulk
carrier

Sanama

CONTRACT
PRICE
(MIO.
USD)

NORMAL
PRICE
(MIO.
USD)

LOSS/GAIN
AS % OF
NORMAL
PRICE

REF. TO SHIP-
BUILDING
REPORT NO.

21,5

18,5

25,7

26,0

–16 %

– 29 %

Chemical
tanker

Cogema

24,5

30,2

–19 %

Daedong

2500 TEU

EF Shipping

VLCC

Ferry

Panamax bulk
carrier

Anangel

Moby

Chandris

30,0

68,5

74,3

22,5

31,2

74,2

88,4

22,8

–4 %

–8 %

–16 %

–1 %

LNG carrier

Bergesen

151,1

164,2

–8 %

ULCC

Hellespont

85,0

93,7

–9 %

LNG carrier

Exmar

162,0

169,2

–4 %

Panamax bulk
carrier

Diana

3500 TEU

Detjen

Capesize bulk
carrier

Cargocean

18,9

31,1

–39 %

38,0

32,0

53,0

46,2

–28 %

–31 %

Samho
(ex-Halla)

Aframax oil
tanker

Chartworld
Shipping

33,5

41,5

–19 %

Samho
(ex-Halla)

VLCC

Oldendorff

69,5

90,9

–14 %

Samho
(ex-Halla)

Suezmax oil
tanker

Thenmaris

43,0

55,4

–19 %

HHI

HHI

HHI

6800 TEU

P&O Nedlloyd

73,5

5600 TEU

K Line

54,3

81,6

59,1

–10 %

–8 %

LNG carrier

Bonny Gas

165,0

176,8

–7 %

10

1

1

2

4

1

2

2

3

4

5

1

1

2

4

5

5

1

2

2

5500 TEU

Yang Ming

Ferry

Suezmax oil
tanker

Stena

Jebsen

7200 TEU

Hapag-Lloyd

Suezmax oil
tanker

Athenian Sea
Carriers

56,0

70,0

43,0

72,0

43,0

63,7

88,2

51,2

79,5

49,9

–13 %

–21 %

–16 %

–9 %

–14 %

LNG carrier

Golar

162,6

178,4

–9 %

HHI

HHI

HHI

HHI

HHI

HHI

HMD

HMD

HHIC

HHIC

HHIC

SHI

SHI

SHI

SHI

SHI

SHI

Cable layer

Ozone

Chemical
tanker

Bottiglieri

6250 TEU

Niederelbe

5608 TEU

Conti

1200 TEU

Rickmers

5500 TEU

Nordcapital

3400 TEU

CP Offen

Ferry

Minoan

7400 TEU

OOCL

Il Heung

Chemical
tanker

Naviera
Quimica

5762 TEU

CP Offen

Shina

Product tanker

Fratelli
D'Amato

2.3.2. New cost investigations

2

4

4

3

3

5

1

4

3

3

3

2

2

1

1

4

5

5

3

37,3

24,5

62,0

58,0

19,5

10,5

55,0

36,0

69,5

79,7

46,8

26,3

66,2

61,0

21,3

13,0

68,0

52,4

87,9

91,5

–20 %

–7 %

–6 %

–5 %

–8 %

–19 %

–19 %

–31 %

–21 %

–13 %

55,0

21,7

66,7

24,1

–18 %

–10 %

LNG carrier

British Gas

162,5

176,5

–8 %

Since  the  fifth  shipbuilding  report  seven  new  cost  investigations  have  been
undertaken.

These concern the following orders placed in South Korean yards:

– 

– 

Capesize bulk carrier (series of 3 plus 1 option), 26 250 cgt, to be built by HHI

Product tanker (series of 6), 19 200 cgt, to be built by HMD

11

– 

– 

– 

– 

– 

Product  tanker  (series  of  3  plus  4  options),  24 880  cgt,  to  be  built  by  STX
Shipbuilding Co. (ex-Daedong)

Product tanker (series of 2 plus 2 options), 24 879 cgt, to be built by STX

Capesize  bulk  carrier  (series  of  2),  26 250  cgt,  to  be  built  by  Samho  Heavy
Industries (ex-Halla)

2 500 TEU container ship (series of 5 plus 5 options), 18 972 cgt, to be built by
HHI

Liquefied Product Gas carrier (LPG) (plus 1 option), 14 521 cgt, to be built by
STX

The results of these cost investigations are summarised below.

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

CONTRACT
PRICE
(MIO. USD)

NORMAL
PRICE
(MIO. USD)

LOSS/GAIN AS %
OF NORMAL PRICE

SHIPYARD

SHIPTYPE

OWNER

HHI

Capesize bulk
carrier

Golden Union

HMD

Product tanker Schoeller

STX

STX

Samho

HHI

Product tanker Target Marine

Product tanker Byzantine

Marine

Marmaras

Capesize bulk
carrier

2 500 TEU
container ship

P&O Nedlloyd

27,5

STX

LPG carrier

Qatar Shipping

30,0

36,0

26,0

25,5

29,5

36,0

45,2

27,1

28,7

36,0

53,6

32,7

40,1

–20 %

–4 %

–11 %

–18 %

–33 %

–16 %

–25 %

These  results confirm the findings  from  previous reports. Korean  yards continue to
sell ships at prices below full  costs of production.  As prices for ships  from  Korean
yards  have  been  lowered  further  in  the  reporting  period,  while  costs  of  production
have increased, the gap between contract price and normal price is widening. For the
latest investigations this gap is 18 % on average (not weighted), while it was 8 % for
the new cost investigations summarised in the fifth report.

The  results  also  confirm  that  certain  yards,  such  as  HMD,  operate  more  carefully
than others. It should be  noted  that Samho (ex-Halla)  and STX (ex-Daedong)  were
among those yards going into receivership after the Asian crisis of 1997/98.

12

3.

CONCLUSIONS

The  crisis  in  world  shipbuilding  is  deepening,  with  very  slow  order  intake  in  the
major shipbuilding regions in the first six months of 2002. The main reasons are past
over-supply,  slowing  economies  around the  world and  the effects  of  11 September.
Only  Japanese  yards  currently  still  manage  to  fill  building  slots.  However,  this  is
very  much  helped  by  domestic  demand,  in  particular  for  bulk  carriers,  as  has  been
long-standing practice in this region.

World-wide ordering for new ships in the first half of 2002 was down by almost 2/3,
compared to average quarterly figures in 2000, which on the other hand was the best
year ever for shipbuilding. In the EU, the situation is even worse, with ordering being
down by almost 4/5 compared to the year 2000.

Most  affected  are  container  ships  and  cruise  ships,  but  crude  oil  tankers  and  LNG
carriers  have  also  seen  lower  demand.  Demand  has  remained  comparatively  stable
only  in  the  segment  of  product  tankers,  due  to  replacement  needs  stemming  from
new EU maritime safety legislation, and in the segment of bulk carriers.

As a result shipyards are running out of work and a number of bankruptcies and lay-
offs, mainly in Europe, have already occurred.

Prices for new ships have declined further and are now at the lowest level for more
than a decade.

Yards in South Korea have further lowered offer prices, despite increases in all major
cost factors and a number of Korean yards may find it difficult to meet their financial
obligations if order intake is not increased soon.

The  Commission’s  detailed  cost  investigations  for  orders  placed  in  South  Korean
yards  confirm  the  findings  from  previous  reports,  namely  that  ships  are  offered  at
prices which do not cover the full costs of production. The investigations show that
the gap between offer prices and calculated normal price is again widening.

13