1. INTRODUCTION
This report by the European Commission on the situation in the world shipbuilding market is the second of a series and it presents a follow-up and extension of the first report which was submitted to the European Council of Ministers on 9 November 1999 as COM (1999) 474 final. This initial report responded to Council Regulation (EC)No. 1540/98 establishing new rules on aid to shipbuilding which requires the European Commission to present to the Council a report on the market situation and appraise whether European yards are affected by anti-competitive practices. If it is established that anti-competitive practices of any kind are causing injury to industry, the European Commission is, where appropriate, to propose to the Council of Ministers measures to address the problem.
The second report is based on the approach and the findings of the first report.
Therefore certain elements of the first report are not repeated. These references cover 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 and the description of the applied methodology. However, the information contained in the first report is updated where appropriate. This concerns in particular the detailed cost investigations for shipbuilding orders awarded to Asian yards as the underlying cost model is re-run each time new or better information is obtained.
The key findings of the first report were the following:
- Significant over-capacities in the shipbuilding market exist and are very likely to grow due to both decreasing demand and increasing supply.
- South Korean capacity expansion, especially in the period 1994 to 1996, has been the main reason for the continuing and growing imbalance between supply and demand, and Korean yards have great difficulties in attracting a sufficient number of orders to secure cash flow. Nevertheless further capacity expansion is undertaken in Korea.
- Ship prices have plummeted by 15% to 30% since 1998, in particular for ship types for which Korea competes, bringing forward demand and shifting market shares to Korean yards.
- The shipbuilding market monitoring study has provided a stable cost model which is suited to analyse the true costs of shipbuilding in Korean yards (the only ones investigated in the first report).
- None of the 9 investigated orders for new vessels was clearly profit making and there are convincing indications that Korean yards offer ships at below cost price.
- Two Korean yards, both under bankruptcy proceedings since 1997, exhibit business behaviour which would be considered as unacceptable in the EU. Of particular concern are past and current debt forgiveness and debt moratoria, as well as advantageous interest rates, fresh credits and guarantees for new ship construction projects.
- The financial system in South Korea, as far as it is used for the financing of shipyards and shipbuilding projects, remains opaque and, as there is substantial scope for government intervention with large parts of the banking sector being owned by the state, interference in financial and organisational matters could have occurred.
This second report from the European Commission extends the price investigations to shipyards in the People's Republic of China which have achieved a significant increase in market shares in 1999. Four particular orders are analysed and the findings are presented in chapter 3. Although China is widely considered as an important shipbuilding country in the future, the economic structures in China in general and in the shipyards in particular seriously constrain industrial competitiveness. Therefore, Chinese yard activities are still limited to shiptypes where labour costs are a dominating factor and currently Chinese yards do not appear to pose a general threat to EU yards, similar to that from Korean yards. More detailed information on the structure of the Chinese shipbuilding industry is provided in the annex.
1.1. Follow-up to the First Report from the European Commission on the Situation in World Shipbuilding
The Industry Council took note of the Commission's first report during its meeting on 9 November 1999 and called on the Commission, Member States and industry to pursue four lines of action, namely:
- To engage representatives from the Republic of Korea in bilateral talks with a view to halt the unfair competition.
- To collect as much detailed evidence as possible of the alleged anti-competitive behaviour, in order to take appropriate action under the WTO.
- To urge the IMF to continue to investigate whether the conditions and assumptions under which the IMF-led rescue packages are given, are fully respected.
- To pursue the efforts to establish a level playing field for the sector in the appropriate international fora, including the OECD, in order to enforce without any delay fair competition rules.
The European Commission, Member States and the shipbuilding industry have responded to these requests and related activities are currently pursued. Interim results can be summarised as follows:
- Three rounds of bilateral talks with the Korean Government and industry were held in December 1999, February and March 2000. The European Commission and the Korean Government finalised their talks and initialled on 10 April 2000"Agreed Minutes relating to the World Shipbuilding Market". These Agreed Minutes are focusing on non-subsidisation, banking, financial transparency(with regard to international accounting standards), commercial pricing practices and an effective consultative mechanism. The overall aim is to promote fair and competitive market conditions in the world market and to work together to stabilise the market and thereby help raise the level of ship prices to ones that are commercially sustainable.
- Evidence to support a possible complaint under the Trade Barrier Regulation(EC) No 3286/94 is being actively collected and industry has announced its readiness to file a complaint in the absence of a recognisable improvement in Korean business practices. This could lead to a complaint under WTO later. The Japanese shipbuilding industry has announced that it considers to file a complaint of its own against Korean competition practices to the WTO. The Shipbuilders Council of America (SCA) representing ca. 50 smaller US shipyards has requested the US Trade Representative to support the EU efforts, because US yards are increasingly losing export contracts for small navy vessels and offshore constructions to Korean yards. Although no detailed investigations have been made in these market segments Korean offer prices are considered unrealistically low.
- Two meetings were held with IMF representatives, one on the request of the German Government with the Director of the IMF Asia and Pacific Department, and one in Korea between the Commission and the local IMF representative. In both meetings the IMF representatives repeated the IMF's official position, namely that the IMF does not monitor sectoral activities and therefore had no evidence of unfair competition practices, directed lending or hidden subsidies to shipyards in Korea. On the contrary, the IMF is convinced that Korea has shown a remarkable recovery from the crisis in 1997 and that market-oriented economic restructuring is basically on track. As agreed the European Commission provided additional information to the IMF together with more specific questions which could help the IMF to investigate the soundness of financial arrangements between Korean yards and crediting banks. A reply from the IMF is awaited.
- The current situation in world shipbuilding was also subject of the OECD Working Party 6 meeting in December 1999 in Paris. Despite the efforts by the delegation of the European Commission to come to a common understanding of the problems with Korea no discernible progress was made. Discussions will be taken up again in a further session in spring 2000, based on a proposal by Japan to explore ways and means to stabilise the world shipbuilding market. The European Commission supports this initiative by Japan.
