THIRD REPORT FROM THE COMMISSION TO THE COUNCIL ON THE SITUATION IN WORLD SHIPBUILDING

Under Council Regulation 1540/98 establishing new rules on aid to shipbuilding the Commission is required to report on the situation of the world shipbuilding market. The first report (COM(1999) 474 final) was presented to the Council on 9 November 1999. The second such report (COM(2000) 263final) was presented to the Council on 18 May 2000.

Both times the Council requested the Commission to follow certain lines of action to address the situation. This is the third such report. It analyses the latest developments in the world shipbuilding market and assesses the results from the actions undertaken in response to the Council's requests.

The world shipbuilding market continues to face serious difficulties. Supply still outstrips demand and there are few indications that this situation may improve. Despite increased ordering activity in the first 8 months of this year due to favourable market conditions in liquid bulk shipping (crude oil and oil products), and to the development of new innovative ship concepts (very large container ships), ship prices have not recovered from the massive drop since 1997, although there are some signs of improvement compared with the low levels at the end of 1999. Prices for non-tanker shiptypes have (with some limited exceptions) continued to decline over the past 12 months whereas tankers have seen slight price increases of 5-10%. The on-going depression in prices is caused by low offer prices from Korean yards.

South Korea is now the biggest shipbuilder in the world. Its shipyards took more than 40% of all new orders in the first 8 months of the year 2000 (Japan: 25%, EU +Norway: 16%, Rest of the World: 19%) in terms of cgt (compensated gross tonnes). In the important segment of containerships Korean yards took 60% of all new orders in this period (Japan: 4%, EU +Norway: 8%, Rest of the World: 25%). For the very large containerships ("Post-Panamax")which are starting to dominate the liner shipping industry, Korean yards took 82% of the market(Japan: 4%, EU + Norway: 0%, Rest of the World: 14%). On the other hand EU yards have continued to dominate the high value cruise ship market.

The detailed cost investigations for shipbuilding orders reported in the two previous reports have been updated in order to factor in assumptions on inflation and to reflect new information received from Korea on the financial situation of shipyards. Under these assumptions the calculated losses taken by Korean yards are between 4% and 39% of the actual building costs(with the lower figure relating to a shipyard which has massively reduced its debts through write-offs). The average loss for all investigated orders is estimated at ca. 20%. In addition seven more orders were investigated since the last Commission report, mainly concerning shiptypes which are typical for the portfolio of EU yards. The results of these investigations indicate that Korean yards (with some exceptions) continue to take orders at prices which are not covering all costs. Nearly all market segments are targeted by Korean yards, leaving mainly smaller domestic orders and highly specialised tonnage to EU yards. Therefore, this third report by the European Commission on the situation in the world shipbuilding market confirms the findings from the Commission's first and second reports.

All lines of action to address the problem (as requested by the European Council of Ministers in its meetings of 9 November 1999 and 18 May 2000) are currently being pursued (see chapter 4). In particular, strenuous efforts have been made by the Commission to secure binding commitments from Korea in relation to its non-intervention in the financing of shipbuilding activities. After several rounds of consultations, the European Commission and the Korean Government came to an agreement in the form of "Agreed Minutes relating to the World Shipbuilding Market" which was signed on 22 June 2000. More talks were held after the signing of the agreement in order to implement the principles laid down in the agreement.

However, no common approach to the problems could be found and the bilateral talks with Korea have therefore ended without results.

The evidence gathered within the framework of the market monitoring undertaken by the European Commission has helped the EU industry to compile sufficient elements for a complaint under Council Regulation (EC) No 3286/94 (the Trade Barriers Regulation - TBR).

Industry has filed such a complaint with the Commission on 24 October 2000. The Commission will continue with its market monitoring exercise.

As the Commission sees a certain role for the IMF with regard to the industrial restructuring in Korea, contacts to the IMF were established in order to point out the effects that the non-market behaviour of Korean shipyards could have. The IMF has looked into the matter, but states that it has no mandate to deal with sectoral aspects. The Commission continues to inform the IME about the developments in order to ensure that the accumulated losses of Korean shipyards are neither directly nor indirectly cleared by the Korean Government and market principles are fully applied.

The Commission has also examined the current aid arrangements under Council Regulation 1540/98 for EU yards concluding that operating aid has not provided a solution to the Korean problem.

In the light of the foregoing, it is proposed that the following actions be pursued: