As regards the analysis of the existing gap between supply and demand in shipbuilding capacities little progress has been made since the first two reports. The three major shipbuilders' associations AWES (Association of European Shipbuilders and Shiprepairers) and SAJ (Shipbuilders' Association of Japan) on the one hand, and KSA (Korean Shipbuilders' Association) on the other, do not agree on the extent of this gap, and predict future demand and supply at different levels. However, both sides agree that the gap between supply and demand will widen in the coming years due to increased yard productivity, the conversion of some repair yards to newbuilding, and the entrance into the market by new competitors such as the People's Republic of China

The timing of the impact on demand of the forthcoming new EU legislation and IMO rules on tankers and whether the additional demand will benefit EU yards remains to be seen.

The total new building capacity world-wide currently amounts to ca. 21 Mio. cgt(compensated gross tonnes, a measurement combining ship size and shiptypespecific building effort; source: OECD and AWES) and is expected to grow to ca. 24 Mio. cgt by 2005. Total new shipbuilding production was 17,5 Mio. cgt in 1999 after 18,0 Mio. cgt in 1998 and 17,1 Mio. cgt in 1997 (source: Lloyd's Register of Shipping) which indicates that demand is significantly lower than supply and a significant increase in newbuilding prices due to higher demand cannot be expected, at least in the short term.

To assess current market movements, figures on new orders are most appropriate to reflect the actual situation in the market. Figures on orderbooks and completions are useful to analyse the longer-term developments in the industry, but these figures are based on orders placed in the past. It should be kept in mind that shipbuilding has long lead times of up to three years. In particular figures on current completions can be misleading as these deliveries reflect orders placed in 1998 when Korean shipyards were struggling due to non-availability of ship financing from domestic financial institutions. Orderbooks and completions in the years 1997 to 1999 were analysed in the Commission's second report and, as the figures for the full year 2000 are not available yet, this particular analysis is not updated here.

Shipbuilding statistics often refer to gross tonnes or production value. Both figures contain a certain bias, although in opposite directions. While gross tonnes describe shipbuilding in terms of physical volume and therefore indicate a larger share for those regions that focus on the production of tankers and bulk carriers, production value would tilt the balance in favour of shipbuilding regions that produce sophisticated ships such as cruise vessels, ferries and specialised tonnage. In order to avoid bias in either direction the analysis contained in this report is based on cgt as a measurement that most appropriately reflects shipbuilding contents.

The following graph provides information on the development of new orders since 1997, based on cgt and per major shipbuilding region. It is followed by a short analysis.

The graph shows the sharp expansion of Korean market share in new orders since the Asian economic crisis in 1997. The year 1998 is an exceptional one as Korean yards had problems to compete for orders due to the non-availability of ship financing from domestic financial institutes. World ordering activity has been strong in the first six months of the year 2000, with almost double the average monthly intake as compared to 1999, totalling 10.895.762 cgt. In terms of cgt, 74% of these "additional" orders were placed in Korea. As a result, order books are full in Korea(partly up to 2004) which allows yards to target higher price levels (at which speculative ordering ceases). Moreover, demand appears now partly satisfied. Korea achieved a global market share of ca. 40% in the first 8 months of 2000, up from ca. 33% in 1999. Japan stood at 24% and the EU at 16%. This expansion in market share has mainly been at the expense of Japan, though the EU also lost market share also.

EU yards have almost completely abandoned the construction of low value standard tankers and bulk carriers and they have lost a large amount of their share of the containership sector. They have become increasingly reliant on passenger ships and specialised tonnage.

Booming production of cruise vessels with their comparatively high cgt values has stabilised the overall situation of the EU shipbuilding industry. However, currently only 10 EU yards are active in this field and the number of yards which could easily turn to cruise ship construction is limited by technical and commercial constraints.

Moreover, Korean and Japanese yards are actively pursuing cruise ship orders (with Japan having already taken two orders for large cruise ships). Recent orders for passenger ferries placed in Korea indicate that Korean yards are already building up the know-how required for the construction of large passenger ships, and the step from sophisticated ferries to cruise ships should become possible in the medium term. The above analysis seems to indicate that EU yards overall still operate in a comparatively stable business environment with relatively good orderbooks, although the situation in particular Member States and for particular shipyards may be very different, depending on their product portfolio. Most threatened are small and medium sized yards that have a focus on the production of merchant cargo ships such as container ships, product tankers or gas carriers. These yards typically do not have the option to compensate a loss in market share through the construction of large cruise ships or navy contracts, even if their general competitiveness in terms of productivity may be good. Recent developments indicate that bigger shipyards are starting to face similar problems, especially when certain strategic orders cannot be secured and other market segments have become inaccessible due to Korean competition.

Consistent monitoring of all newbuilding prices is rarely undertaken in this industry. This is due to the nature of shipbuilding contracts which have to be seen as large oneoff engineering projects where many parameters determine the costs and the price.

These parameters include vessel specification, delivery times, length of series (if any), terms of financing etc. Therefore prices are often reported with reference to certain standard shiptypes as given below. This information is mainly based on input from ship brokers who may not always see the entire market and who may have an interest in sending positive (or negative) signals to the market. Thus this kind of price information needs to be used with care. The Korean Government, in its negotiations with the Commission under the "Agreed Minutes", based its assessment of the situation in world shipbuilding on these figures, but these results give an incomplete picture as explained below.

Looking at the prices for these important shiptypes in the years 1997 to 2000 it is clear that the increased demand from 1998 to 1999 and the comparatively high number of orders in early 2000 had only a limited positive impact on prices. On (numerical)average, prices for new ships are still ca. 13 % below 1997 levels and now are only heading back to 1998 levels. Oil tankers and certain types of bulk carriers have seen a strong upward trend in prices. The reasons for this movement in prices lie in the strong demand for transport capacity allowing higher freight rates and thus triggering orders for newbuildings. With limited availability of building slots for early delivery in Korean yards and EU yards not competing at these still very low price levels, owners need to pay a premium compared to 1998 and 1999. Moreover the market has started to anticipate the impact of the forthcoming new EU legislation and IMO rules on tankers which will limit the use of older tonnage. 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. Where Korean yards are still trying to conquer market share and where intra-Korean competition is fierce, e.g. in the segments of large container ships and gas carriers, prices show, according to Clarkson World

Shipyard Monitor, only a limited upward trend and are still more than 20% lower than before the Asian economic crisis. It should be noted that the price for LNG carriers given by Clarkson (175 Mio. USD by the end of August 2000) is not supported by the Commission's own investigations: recent orders for this shiptype placed in Korea were priced at 152 and 165 Mio. USD, respectively. As only a limited number of LNG carriers are produced each year (with some years seeing no construction at all) the actual price level needs to be seen closer to the 1999 figure given by Clarkson.

The Commission has doubts about the validity of the above approach as suggested by the Korean Government. Three key reasons make the above information unsuited for a proper assessment of price developments.

In order to deal with these shortcomings a separate analysis of price developments is being undertaken by the Commission, comparing price levels in Korea per shiptype and per shipyard. The methodology used is to establish a "base price" which is the average price level for contracts taken over the period April 1999 to April 2000 and compare it to the average of contract prices since April 2000 (when the "Agreed Minutes" with Korea was initialled). The underlying data set currently contains prices for ca. 250 orders placed in Korean yards. Prices are measured in USD/cgt. This analysis should indicate how far individual Korean yards have raised prices and, if they did, to which shiptypes this applies.

The overall price trend for all Korean yards is given below.

It can be seen that prices are recovering from the low point in late 1999, having increased by around 6% on average, but progress is very slow and current prices do not reach the level of spring 1999.

Looking at prices per shiptype the statements made further above are confirmed:

Tankers and bulk carriers benefit from a healthy transport market, and the subsequent demand for new ships has driven up prices (although this effect is more pronounced in the case of tankers). Prices for container ships, on the other hand, 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. All major Korean yards are targeting this market segment as they see it as more profitable than the construction of tankers and bulk carriers. This intra-Korean competition has blocked any sustained upward trend in prices for container ships. The general pricing behaviour of the major Korean yards is heterogeneous as they find themselves in different financial situations. The continuous need to attract orders may be more urgent for some, leading to lower prices for specific important orders.

As discussed in the first two reports, container vessels represent the largest market segment in commercial shipbuilding in terms of cgt and container ships have been a major product of Japanese and EU yards in the past. The first report also stated that Korean yards have made significant inroads into the market for container vessels since 1997. Currently the situation in this particular market segment presents itself as follows:

South Korea has consolidated its dominant position in the building of containerships. The group of "others" which in this segment is represented by countries such as China, Taiwan and Poland has come back to some extent, mainly with the construction of smaller "feeder" containerships. The EU position seems to weaken constantly in this market segment, even with the significant decrease in the value of the euro against the dollar since January 1999. As the Yen has seen a significant appreciation in the past year this has added to the problems encountered by Japanese yards.

Korea dominates the segment of the very large containerships (Post-Panamax) which are rapidly becoming the standard vessel for inter-continental liner shipping. Post-Panamax containerships represented 65,5% (in cgt) of all containership orders placed in the first 8 months of 2000. This shiptype was invented in Europe in 1988 but the complex global logistics required to build transport services based on these large vessels (e.g. extension of port facilities, waterways and hinterland connections) have only made it possible now to bring a great number of vessels into operation.

Consequently ordering for this new shiptype has been very dynamic in 2000 with new orders for 85 vessels of which 70 orders, i.e. the equivalent of 82% of the total, went to Korean yards. Japan took 4% of orders for Post-Panamax containerships while EU yards did not attract any orders, although some EU yards claim to have specialised in this shiptype. The rest of the world share was 14%.

Operating very large containerships with a capacity of up to 8.000 TEU (Twenty Feet Equivalent Unit, i.e. a standard container) between major hubs requires supporting "feeder" services which use smaller containerships with a capacity between 200 and 2.500 TEU to connect minor ports. As Korean yards are neither specialised in these smaller ships nor do they currently have short or mid-term building capacity available, orders for these vessels have recently gone to some EU and Polish yards. Although this is a positive development for the shipyards involved, it needs to be kept in mind that these orders are a "spill-over" from the construction of the very large vessels and they do not match the volume and the value of the Post-Panamax orders.