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, 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 18 orders placed in Korea covered in the first two 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 cannot be challenged.

The updated analysis now 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.

In the context of report COM(1999) 474 final nine orders placed at South Korean shipyards were investigated. In addition to these orders, 13 more orders have been analysed for the second report COM(2000) 263 final. Nine of these orders were placed at six different South Korean yards, four orders were placed at four yards in the People's Republic of China. The Commission ensured a balanced selection of cases while taking into account the overall objective of the exercise, the relative urgency of the matter, and the availability of meaningful data for comparison. Not all of the selected projects are confirmed orders and in some cases the financing may not yet be in place. This could lead to higher or lower order prices, depending on the particular situation. The Commission is, however, convinced that the information entered into the analysis is at present the best available.

The following table summarises the updated findings for the above 18 orders placed in Korea:

It should be noted that in no case has the model concluded that any of the contracts examined has been priced at an economic level, that is to say covering direct costs, plus an appropriate contribution to overhead costs, plus an appropriate contribution to debt servicing (i.e. repayment of principal plus interest), plus an element of profit.

In a number of cases, prices have also failed to reach the break-even level (i.e. the normal price excluding profit). On average the losses taken by Korean yards with regard to these orders are ca. 20% of the actual building costs, when inflation is factored in. Some orders may be close to profitability, but these concern shipyards that have been able to reduce their debts, either through the issuing of new shares(HHI) or through debt restructuring (deferred repayments, moratoria on interest, write-offs, debt-equity swaps) as it is the case with Daewoo and Halla/Samho. The update of the cost investigations does not mean that the Commission accepts the new debt situation as such, in terms of its compatibility with WTO provisions, as creditors to Korean yards are mainly government-controlled financial institutes and the public authorities in South Korea also played a significant role (and continues to do so) in the workout programmes for ailing yards. However, in line with the methodology of the cost model changes in the debt situation of yards are recognised and factored in, e.g. debts written-off are not included in the cost calculations.

Since the Commission's last report more detailed cost investigations for orders placed in Korean yards were undertaken. The aim of these investigations was to cover as much of the Korean shipbuilding industry as possible, looking at more companies and specific orders that would have been of interest to EU yards. The following orders were investigated:

The following table summarises the findings for the above seven orders.

The above investigations for orders placed at HHIC are the first undertaken for this particular yard. HHIC is a public company and has been quoted on the Korean Stock Exchange since 1956. It is an integral member of the Hanjin Group and is active in shipbuilding, ship repair, construction, plant engineering and logistics engineering. In general HHJC is considered a reasonable operator who has not followed other yards' strategy of massive expansion without regard to the market situation. Therefore it does not come as a surprise that this yard offers prices which appear to be in line with actual construction costs (also when inflation is factored in). According to the cost model the orders taken by HHIC would not allow for a profit but the break-even level is reached.

The Hapag-Lloyd order at Hyundai and the LNG carrier order at Daewoo were chosen for detailed cost investigations because orders for vessels of these types should be within reach of EU yards and there were some initial indications that injury to EU yards may have occurred. Both orders had to be re-calculated after new information on the companies' debt situation was received. The massive decrease in debts has changed the picture: Before the debt restructuring the normal price was calculated as 92,4 Mio. USD for the containership order at HHI and as 171,0 Mio. USD for the gas carrier order at Daewoo. This would have meant a calculated loss of 19% and 12%, respectively. As already stated above, the update of the cost investigations does not mean that the Commission accepts the new debt situation as such.

The cost investigation for the product tanker order at Shina is the first undertaken for this particular yard. Shina is one of the smaller Korean yards with employment of 350 people. However, the yard has become very active in the production of handysize product tankers for European customers while in the past 75% of all deliveries from Shina were for Korean customers. Shina did not reach the same level of indebtedness as other yards in Korea and financial costs to be borne by this project are therefore lower. Still the offer price does not fully cover all costs when reasonable assumptions for inflation are factored in and it is concluded that the order will generate an operating loss.

As in the case of the first two reports on the situation in world shipbuilding, a negative impact on EU yards may be assumed when the order to the Korean yard is made at a price which does not cover costs and which is low enough to keep the order out of reach of bids from EU yards that would otherwise have been competitive. This can be particularly true if the owner has traditionally placed orders with EU yards. However, even where Asian competitors had significant market shares in the past the depressing effects of this pricing policy could have a negative effect on the market in general and, on this basis, the price may be perceived to be injurious.

Of the newly investigated orders placed in Korea, four can be seen to have an impact on EU yards. The three orders at HHIC appear to be priced at an economic level and thus injury to EU yards cannot be assumed. The key elements for the four cases that could involve injury to EU yards are as follows.