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

　

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, updated figures are in line with the original findings.

　

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

　

　

　

Since the sixth shipbuilding report five new cost investigations have been undertaken.

　

These concern the following orders placed in South Korean yards:

　

　

The results of these cost investigations are summarised below.

　

　

These results confirm the findings from previous reports. Korean yards continue to sell ships at prices that appear to be below normal price (full costs of production plus a profit margin of 5%). Typically prices seem to be set at a level that covers direct operating costs but which does not include provisions for inflation and all financial costs. As prices for ships from Korean yards have stayed at historical lows in the reporting period, while costs of production have increased, the gap between contract price and normal price is widening further. For the latest investigations this gap is 20% on average (not weighted), while it was 8% for those in the fifth report issued a year ago.

　

Korean yards, with their enormous production capacities, are particularly affected by any market downturn as they need to fill their large building docks and assure enough cash flow to roll over their short terms debts. As a result indications are that Korean yards are trying to get hold of almost any order that appears in the market, no matter whether those orders will be profitable in the light of Korean costs or not. It is noteworthy that Korean yards' orderbooks are increasingly dominated by tankers, despite the announcement made in March 2001 by the executive vice president and chief marketing officer of Hyundai Heavy's shipbuilding division who said that HHI "planned to focus on boosting profit margins by being more selective in receiving orders"⁸. Other yard managers equally said that Korean yards will move away from the tanker and bulk carrier market segments as cost increases due to higher wages, inflation and exchange rate movements no longer allow to achieve a profit on lower value vessels. This development has not materialised and consequently, a number of Korean shipyards have reported losses for 2002. Other yards have reported pro-forma profits.

　

Of particular interest is the investigated order for a 5100 TEU container ship for Hamburg Süd. This order received bids from one European and two Korean yards. DSME finally won the order with an offer price of 55.0 Mio. USD, leading to a complaint by SHI to the Korean Government about price under-cuffing by DSME. The Korean Government then ordered DSME to raise the price to SHI's level of 58.0 Mio. USD. As a justification of this exceptional move by the Korean Government (which repeatedly had claimed vis-à-vis the Commission to have no influence on business practices of Korean yards) the Director of the shipbuilding division at the Ministry of Commerce, Industry and Energy stated that "Daewoo's price offer, which looks too low in view of the market prices, might hurt fair competition and damage (the) credibility of Korean exporters"⁹. It is unclear whether DSME actually increased the price, as Hamburg Süd insists that the contract was signed at the price of 55.0 Mio USD and they saw no reason to accept such a substantial change.

　

The serious difficulties in world shipbuilding continue, with decreasing order intake in the major shipbuilding regions and prices locked at a very low level. The main reasons are production over-capacities, past over-supply, slowing economies around the world and the effects of 11 September. The latter issue had a significant impact on the short and mid term prospects of the cruise industry and thus the demand for new cruise ships. Fierce intra-Korean competition has to be seen at the core of depressed prices for most ship types. Only Japanese and Chinese yards currently still manage to increase sales through stable domestic demand and good price competitiveness, respectively.

　

World-wide ordering for new ships in 2002 was down by ca. 12% compared to 2001. In the EU, where production increasingly focussed on cruise ships, the situation is much worse, with ordering being down by more than 50% compared to the year 2001 and more than 70% compared to the year 2000.

　

Most affected by weaker ordering activity are container ships and cruise ships, but crude oil tankers, chemical tankers and LNG carriers have also seen lower demand. Demand has increased in the segment of product tankers, due to replacement needs stemming from new EU maritime safety legislation, and in the segment of bulk carriers. However, this additional demand had a very limited impact on prices.

　

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. Prices increases were not achieved in 2002 and are equally unlikely in 2003.

　

Yards in South Korea have further lowered offer prices, despite increases in all major cost factors and, based on the Commission's analysis, a number of Korean yards may soon find it difficult to meet their short-term financial obligations.

　

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 seem to cover the full costs of production. Typically, provisions for inflation and debt servicing are not included in Korean offer prices. The investigations show that the gap between offer prices and calculated normal price is again widening.