Uncertain future for EU’s ailing shipyards

Date: 08/02/1996

By Tim Jones

A SHAKE-UP is on the cards for Europe's shipbuilders.

The increasing threat from low-cost South Korean yards, the strength of northern European currencies against the US dollar and the beginnings of an economic slowdown are all weighing on the sector.

Against this back-drop, experts from all member states will meet in Brussels on 4 March to discuss the levels of state aid in shipbuilding.

Germany's premier shipbuilder, Bremer Vulkan, is creaking under debts of 500 million ecu and has had to be bailed out twice over the past three months, while Denmark's oldest yard has gone into receivership.

Last year, Belgium saw the last of its big shipbuilders close for business. Boelwerf, saved three times by state cash and finally by a sale to a Dutch company, was allowed to shut down after the Flemish government declined to rescue it again.

This latest round of restructuring follows years of production and employment cutbacks in the Eighties. While world production generally fell over that period, output in the EU fell even more sharply, sending the Union's share of world production down from 23.7&percent; in 1980 to 19.7&percent; in 1986.

A turnaround came in 1989-90, as the prices of new ships started to rise again, but over-capacity reappeared with a reduction in orders in 1992. In the meantime, competition from Japan and South Korea heated up. Japan's market share rose from 35&percent; to 41&percent; and South Korea's from 11&percent; to 17&percent; between 1985 and last year.

But European shipbuilders still have the potential to compete on world markets, providing high 'value-added' products such as dedicated container ships, gas tankers, chemical tankers and cruise ships.

Most companies have taken the decision to leave the market for dry-bulk carriers and oil tankers to the South Koreans, who can produce them more quickly and at lower cost. EU firms are banking on the fact that higher safety and environmental standards will increase demand for their higher-technology vessels.

Despite this upbeat outlook, employment in the sector has fallen sharply. The workforce in western Europe has shrunk from 462,000 in 1975 to only 80,000 last year, with many jobs still concentrated in politically-sensitive areas.

As a result, governments have been continually willing to keep paying subsidies to shipbuilding firms incurring massive losses year after year, despite the tight rein generally being kept on public spending across the Union.

But to many companies in Denmark, the UK, Scandinavia and some in Germany, these actions have not saved jobs, but cost them. “In a free market, job losses just move from one country to another if one country subsidises its yards,” said a Danish official.

Those opposed to subsidies argue that state aids, legal or otherwise, are not only keeping some southern European and eastern German yards alive, but are also killing off potentially-profitable yards in the north.

In June last year, Burmeister & Wain, a fixture in the Danish shipbuilding scene for 152 years, went into receivership when Lauritzen Holding announced it would not inject more funding into the yard.

At next month's meeting, northern member states will want assurances that the kind of state aid they say is destroying their industry will be brought to an end.

This regular gathering, used by the European Commission to brief governments on subsidies to the sector, is likely to focus on whether to allow further subsidies to Spanish shipyards, most of which go to yards owned by Astilleros Espanoles SA (AESA).

On 20 December last year, the Commission approved 560 million ecu in aid to ASEA as compensation for past losses. Most of this aid was previously approved in 1991, but not paid out due to budgetary problems. The rest was intended as compensation for interest charges.

The subsidy was approved in conjunction with a package of measures notified by the Spanish authorities to support plans for a further restructuring of the state-owned yards in 1995-98. A further 302 million ecu of aid in the form of tax credits is under investigation.

“We will not support this,” said an official from a northern state. “It doesn't help the industry because they become more reliant on the aid.”

AESA, which has eight yards including offshore and repair facilities, has already been through two rounds of restructuring, for which it also received subsidies.

“The question is: should they receive a restructuring aid every time the last one runs out,” complained an industry official. “It is unfair competition if they can win an 'exceptional' aid time after time.”

The word in the industry is that many Spanish yards are selling vessels at below their production costs and operating with losses amounting to half their turnover over the past three years. “To sell a ship at half the cost is not possible for other yards and you can see the effects every time another one is forced to shut down,” claimed one Danish official.

The Danish shipbuilders' association is expecting a decision soon from the European Court of Justice on its complaint against the German government's subsidisation of the East German yard MTW.

The association claims the Commission exceeded its powers in allowing the subsidies to MTW, which competes directly with Danish yards in building container and cruise ships. It also claims the Commission allowed the yard to double capacity and permitted payment of state aid beyond the deadline it had set for such payments to end.

The Commission is determined to phase-out state aid in the sector, using a series of directives which stated that all production aid for the construction of ships should be subject to a 'common aid ceiling'.

When the first scheme was introduced in 1986, the maximum subsidy level was 28&percent;, but by the end of last year, it had been reduced to 9&percent;.

Once the long-awaited agreement on shipbuilding subsidies brokered by the Organisation for Economic Cooperation and Development (OECD) comes into force, this directive will be superseded.

The OECD agreement, signed by the EU, the US, South Korea and Norway, ends direct production aid from governments to shipbuilders within a set time-frame, once the accord has been ratified by all the signatories to the accord.

But just as the EU's laws have been hard to enforce, the OECD agreement is also likely to receive a rough ride. Soon after signing the accord, South Korea announced plans to double capacity by the year 2000 to 9 million tonnes.