Asia ‘threat’ revives shipyard aid debate

Date: 11/11/1999

By Bruce Barnard

THE European Union is facing renewed pressure to throw more taxpayers' money at its shipbuilding industry to repel further advances by Japanese and South Korean yards into its home turf.

European shipbuilding has been propped up for years by construction subsidies aimed at bridging the price gap with its Asian rivals. The handouts, worth 9&percent; of a ship's contract value, have worked, after a fashion, by maintaining Europe's near 20&percent; share of the world market. But they are due to be phased out next year unless EU governments have a change of heart.

Right on cue, a rearguard action to maintain the status quo is getting under way, with European yards redirecting the politicians' attention to ruinous price dumping by South Korean shipbuilders. And as long as Seoul remains in the dock, there is a good chance that state aid will keep on flowing to European shipyards.

South Korea is an easy target as it positions itself to overtake Japan as the world's biggest shipbuilder in 1999 for the first time in six years.

The Commission has unearthed evidence to support allegations that Korea is dumping ships on the world market. A recent report said its yards did not build ships for profit, with prices sometimes not even covering operating costs - let alone the servicing of debt. A study of nine contracts revealed price-cutting ranging between 13&percent; and 40&percent;.

EU industry ministers are bracing themselves for a new bout of special pleading on behalf of an industry whose political and emotional clout is greater than its economic significance.

The dire state of European ship-building was highlighted by the dramatic decision last April by Kvaerner, the Anglo-Norwegian conglomerate and the world's third largest shipbuilder, to quit the industry and put its 13 yards in Europe, Russia and the US on the market. The EU Shipbuilder's Association pinned most of the blame for its plight on the Koreans.

The reality is more complex. Kvaerner's problems stemmed from cost overruns on a clutch of cruise ships - a sector in which it is a world leader and which Korea has only recently entered - as well as a dispute with the EU over subsidies for its Warnow yard in Germany. Moreover, as late as 1997 shipbuilding was generating nearly as much profit as all of Kvaerner's other divisions on just over 15&percent; of group sales.

But individual European shipyards are finding it increasingly difficult to survive. The latest to bow out was Ateliers et Chantiers du Havre, which ended 480 years of shipbuilding at the northern French port of Le Havre last month with the launch of a 37,000-ton chemical carrier. It was an emotional occasion, but it had little to do with Korean price cutting.

The EU, Japan and South Korea came within an ace of an accord in the Organisation for Economic Cooperation and Development (OECD) to outlaw construction aids, but the US failed to ratify the deal, prompting dire warnings of an all-out subsidy war.

Asian yards may be building ships below cost to keep their berths busy and workers employed, and often benefit from intra-company subsidies - most are units of giant Japanese industrial conglomerates and Korean chaebols.

But they are not getting government handouts and there is no evidence that Seoul has channelled International Monetary Fund crisis hand-outs into the industry as European yards feared. Moreover, some Korean yards are making money. Hanjin Heavy Industry, for example, is expected to make a net profit equivalent to €123 million this year.

The row over alleged Asian dumping and subsidies flared up again earlier in the year because the industry had hit a new low. In the first quarter of 1999, new orders slumped to their lowest level for five years and prices crashed by a third to a ten-year low as yards scrambled to fill empty berths.

The market has rebounded in the past six months as shipowners have responded to the gathering economic recovery in Asia by placing orders, especially for bulk carriers which transport commodities such as grain, iron ore, coal and minerals.

The booming market for these production-line vessels is almost totally dominated by Asian yards. The region also monopolises orders for tankers while Europe hogs most of the market for cruise liners, limiting east-west competition to sectors such as container vessels and other more sophisticated tonnage like gas carriers and super-high-speed ferries.

The market revival has been accompanied by a strategic rethink by Asian yards. Hyundai, a leading Korean chaebol, stunned the industry late last month when it sent an ultimatum to Swiss operator Suisse Atlantic and other owners which had placed orders at the troubled Halla yard it recently acquired - pay more for your ships or go elsewhere.

Japanese yards are also reported to be shying away from a price war, putting profits before market share and employment.

Many of the large Asian yards have bulging order books which guarantee work for up to three years, but a lot of the contracts were booked at historically low prices and will probably be delivered at a loss.

There is also a question mark over how much longer some can remain in the red: shipbuilding is one of the main units of Daewoo, another Korean chaebol, which last week was said to have amassed debts of around €70 billion.

Europe is also on the edge of a boom, with owners and operators of cruise ships unveiling plans to add 22,000 berths (the measurement for cruise ship orders) since the beginning of October. A large slice of this business will go to yards in Italy, Finland, Germany and France, with Japan and Korea standing on the sidelines.

The cruise boom could make the UK a shipbuilding nation again, with ship repair company Cammell Laird declaring that it wants to start building ships at its yard on the river Mersey in Liverpool.

Meanwhile, Poland's largest shipbuilder Gdynia wants to buy two Kvaerner yards in Finland. But unlike Kvaerner, which received more than €400 million in subsidies when it took over the Warnow Werft yard in former Communist East Germany, the Polish yard is not asking for a handout.