Select Committee on European Scrutiny Thirty-Seventh Report





COM(02) 205

Fifth Commission Report to the Council on the situation in world shipbuilding.

Legal base:


Document originated:

30 April 2002

Deposited in Parliament:

17 May 2002


Trade and Industry

Basis of consideration:

EM of 29 May 2002 and Minister's letter of 9 July 2002

Previous Committee Report:


To be discussed in Council:

Already agreed

Committee's assessment:

Politically important

Committee's decision:

Cleared, but request to be kept informed



    1. Under Article 12 of Council Regulation (EC) No 1540/98, (the EU Shipbuilding Regulation) the Commission must present to the Council a regular report on the market situation in shipbuilding and on whether European yards are affected by anti-competitive practices of any kind. If there is injury to the industry the Commission, where appropriate, proposes to the Council measures to address the problem. This is the fifth report since November 1999.
    2. The document

    3. This report has two parts, on which it bases its conclusions: market analysis (market developments and shares and price developments and analysis) and cost investigations (an update on previous investigations and information about new ones).
    4. The report says that because of an imbalance of supply and demand the world shipbuilding market continues to face serious difficulties. To a degree prices improved in 2000 because of a surge in new orders, but this proved to be unsustainable. A significant drop in orders in 2001, which fell by 21% compared with 2000 by volume, led to decline in prices. Price levels are only about 20% higher than they were in 1987, i.e. they have not kept pace with inflation. 2001 was an especially difficult year, owing to the US recession and the events of 11 September, which have reduced the demands for sea trade and cruises.
    5. The decline in orders most affected container ships and cruise ships, segments in which Korea and the EU are particularly strong, and led to a drop in overall market share for both. The EU's market share fell from 19% in 2000 to 13% in 2001 and Korea's fell from 36% to 30%. Within the EU, the fall in orders in 2001 was exacerbated by the abolition of operating aid at the end of 2000. Japan, benefiting from a surge in domestic orders and a weaker yen, increased its share from 26% to 33% and China became a prolific builder of product tankers, through low prices and improved quality, and increased its share from 7% to 11%.
    6. The Commission notes that only in the Liquid Natural Gas carriers (LNG) segment was an increase in the volume of orders seen in 2001. However, as the ships are highly sophisticated and comparatively expensive, at 8% of world orders by volume, this remains a niche market. Despite being new to the market, Korean yards took most of the orders for LNG carriers, and hold 65% of current orders, compared with Japan's 25% and the EU's 10%. The Commission's market analysis suggests that Korean yards were successful in this area due to very low offer prices, which have declined to less than 1998 levels. The Commission believes this cannot be explained by productivity or technical progress alone. It appears that Korean shipbuilders have targeted the LNG sector as the next growth area in which to attempt to gain market share.
    7. The Commission says that since its last report it has made six more detailed cost investigations for orders placed in Korean yards, bringing the total to 36. These show that certain Korean yards continue to price ships at below cost. Because of high sales volumes and the related advance payments received most major Korean yards managed to show a profit for 2001. But in some instances certain one-off measures to improve the yards' financial situation also played a role. The Commission believes these measures to be incompatible with WTO rules and that without them the results of the cost investigations would show a serious gap between full costs and offer prices.
    8. Of the new orders investigated three are LNGs. Two of these were found to be marginally above the Commission's cost model (by 1.8% and 2.1%) while the third was shown to be offered at a price 2.1% below estimated build costs. The other three new orders investigated showed prices ranging from 7.3% to 14.2% below the cost model.
    9. The Commission says that EU industry continued to suffer serious adverse effects in the container ship and product/chemical tanker sectors. But it considers further examination of the LNG sector is necessary to determine whether a consistent trend of below-cost pricing would emerge over the longer term.
    10. The Commission notes that Korean unfair competition in shipbuilding is a long-standing issue. The report rehearses the recent history. Korea has failed to offer any effective bilateral solution. In view of the lack of progress, the EU industry launched in November 2000 a Trade Barriers Regulation (TBR) case against Korea. In May 2001 the Commission confirmed the TBR case against Korea and recommended WTO action against Korea. The May 2001 Industry Council endorsed such action. WTO action has been on hold because the Commission has linked to it a proposed reintroduction of limited shipbuilding subsidies - for container ships and product chemical carriers - as a temporary defensive mechanism, which has been opposed by a blocking minority of Member States.
    11. The Government's view

    12. In his Explanatory Memorandum, the Minister of State for Employment Relations, Industry and the Regions, Department of Trade and Industry (Mr Alan Johnson) tells us:
    13.       "As Korea had failed to offer an effective bilateral solution the Commission recommended WTO action against Korea, which all Member States approved and the May 2001 Industry Council endorsed. WTO action has however been severely delayed because the Commission has since proposed the reintroduction of limited shipbuilding subsidies — for container ships and product chemical carriers — as a temporary defensive mechanism, which they have insisted on linking to the launch of the WTO action. However the Commission approach has consistently failed to gain the support of Member States. The UK and France lead a blocking minority while Germany leads the pro-subsidy lobby.

            "When this matter was last discussed at the December 2001 Industry Council there was still no qualified majority for the Commission subsidy proposal and the deadlock on the Commission approach continues. France, the swing vote, continued to sit on the fence. It is expected that France will switch its allegiance if LNGs are included in the proposal but as the Commission has decided against this, at least for the present, we believe that France will maintain its opposition at the June Council. Progress at the Council looks problematical, unless the Commission can be persuaded to change their approach by dropping the subsidy proposal."

    14. The Minister tells us in his letter of 9 July to the Chairman of our sister Committee in the Lords that subsequent to his Explanatory Memorandum the Commission decided to include LNGs in its proposal and France abandoned its opposition, depriving the UK and its other supporters of the blocking minority. Despite protests of the UK and others the matter was concluded at an Agriculture Council meeting on 27 June, with a qualified majority in favour of a Commission measure on subsidies. The Commission will now pursue further negotiations with Korea, which the Minister feels is unlikely to succeed. It remains the Government's view that, assuming such failure, the Commission should initiate WTO action.
    15. Conclusion

    16. Ensuring a level playing field for European shipbuilders in relation to competitors such as the Korean industry is important. But now that matters have moved on, despite the Government's opposition, there is no point in us not clearing this document. Nevertheless, whilst clearing the document, we ask the Minister to keep us informed of the outcome of the Commission's negotiations with Korea and of its subsequent action.


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Prepared 26 July 2002