State aid to shipbuilding (I)

This Regulation aims to remove discrepancies likely to distort competition on the transport market.

ACT

Council Regulation (EC) No 3094/95 of 22 December 1995 on aid to shipbuilding [See amending acts].

SUMMARY

Regulation (EC) No 3094/95, which was the result of an agreement concluded in 1994 within the framework of the Organisation for Economic Cooperation and Development (OECD) regarding normal competitive conditions in the commercial shipbuilding and repair industry, cannot enter into force until the agreement has been ratified by all the parties. Given the reluctance by the United States to ratify, the Council initially adopted Regulation (EC) No 1540/98 in its place. This Regulation has now expired and has been replaced by the link on state aid to shipbuilding.

Definition of some of the terms used in the Regulation ("shipbuilding", "ship repair", etc.).

Enumeration of the various types of aid and the conditions which must be satisfied for them to be judged compatible with the common market:

• social assistance (when such aid is intended to cover the cost of measures for the exclusive benefit of workers who lose retirement benefits or who are made redundant or are otherwise permanently deprived of their employment in the respective shipbuilding, conversion or repair enterprise, when such assistance is related to the discontinuance of shipyard activities, bankruptcy, or changes in activities other than shipbuilding, conversion or repair);
• research and development aid (when such aid relates to fundamental research, basic industrial research, applied research or development, provided the limits set by the Regulation are observed);
• indirect aid (when this is given in the form of state loans and guarantees, as development assistance to a developing country or for the building or conversion of ships, provided the conditions laid down in the Regulation are observed).

Derogations in favour of Spain, Portugal and Belgium, whereby reconstruction aid granted in the form of investment assistance and any other aid for social measures not covered by the Regulation and granted after 1 January 1996 may be authorised, provided the conditions laid down in the Regulation are observed.

Possibility of considering other aid to be compatible in the particular cases listed in the Regulation.

Monitoring procedure:

• obligation on Member States to give the Commission advance notice of any aid scheme or amendment of an existing scheme, any decision to apply an aid scheme to an undertaking or any individual application of aid schemes;
• obligation on Member States to provide the Commission with various reports on aid, on the basis of which the Commission draws up an annual overall report to serve as a basis for discussion with national experts.

RELATED ACTS

Seventh Commission report to the Council on the situation in world shipbuilding [COM (2003) 232 final - Not published in the Official Journal].

The countries or regions with the largest market shares in this sector are Japan, South Korea, China and the European Union. The sector is currently reeling from a deep crisis caused by three factors: past over-ordering, the global economic slowdown - and particularly the US slowdown - and the repercussions of September 11.

Order intake worldwide fell by 12.3% from 2001 to 2002, following a decrease of 20.7% between 2000 and 2001. European shipyards have, however, been the worst affected by this slump, with orders generally down 50% on 2001 and by over 70% compared to 2000. The hardest hit vessels are container ships and cruise ships. Only oil product tankers and bulk carriers have seen increased ordering, due to the replacement of old tonnage following new European Union maritime safety regulations and strong domestic demand in the Far East.

The main shipbuilding regions have, however, been affected in different ways: Japanese yards have the advantage of strong domestic demand, especially for bulk carriers; South Korea and China are battling for tanker contracts; and the European Union is only really active in the ferries and small tankers segment, where replacement needs are building up, although it is possible that Korean shipbuilders might try to further penetrate this market segment.

Prices: the statistics show that some categories of vessel are particularly affected by a major drop in market prices. Large container ships have seen their sales prices fall as a result of excessive price-cutting by Korean yards. The trend has been such that production costs have not always been covered. This is all the more surprising as the current weakness of the US dollar against the euro, won and yen should have led to an across-the-board increase in US dollar prices. Studies have also been carried out to investigate the relationship between the normal price, which is the full cost of production plus a profit margin of 5%, and the actual contract price charged by certain Korean shipyards. Given that production costs have risen in recent years, the gap between contract prices and normal prices has widened further. The studies are based on an analysis of several Korean yards and have revealed that the difference between the normal price and the contract price ranges from between -1% and -39%. All these results indicate a clear trend: Korean shipyards are trying to grab every order that appears in the market no matter the cost, despite assertions made to the contrary by the management of the different Korean groups. This strategy could be damaging if Korean yards fail to take certain factors into consideration, such as inflation and debt servicing, and major financial difficulties could ensue in the short term.

Sixth Commission report to the Council on the situation in world shipbuilding [COM (2002) 622 final - Not published in the Official Journal].

Following the breakdown of two rounds of talks conducted by the Commission (26-27 August 2002 in Seoul and 24-27 September 2002 in Brussels) the Commission had no choice but to initiate proceedings with the World Trade Organisation (WTO) and to start bilateral consultations with the Republic of Korea. At the same time a temporary defensive mechanism was authorised for certain market segments and for a limited period only.

The crisis in world shipbuilding is deepening with very slow order intake in the major shipbuilding regions in the first six months of 2002. The main reasons are past over-supply, slowing economies around the world and the effects of 11 September. Only Japanese yards still manage to fill building slots. However, this is helped a lot by domestic demand, in particular for bulk carriers, as has been long-standing practice in this region.

World-wide ordering of new ships in the first half of 2002 was down by almost two thirds compared to average quarterly figures in 2000, which was admittedly the best year ever for shipbuilding. In the EU the situation is even worse, with ordering down by almost 80% compared to 2000. Prices for new ships have declined further and are now at the lowest level for more than a decade. Yards in South Korea have further lowered offer prices despite increases in all major cost factors, and a number of Korean yards may find it difficult to meet their financial obligations if order intake is not increased soon.

Fifth Commission report to the Council on the situation in world shipbuilding [COM (2002) 205 final - Not published in the Official Journal].

The world shipbuilding market continues to face serious difficulties due to a substantial imbalance of supply and demand. Past expansion of shipyards, mainly in Korea, but now increasingly also in China, has led to price depression. Thanks to a historically high level of ordering in 2000, prices recovered to some extent, but the significant drop in orders in 2001 has led to a new reduction in prices. The year 2001 has been very problematic for the maritime industries worldwide: the recession in the United States and the terrorist attacks of 11 September have reduced the demand for sea trade and cruises respectively. The decline in ordering affected the container ship and cruise ship sectors most, leading to a drop in overall market shares for Korea and the EU, which are particularly strong in these segments.

The detailed cost investigations undertaken by the Commission show that certain Korean yards continue to price ships below cost while others are trying to improve their bottom line. Despite various rounds of talks with Korea, the Commission did not manage to convince the Korean authorities and yards to fully implement market principles and allow a shake-out of non-viable companies. An improvement in the market situation is therefore unlikely and the Commission has consequently proposed counter-measures to the Council, including preparing the ground for requesting a dispute settlement at the World Trade Organisation and the introduction of a temporary defensive mechanism for shipbuilding.

Fourth Commission report to the Council on the situation in world shipbuilding [COM (2001) 219 final - Not published in the Official Journal].

The year 2000 has seen a significant expansion in orders for new ships. Nearly 56% more orders were placed as compared to 1999, primarily benefiting South Korean shipyards, which have seen their market share increase again. EU yards also benefited considerably from the higher demand for ships, although orders for cruise ships probably played a dominant role here. In 2000 South Korea has consolidated its dominant position on the world shipbuilding market, accounting for more than 35 % of all tonnage ordered worldwide. If cruise ship orders are included, the market share for the EU and Norway is around 18 % (in cgt). However, if they are excluded from the overall figures, the market share of EU yards for new orders in 2000 is below 10 %. In 2000 prices for new ships are reported to have recovered in certain market segments from the very low levels seen after the Asian crisis in 1997.

Third Commission report on the situation in world shipbuilding [COM (2000) 730 final - Not published in the Official Journal].

In this report the Commission confirms the general trend highlighted in the second report of 18 May 2000, namely that, despite increased orders, ship prices have not on the whole recovered the ground lost since 1997. Prices continue to be depressed owing to the very low offer prices from yards in South Korea, which is now the biggest shipbuilding country in the world. Over the first eight months of 2000, its shipyards took more than 40% of all new orders. The Commission considers the stagnation in prices to be all the more alarming in that the European Union has drastically cut back state aid to shipbuilding. Despite the signing of the Agreed Minutes in June 2000 aimed at obtaining from South Korea firm commitments on non-intervention in the financing of shipbuilding, bilateral talks ended in failure. The Commission thus plans to:

• continue its monitoring of the market situation;
• examine the European industry's complaint of October 2000 against Korean dumping, in order to deal with this problem under WTO rules;
• remain open, at the same time, to any Korean proposals;
• continue efforts to re-establish fair competition at international level;
• encourage the International Monetary Fund to ensure that the restructuring of Korean shipyards is closely monitored;
• continue to cooperate with the industry on competitiveness issues;
• examine with the Council any possible action to address the problem.

Second Commission report on the situation in world shipbuilding [COM (2000) 263 final - Not published in the Official Journal].

The report takes stock of the world shipbuilding market. The market is in crisis, with supply outstripping demand. Vessel prices are falling in the face of unbeatable competition from Korean yards, which are prepared to sell at a loss in order to ensure market share and cash flow. To address the problem, the European Commission obtained an agreement from the Korean authorities to restrict State financial intervention in the shipbuilding industry. The Commission also gathered evidence pointing to unfair competition, and a complaint may be filed under the Trade Barriers Regulation.

First Commission report on the situation in world shipbuilding [COM (1999) 474 final - Not published in the Official Journal].

The report describes overcapacity on the shipbuilding market, with a marked imbalance between supply and demand caused mainly by South Korea's increased capacity. Vessel prices were between 15 and 30% down on 1998 levels, stimulating demand and increasing the Korean yards' market share. There were reasons to believe that Korean yards were offering vessels at below-retail rates.

Council Regulation (EC) No 1177/2002 of 27 June 2002 concerning a temporary defensive mechanism to shipbuilding [Official Journal No L 172 of 2.7.2002].

The commitments contained in the Agreed Minutes signed by the European Commission and the Government of the Republic of Korea on 22 June 2000 with a view to ensuring an effective price surveillance mechanism have not been effectively implemented by the Korean side and therefore a satisfactory result has not been obtained.

Consequently, despite the ban imposed by Council Regulation (EC) No 1540/98, the 2002 Regulation introduces a temporary defensive mechanism applicable to certain segments of the market (namely container ships and product and chemical tankers) for a short and limited period authorising support of 6% of contract value before aid. The aim is to enable Community shipyards to overcome unfair Korean competition. This Regulation expires on 31 March 2004.

Last updated: 05.09.2007