THIS IS THE TEXT OF A PRESENTATION MADE AT
SHIPBUILDING DECISIONS '99 BY
ALLEN WALKER, PRESIDENT, SHIPBUILDERS COUNCIL OF AMERICA.
Good morning. I've been asked to talk to you this morning about what the international shipbuilding community can do to counteract South Korean shipbuilding policies that are hurting shipyards everywhere. There is no doubt that the pricing policies of Korean shipyards are having an immediate negative impact on the world shipbuilding community; however, perhaps more importantly, these practices will have a negative impact for years to come.
There are a number of factors that should be examined in order to understand why Korean shipyards are selling vessels for less than the cost of production. First, worldwide shipbuilding capacity today exceeds demand for ship construction and most estimates predict that this situation will continue in the foreseeable future. Total worldwide shipbuilding capacity is estimated at approximately 20 million compensated gross tons (cgt). For the first half of 1999, new shipbuilding orders of 7.86 million cgt were reported.
While South Korea does not report its shipbuilding capacity, it is estimated that Korean shipyards tripled their building capacity between 1994 and 1996. Today, Korean capacity is estimated at about 4.6 million cgt. In order to utilize this increased capacity, Korean shipyards over the past three years have drastically cut the prices they charge to build ships in almost every sector of the market, forcing other countries to reduce their prices or risk losing contracts. For example, the average price of Panamax Container Carriers has declined almost 30 percent since 1997; Panamax Bulk Carriers by over 30 percent; 1100 TEU Container Carriers by 15 percent; and Capesize Bulk Carriers by 22 percent. The result of the Korean price reductions has been dramatic. For container vessels alone, Korean shipyards increased their share of the market from about 15 percent in 1997 to almost 70 percent today.
U.S. shipyards do not compete directly against the Koreans today in most of these markets, but there is a significant negative trickle down effect every time any market sector experiences an artificial price decrease. The Korean shipyards are now making inroads into more sophisticated, value added vessel construction. Many fear that they will use the same methods that have proved so successful in the container ship market to enter the ferry and cruise ship markets. In fact, Korean shipyards are already making headway into the passenger ferry market. Daewoo signed a $26 million contract to build a 1,500 passenger car ferry for a Greek company, the first time a Korean shipyard had built a ferry for export. Since then, Samsung Heavy Industries has signed contracts to build at least four large passenger ferries for export and Daewoo has signed contracts with an Italian firm to build two additional car ferries.
U.S. shipyards have been hurt directly by Korean price reductions for construction of offshore oil rigs and drilling platforms. In 1996, Hyundai announced its intention to go after the oil rig and drilling platform market. Other Korean shipyards that in the past have not been players in the rig and platform market have also entered this segment of the industry in order to utilize their increased capacity. The pattern or artificially low pricing extends into these markets as well. Not only are Korean shipyards increasing their share of the world market in this sector, they are garnering contracts from U.S. companies for rigs and platforms for use in the Gulf of Mexico. Korean shipyards are underbidding U.S. competition despite the fact that it costs several million dollars to transport rigs and platforms from Korea to the Gulf of Mexico.
In the offshore rig and platform sector, U.S. shipyards are seeing a pattern of collusion emerging from their Korean competition causing further harm to our industry. We are finding that one of Korea's major shipyards will bid a contract well below the cost of production, while the two other major players in this market segment will bid competitively. The next contract, the second Korean shipyard will bid below the cost of production with the other two bidding competitively. The next contract, the third yard will bid low. Then the pattern starts over again.
Korean shipyards have aggressively entered the market to build floating, production, storage and offloading (FPSO) tankers. These vessels are used in oil field locations in the place of oil rigs and drilling platforms. They are more mobile than traditional rigs and platforms, cost less to build or convert and can more easily access remote locations. To date, there are approximately 50 FPSOs in existence with 14 more under construction. Many of the FPSOs currently in operation have been converted from oil tankers. FPSOs are not currently being used in the Gulf of Mexico; however, Texico and others have indicated that there may be a need for these vessels in some of their Gulf oil fields. FPSOs, like rigs and platforms, are not considered Jones Act vessels. If FPSO use becomes more commonplace in the Gulf, we can expect more competition in the offshore market from Korea.
The foreign military sales sector is another area where Korean shipyards are beginning to compete directly against U.S. shipyards. U.S. shipyards have traditionally been a leader in supplying patrol boats and supply boats to foreign navies. However, Hyundai recently signed contracts with the governments of Venezuela and Indonesia to build small naval craft. Daewoo also predicts that it will garner naval contracts worth $100 million from several Middle Eastern and Asian countries. Again, we fear that the same tactics will be used to capture market share in this segment of the market.
The Korean financial crisis has also had a direct impact on Korean shipbuilding policies. Korean companies saddled with historically high debt levels are desperate for foreign capital to make short-term debt payments. Shipbuilding exports are one of Korea's largest sources of foreign capital. Each of Korea's major business groups or "chaebols" participates heavily in shipbuilding. Hyundai is the largest chaebol and also the largest shipbuilder in the world. Daewoo, Korea's second largest chaebol is also the country's second largest shipbuilder. The Samsung group, Halla and Hanjin round out Korea's top five shipbuilders. Orders from these five companies alone generate billions of dollars in much needed foreign capital every year. In addition, Korean shipyards employ thousands of workers and are a major user of Korean steel, one of the country's strategic industries.
If Korean shipyard pricing policies are allowed to continue, we can expect a worsening of the already fragile world shipbuilding market. The situation has reached such a critical stage that even vessel operators, who one would expect to be happy with cheap ship prices, are concerned that Korean ship dumping will result in a devaluation in the value of their fleets.
The question before us today is what can the U.S. or anyone do to stop the Koreans. It's a difficult question. It is very difficult to prove exactly how much it costs to build a vessel and it's even more difficult in Korea where shipbuilders and their suppliers are all part of the same corporate parent. This situation enables Korean shipyards to misrepresent their profitability by forcing losses down the corporate ladder into supplier companies. And, even when we can prove that vessels are being sold at less than the cost of construction, traditional anti-dumping and countervailing measures are not applicable to shipbuilding.
The aim of the OECD Shipbuilding Agreement was to put an end to worldwide shipbuilding subsidies, put a moratorium on added shipbuilding capacity and provide a dispute settlement mechanism for situations like the one we face with Korea. Unfortunately, the U.S. failed to ratify the OECD Agreement and we are back to step one.
Without the OECD Shipbuilding Agreement, the European Union (EU) is requesting that the WTO begin an investigation into Korean shipbuilding practices to determine whether International Monetary Fund (IMF) bailout funds have been used to subsidize Korean shipyards. Under the terms of the IMF bailout of South Korea, IMF funds can only be used to stabilize the Korean won. The agreement prohibited the use of IMF funds to perpetuate anti-competitive business practices in Korea, many of which are credited with bringing on the crisis in the first place. The EU believes action can be taken against Korea using the "Agreement on Subsidies and Countervailing Measures" section of the WTO which provides a dispute mechanism that can be employed against subsidies granted by one WTO participant that causes harm to other WTO participants.
There is little doubt that IMF funds are being used to subsidize the Korean shipbuilding industry, both directly and indirectly. For example, Daewoo, Korea's second largest shipbuilder and second largest chaebol has amassed the largest debt level of any company in history. The company's largest creditor is the Korea First Bank. The Korean government holds a controlling share in the Korea First Bank and the bank has agreed to help Daewoo by rolling over loans and holding Daewoo stock. The court's have ordered Daewoo to complete a restructuring plan; however, Daewoo, like all the chaebols, is dragging its feet because of the faster than expected recovery. It now appears that Daewoo will not have completed its restructuring by the end of the year necessitating a huge government bailout in 2000. U.S. Undersecretary of Commerce for International Trade David Aaron has publicly warned the Koreans against such an action stating that "injecting liquidity in Daewoo can be thought of as a subsidy".
Close government/industry ties are not unique to Daewoo. Similar situations exist for almost every Korean company. In the case of the Halla Group, which operates the fifth largest shipyard in the world, the Korean government controlled export bank (KEXIM) continues to offer loan guarantees to Halla despite the fact that the company is under receivership. The Halla shipyard has failed to make even an operating profit in each of the past three years, indicating that Halla is pricing vessels at a level that does not cover direct cost of sales, let alone contribute to selling and administrative expenses and other costs, including financing the new facility it built in 1996.
SCA has requested that the United States Trade Representative (USTR) support the EU request at the WTO. We are strongly opposed to IMF funds being used to subsidize Korean shipyards. This, in effect, is using U.S. tax dollars to subsidize Korean shipyards, enabling them to compete unfairly against our own shipyard industry. SCA has also requested that our government demand that the IMF not provide IMF funds to be used in a way that supports damaging and non-market business practices. Last week, the Koreans unofficially indicated that they would not take any more IMF funds for the bailout; however, we believe a strong warning from the IMF to Korea about the use of funds already provided is needed.
SCA also believes that the U.S. in its bilateral talks with South Korea should make it clear that our government will not tolerate the continuation of the injurious pricing policies of Korean shipyards. Toward that end, we have briefed USTR officials traveling to Korea this week on the problem and received their commitment that the issue will be brought up as part of ongoing trade talks. SCA also submitted public comments to the USTR requesting that Korean shipbuilding pricing policies be included in the agency's "Annual National Trade Estimate Report on Foreign Trade Barriers" submission to Congress.
We encourage all interested shipyards to make it clear to their congressional representatives that Korean shipbuilding pricing policies are having a negative impact on the ability of U.S. shipyards to compete in the international marketplace and that if these policies are allowed to continue our chances of competing in the future will be greatly diminished. Artificial pricing will continue to exacerbate the already overtonnaged world market and lead to a further depression of shipping prices and declining shipbuilding in future years.
While it is important that we use every avenue available to us to stop Korea's injurious pricing policies, SCA believes that the only lasting solution is an international shipbuilding agreement. In order to avoid the pitfalls that we encountered with the OECD Shipbuilding Agreement and because the industry cannot afford an extended negotiation process, SCA believes that industry representatives from the United States, EU and Japan should meet to determine each nation's bottom line position prior to government-to-government negotiations beginning. Once the bottom line positions have been agreed upon, each industry should request that their respective governments enter into multilateral negotiations aimed at achieving an agreement in a timely manner. We fully recognize that this will not be easy and that the resulting agreement may not be as comprehensive as the OECD Shipbuilding Agreement; however, the crisis we face with Korean injurious pricing policies is so severe that we must act quickly or risk permanent damage the shipbuilding industry.
As you can see, the situation in Korea is complicated. I do not believe anyone fully understands the complex tangle of government/industry relationships in Korea. But, it is clear that the relationship exists and that the relationship does not promote fair trade policies.
Thank you and I would be happy to take any questions.