European yards face collapse in credit crisis

Technorati Tags: Baltic Dry Index,Baltic Dry Indices,Ship Chartering,Shipchartering,Voyage Fixtures,Time Charter Fixtures,Panamax,Capesize,Handymax,Handysize,Supramax,Dry Cargo Fixtures,Bulk Cargo Fixtures,Baltic Exchange,Freight Review,Maritime Baltic Index,TNT Freight Review,Shipbuilding,European shipyards,Gunter Verheugen,Newbuildings

Justin Stares, Brussels - Friday 13 February 2009

 

EUROPE’S yards and marine equipment industries face being wiped out if credit markets do not ease “soon,” the European Commission has warned. 
The large capital requirements of the shipbuilding industry and the lack of affordable finance have combined to “jeopardise the economic survival” of the European Union industry, said Brussels Industry Commissioner Gunter Verheugen. 
In a briefing paper prepared for fellow commissioners and discussed earlier this month, Mr Verheugen warned that the European Union industry was not able to fight a price war with Asian competitors or to operate below cost for any length of time. Europe is also struggling from a “severe lack” of finance for trade in general, the German commissioner said. 
“The high capital intensity of shipbuilding and its high pre-delivery financing need might jeopardise the economic survival of European shipyards in case financial markets were not soon to return to business as usual,” the paper said. “European yards do not have the means to withstand a price war or to operate at below costs for very long.” 
While many yards are still technically fully booked for the rest of this year, newbuilding orders have “virtually dried up since the last quarter of 2008 and certain functions like marketing, design and research are already running out of work and starting to downsize,” Mr Verheugen told the commission. 
“This is potentially very damaging as the competitive advantage of European yards depends on their innovative edge and staying ahead of competitors.” 
Mr Verheugen warned that Europe’s niche market dominance in high value-added ships is also under threat. “The problem for many of the European yards though is that Asian ‘mass market shipyards’ will almost certainly try in the future to enter most niche markets by offering unfairly low prices to win whatever few orders are out there. And as the competition in shipbuilding takes place at the time of ordering, the damage could be done before the ships are ever built in two or three years’ time.” 
The contents of the paper, designed only for internal consumption, were confirmed. “This was discussed by the college [of commissioners],” a spokesman said. 
The tone was not overly dramatic, according to the Community of European Shipbuilders Associations, which holds its annual gathering in Brussels tomorrow. “There is reason to be nervous,” said Cesa secretary-general Reinhard Luken. “Ships are not full and 50% of the world fleet is on order. There have been lay-ups and increased scrapping, but the amounts that we have seen to date have not made a huge difference.” 
Banks are pulling credit lines even if companies are viable, simply out of fear, Mr Luken said. “Member states do not have the means to tackle this crisis,” he said, in reference to the danger that certain countries will want to intervene to protect their yards. “We have to trust in Europe.” Newbuilding orders are thought to have crashed 90% in the final quarter of last year. 
Shipbuilding was one of 12 industrial sectors discussed at the commission meeting, which also covered semi-conductors, aeronautics, automotive, food, construction, mechanical engineering, chemicals, pharmaceuticals, non-ferrous metals, textiles and steel. 
There are around 150 large shipyards in Europe, of which 40 are active in the global market for large seagoing commercial vessels. 
The industry directly employs 120,000 people. 
The commissioners were told that the decline in industry activity in Europe in November, when the credit crunch was in full force, was “staggering”. The dire state of export finance was also brought to their attention.
“The lack of access to affordable export financing is another direct consequence of the financial crisis. It is estimated that as much as 90% of international trade used to be financed by credits,” Mr Verheugen’s notes read. 
“The problem is a severe lack of funding for trade transactions, caused by a lack of confidence in the private financial market and increased risk aversion. Furthermore, as the financial crisis spreads into the real economy, this affects credit risks, which in turn further reduce the willingness of the private market to finance.” 
Trade finance was inexplicably being given a low priority in the banking sector, it was reported: “For a reason not yet fully clear, trade finance — though considered one of the safest forms of finance — does not seem to have the necessary priority of bank-treasurers.” 
There was, said Mr Verheugen, “a severe risk of a revival of protectionism, which would hurt EU manufacturing hard”.