Pandemic may break European taboo on state aid for maritime industry
For some shipbuilders in Spain, it’s just sour grapes. They are angry with the Dutch Government after its decision to save the Royal IHC shipyard from falling into Chinese hands. However, in his latest opinion piece, SWZ|Maritime’s Editor-in-Chief Antoon Oosting says these events may give rise to a new European industrial strategy.
Until recently, the Dutch heavily criticised the Spanish Tax Lease policy to support their ailing Spanish shipyards. But this state aid could not rescue the country’s most productive LaNaval-shipyard in Bilbao from financial ruin. In turn, for the Dutch it is a major breakthrough to step over a decade-long taboo on everything that could be interpreted as state aid for distressed industries, even when they suffered from unfair competition from state supported industries in countries such as Spain, Eastern Europe and nowadays especially China and South Korea.
Too many crucial industries have already been lost to Asian competitors that can rely on practically unlimited financial support from governments that want to be the biggest in strategic industries. And now that the first Europeans are starting to realise how difficult it is to have to rely on the Chinese for the production of such a simple product as facial masks, it might also be time to think about the consequences when in big parts of the economy, Europe cannot decide anything anymore without the help of Chinese hardware and engineering. This is already the case in countries like Greece and Serbia and soon Italy will also realise this. Ever more European politicians now start to see that Chinese help is never without obligations.
Picture by Hans de Wilde (SWZ|Maritime, May 2020).
Branches hit hardest
It is rather an understatement to say that the China-originated coronavirus has jeopardised world economy and with that also the welfare of the Europeans. Shipbuilding in Europe is one of the branches that was hit first and hardest by the crisis.
In Germany, Finland, France and Italy all major shipyards temporarily closed down and send their workforce home. Payment has often been taken over by the state. But within weeks, temporary lay-offs became permanent as 450 of the 2000 employees of Finnish shipbuilder Meyer Turku learnt at the end of April. The yard in Finnish Turku had in 2014 been taken over from Korean STX by German Meyer Werft.
Shipbuilding in Europe is one of the branches that was hit first and hardest by the crisis
Just a week earlier, the management of Meyer Werft already announced that production had to be slowed down and that working time reduction had to be put in place. Less working time means fewer working hours and fewer jobs. In a video message to the personnel, Meyer Werft Director Bernard Meyer said to expect that it would take until 2022 at least for the company to make a profit again.
Instead of building two bigger and one smaller ship a year, Meyer Werft in Germany will reduce production towards delivering one bigger and one smaller ship. Meyer Turku plans to reduce production to one bigger ship a year. Yet, instead of slowing down production, some clients of the shipbuilder would prefer to completely cancel their orders. In that case, the impact would be heavier still.
Ships in cold lay-up
The Meyer Werft in Papenburg has 3625 people in permanent jobs on its own payroll, but on busy days, there could be some 10,000 people at work at the yard. The order book in Papenburg is filled until 2023, for the yard in Turku (around 2000 employees) until 2024. But how reliable these orders will turn out to be, remains to be seen as cruise operators are now struggling to survive.
The bigger companies have secured themselves of extra credit facilities to survive the crisis. Some companies are already putting their ships in cold lay-up, which means that they count on not using their ships for at least several months. At several places in the world: the Bahamas, Manilla Bay and the South Coast of England, there’s a huge build-up of now idle cruise-ships. And at the moment, it is still very uncertain when these ships will sail with passengers again.
There’s a huge build-up of now idle cruise-ships
For a large part, the construction of cruise ships is a real European affair. Besides the Meyer Werft, the biggest cruise shipbuilding yards are Italian Fincantieri with 19,000 employees and twenty shipyards of which nine are also in Italy, French Chantiers de l’Atlantique in Saint-Nazaire (2000 employees) and Genting-owned (Hong Kong) German MV Werften with three yards in Eastern Germany in Rostock, Wismar and Stralsund. Fincantieri and Chantiers de l’Atlantique are partly state-owned.
MV Werften has around 3000 employees and has been told it can hope for financial support worth of some 600 million euros up to the end of the year to help it cope with the production shutdown caused by Covid-19.
A vulnerable industry
The reports about the cruise shipbuilding yards also indicate how vulnerable the European shipbuilding industry has become. Besides the yards that are occupied with building ships for their national navies, the main part of what is left of the shipyards in Europe, especially in Italy, Germany and France, is involved in building cruise ships. That makes these yards very dependent of the success or failure of the cruise industry.
Cruise ships turned out to be sailing prisons in this pandemic
The last thirty years, this industry enjoyed a tremendous growth, but at this moment it is in the deepest crisis. It may take several years until holiday makers from the Americas, Europe, Asia and Australia dare to book a trip again on ships that turned out to be sailing prisons in this pandemic.
While the cruise shipyards are an example of how fast glory can turn to misery, in the rest of the shipbuilding industry they haven’t experienced glory for several years now. The global shipbuilding industry reached its peak in output and orders in 2010, after which it only slowed down, except for a short revival in 2015.
But the Covid-19 pandemic changes everything. Shipbuilding News reported that the economic fallout from the Covid-19 restrictions helped cut investment in shipbuilding to its lowest level in eleven years in the first quarter. Work at Asian yards, but also in Europe has nearly halted and owners are holding back on orders as global demand for goods nosedived.
A record decline in trade
According to shipbroker Clarkson PLC in its monthly World Shipyard Monitor report, only 100 vessels of all types were ordered in the first three months of 2020 with a value of 5.5 billion US dollars, a decline of 71 per cent from last year’s first quarter and the lowest total since the second quarter of 2009. Clarkson expects orders to keep sliding as a global downturn in global trade deepens.
The decline in seaborne trade results in falling orders that affect every type of ship
Clarkson says that seaborne trade, which stands at around 12 billion metric tonnes, will contract by 600 million metric tonnes a year, the biggest fall in more than 35 years. The shipbroker forecasts that overall trade of goods moved on ships will shrink by 5.1 per cent in 2020 from last year, which will be an even bigger decline than the 4.1 per cent during the 2008-2009 financial crisis.
The decline in seaborne trade results in falling orders that affect every type of ship, from container vessels that move around the world’s manufactured goods to high margin LNG carriers. Moreover, the orders for dry bulk carriers and tankers are drying up as well, even though China is resuming commodity imports and energy traders are booking tankers to store oil on the back of the crude oil price collapse.
Not being able to build the large volume ships like tankers, bulkers and container vessels, means that especially the Chinese and Korean shipyards now have their eye on other ship type markets. European yards have already lost a big part of the newbuilding market of ro-ro ships in the European ferry industry, but now the last remaining European shipbuilder of this type of ships, the German shipbuilder Flensburger Schiffbau-Gesellschaft (FSG) has also filed for “self-administered” insolvency, a German bankruptcy process in which the existing management remains in control while the company restructures its finances.
A Dutch takeover
Back at home in the Netherlands, the most positive news came on the last day of April when an agreement was reached for the takeover of shipyard Royal IHC by a Dutch-Belgian consortium. It is a consortium of three of the four biggest Dutch and Belgian dredging companies: mother company of DEME, Belgian investor Ackermans & Van Haaren; Merweoord, the family-owned company of Van Oord; HAL Investments that owns a big part of Boskalis; and crane manufacturer Huisman. The takeover is supported by the Dutch government with 400 million euros in credits, loans and guarantees.
With this support, not only the jobs of up to 3000 employees of Royal IHC are secured, but also many more at the Dutch maritime suppliers. Thousands of jobs, billions of turnover and hundreds of millions of tax revenues that would certainly be lost should Royal IHC have fallen into the hands of the Chinese.
Which industries do we want to keep and support?
The positive outcome of this deal is that with this, the discussion could start about developing a new European industrial strategy. Which industries do we want to keep and support to also fulfil other policies, such as the effort to reduce the exhaust of greenhouse gases? For that, a modern, zero-emission maritime transport system is vital, which keeps jobs and tax revenues in Europe and the Netherlands. Therefore, the Maritime Recovery Plan of the Nederland Maritiem Land Foundation, the lobby organisation of the Dutch maritime industry, is a helpful initiative.
This opinion piece was written by SWZ|Maritime’s Editor-in-Chief Antoon Oosting and published in SWZ|Maritime’s May 2020 issue.