China, Japan and Korea are the three principal commercial shipbuilding countries, and all three have powerful navies. These countries are most competitive in low value-added vessel markets, such as bulkers and tankers, primarily because of labor and materials costs. European shipbuilders have continuously lost global market share to Asian shipyards. European yards generally specialize in more complex vessels with a high value-added content, such as naval vessels, passenger/cruise vessels, containerships, reefers, liquid natural gas and liquid propane gas (LNG and LPG) carriers, and, in the case of northern European yards such as Kvaerner Masa-Yards in Finland, ice breakers.
The United States is not a major world producer of commercial ships. The U.S. shipbuilding industry produces large numbers of vessels for the U.S. Navy and has produced commercial vessels for the U.S.-flag fleet (including the Jones Act fleet. The Merchant Marine Act (June 1920), commonly known as the Jones Act, prohibits non-US build and owned ships from transporting goods and people between US harbors. This fleet is required by law to use vessels built in U.S. yards, primarily tankers carrying Alaskan crude oil. But the U.S. shipbuilding industry has not produced a commercial vessel for export (that is, to be foreign-flagged) since 1960. The U.S. shipbuilding industry has not received the benefit of any direct shipbuilding subsidies since 1981, when the construction differential subsidy (CDS) ceased to be funded.
There are clearly economies of scale in ship production since the surface area of a ship does not increase in direct proportion to its volume. That is, a 200,000 deadweight tons (dwt) can carry ten times the cargo of a 20,000 dwt ship although the former is only about twice as long as the latter. Because construction costs are tied to surface area and not to volume, such costs are reduced for large vessels. Moreover, engine size and complexity of machinery do not increase dramatically in proportion to the size of the ship leading to power efficiency for large vessels.
The complexity and sophistication of military vessels is typically far beyond anything associated with commercial vessels. Military vessels often accommodate a significantly larger crew complement than commercial vessels do and have advanced electronics for radar, sonar, communications equipment, and weaponry. In addition, complex propulsion systems are often unique to military vessels. Because military vessels are designed to maintain their operational integrity under the most adverse environmental conditions, they are built to more exacting standards and with higher cost materials than are most commercial ships.
The history of shipping is a glorious and proud one. There is no doubt, for example, that the magnificent square riggers of the era of sail or the early 20th century?s prestigious ocean liners could stir the hearts of all those that beheld them. But the ships of today are just as worthy of admiration, for shipping today is in another truly golden age. Ships have never been so technically advanced, never been so sophisticated, never been more immense, never carried so much cargo, never been safer and never been so environmentally-friendly as they are today. Mammoth containerships nudging the 11,000 TEU barrier yet still capable of 25 knot operating speeds; huge oil tankers and bulk carriers that carry vast quantities of fuel, minerals, and grain and other commodities around our planet economically, safely and cleanly; the complex and highly specialized workhorses of the offshore industry; and the wonderful giants of the passenger ship world are all worthy of the greatest admiration.
There should be no question that today's finest ships are also worthy of the sort of recognition usually reserved for the great icons of land-based civil engineering ? with one substantial difference in favour of the former: while skyscrapers, bridges, dams et al are static structures designed to withstand the elements coming to them, the very essence of vessels sends them out to sea to face the elements at full force, alone in the vastness of the ocean. They should, therefore, be robust when built and maintained as such throughout their entire lifetime.
Ships are high value assets, with the larger of them costing over US $100 million to build. They are also technically sophisticated: you are more likely to find one of today's modern vessels being controlled by a single joystick and a mouse-ball in the arm of the helmsman?s seat than by a horny-handed bosun grappling with a spoked wheel; the chief engineer will probably have clean hands and the calluses on his or her fingers will be from tapping a keyboard rather than wielding a spanner. The crew accommodation will be clean, light and airy with modern recreation facilities; the food will be good.
The maritime business has long been known for being cyclical. In times of growth and high profits, shipowners have positive cash flows and they order new capacity. This capacity, however, takes time to be delivered. There are waiting times, because shipbuilding berths tend to be full in times of prosperity; any new construction will only be started two to three years after it has been ordered, and then the construction itself can take up to one year. During the industry's boom years, the world saw records for new vessel orders being set year after year.
Shipyards in Europe and Asia were rebuilt during the late 1940s and early 1950s and began delivering ships to foreign customers in the mid- to late 1950s. U.S. ships initially had the competitive edge, as they were the least expensive on the market during most of the 1950s. However, foreign builders began to build much larger ships outfitted with diesel engines, which were far more economical to operate and could carry larger payloads. (U.S. ships primarily were powered by turbines.) Additionally, at that time, the U.S. Government required that a foreign buyer of a U.S.-built ship put up a bond as a condition of a ship contract, agree that the ship would not go to certain areas of the world, and agree not to sell the ship to citizens of certain countries. The last U.S. ship built for foreign owners and sailing under a foreign flag was delivered in October 1960.
Shipping was hit particularly hard by the 2008 economic crisis. The downturn in trade in 2009 leddirectly to a rapid decline in demand for transport and related services. And yet, in spite of this downturn in demand, shipping capacity expanded throughout 2009, as vessels ordered in earlier years continued to be delivered by the world's shipyards. The supply side's response to changes in demand is never immediate. Between 2002 and 2004, demand for containerized trade grew faster than the supply of container-carrying capacity, so the industry ordered new tonnage. This tonnage is usually delivered two to three years later, and since 2006, the supply of containerships has been growing faster than demand. In 2009,the difference in these two growth rates amounted toa staggering 15 percentage points. The resulting oversupply of tonnage has led to a significant drop in container freight rates, which decreased by one third between the end of 2008 and the end of 2009.
At 32 million compensated gross tonnes (cgt), world orders dropped by 18% over 2010 and in the first quarter of 2012 orders totalled less than 5 million cgt, down 24% on the same period in 2011. Were this trend to continue, 2012 would become one of the years when demand hit a record low. The financial crisis, which led to a considerable slowdown in seaborne trades, came on top of a very high volume of newbuilding deliveries between 2009 and 2011, which in turn led to a general drop in freight rates, impacting on the profitability of shipowners and hence on ships new orders. The slowdown in orders was not only been recorded in the standard ships sector but also in the market for high tech ships, including cruise vessels, with the sole exception of the offshore sector and gas tankers, where the Korean and Norwegian shipbuilders excel. Considering that in the medium term world demand is not expected to exceed 40 million cgt and that these volumes will be matched by a production capacity which has reached 60 million cgt, the extent of the serious overcapacity which the sector will have to bear in the years to come is clear.
The world shipbuilding market is characterized by intense competition. Prices have been declining, in part because of substantial overcapacity, but also partly as a result of improved productivity and increased outsourcing of components. Currency fluctuations also have an impact on prices. All yards have been subject to competitive pressures, and most have dealt with declining market shares andlor reduced prices by restructuring. In such an environment, government assistance often can be the determining factor in a yard's ability to win contracts. Such assistance can take numerous forms, including direct subsidies, loans at preferential rates, government guaranteed loans, restructuring assistance, and research and development assistance. Quantifying and correlating the value of measures of assistance among competing countries can be problematic.
The Organization for Economic Cooperation and Development [OECD] took up the issue of shipbuilding subsidies after U.S. shipyards approached the U.S. Government during the late 1980s to protest their inability to compete with heavily subsidized foreign yards. The United States had unilaterally ended its shipbuilding subsidies in 1981, when Congress did not authorize any further fimds for the Title XI Loan Guarantee Program.l After the loan guarantees stopped, U.S. shipbuilding capacity dropped by more than one-half, and U.S. yards ceased building commercial vessels for export, concentrating instead on shipbuildiIig for the U.S. Navy. Over the years various legislative remedies were proposed, intended to arrest the declining number of vessels built by the U.S. shipbuilding industry. At that time, the majority of U.S. yards maintained that the best route toward fair competition in international shipbuilding was, in fact, a multilateral agreement to reduce subsidies.
The Agreement, formally entitled "The Agreement Respecting Normal Competitive Conditions in the Commercial Shipbuilding and Repair Industry," was negotiated over a period of 5 to 6 years under the auspices of the OECD. The Agreement calls for the elimination of such trade-distorting practices as subsidies, export credits, tariffs, tied aid, and predatory pricing. It contains a binding dispute settlement process based on that of the World Trade Organization (WIO) and a strong enforcement mechanism. In 1995, the Agreement was signed by the United States, the Member countries of the European Union, Japan, Norway, and Korea. These countries also agreed to a Memorandum of Understanding (MOU) on Export Credits for Ships, that would establish guidelines for regulating export credits and guarantees for such vessels.
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