distortions on shipbuilding markets: tackling pricing issues · promoted (e.g. public welfare) by...
TRANSCRIPT
Distortions on shipbuilding markets: tackling pricing issues
Alessio Tei
Newcastle University
Paris, 29th November 2018 - Dr. Alessio Tei 1
Agenda
• Market distortions and shipping
• Market distortions and anti-dumping regulation
• Shipbuilding dynamics
• Shipbuilding and injurious pricing
• Conclusive remarks
Paris, 29th November 2018 - Dr. Alessio Tei 2
Market distortions and competition
• A “market distortion” is an event in which an external element (e.g. government body, economic shocks, market power) affects the equilibrium between supply and demand, provoking an effect on the determination of their equilibrium
• In this situation the price in which the good is sold is not equal to the marginal cost (i.e. optimal situation in case of perfect competition):• Either because one of the parties involved in the exchange is capable of
“bargaining” a better situation or because the price at the marginal cost does not guarantee a sustainable situation (e.g. “market failures”)
• Possibility to create distorted scenarios in terms of optimal resource allocation
Possibility for regulated markets, price discrimination or unfair competition
Paris, 29th November 2018 - Dr. Alessio Tei 3
Market distortion and regulation
• Market distortions are typically either corrected (e.g. cartels) or promoted (e.g. public welfare) by relevant regulators
• The regulation is normally based on the attempt to achieve an optimal economic and social status• E.g. distortions could be guaranteed in order to protect local industries (e.g.
subsidies), to create advantages for companies (e.g. tariffs, export credits), or to protect companies from macro-economic shocks (e.g. business cycles)
Distortions are neither good nor bad but they may cause advantages for specific industries and they could have a ”cascading”
effect on interconnected markets
Paris, 29th November 2018 - Dr. Alessio Tei 4
An example: steel industry
• As identified by Tarr (1979) the steel industry is often characterised by market distortions caused by the cyclicality of the market
• Thus, distortions can influence a market development
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Iron and Steel Index
Source: FRED, 2018
Paris, 29th November 2018 - Dr. Alessio Tei 5
Market distortions and shipping industry
• Agreements limiting the competition within the market have always been a characteristic element of the shipping industry as whole, for instance:• Conference (banned from EU in 2008)• Investment agreements• Cooperation (e.g. 75% of deployed capacity on Asia-NA and 96% in the EU-Asia route [Drewry, 2018])
• Shipbuilding has historically followed this trend given its business characteristics and the role in the regional economy:• Cluster effects• Connection with the steel industry• Mixed naval and commercial ship production
Reasons for reducing the level of competition are generally connected to:- High (fixed) investment costs
- - High level of volatility
Paris, 29th November 2018 - Dr. Alessio Tei 6
International regulation and shipbuilding industry• Shipbuilding industry has always been heavily subsidized (e.g. Stopford,
2003) since it has always been:• High employment generator
• Japan shipbuilding association estimated an indirect employment generation of about 30% of the direct employment
• Positive impact on related sectors (e.g. steel)• Strategic national interest (e.g. navy)• Connections with other technological sectors
• Moreover, recent industry evolution has increased the need for special interventions:• Increased shipyard size• Increased yard productivity• Volatile demand
☝︎↑︎ Fixed costs
↓Employment
↑ Uncertainty on revenue stream
Restructuring actions occured in main markets (e.g. Europe [‘80s-
’90s], Japan [‘90s-’00s], Korea [‘00s-’10s])
Paris, 29th November 2018 - Dr. Alessio Tei 7
Distortions and anti-dumping regulation
• Market distortions are considered dumping actions whenever the protection of the internal market (and related companies) generates unfair advantages in respect to “foreign competing” industries
• International rules establish unfair pricing as practices applied to goods that are imported from a foreign country in which the importer sell the good to a lower price• Either because they can enjoy a market domestic advantage (e.g. market
power)
• Or certain favourable regulatory regimes (e.g. subsidies, entry barriers)
DUMPING MARGIN
Unfair advantage, negatively affecting domestic industries allowing companies to
produce on loss, to artificially increase their profits, or to form entry barriersParis, 29th November 2018 - Dr. Alessio Tei 8
A translation to the shipbuilding industry
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5,000,000.00
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15,000,000.00
20,000,000.00
25,000,000.00
30,000,000.00
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Orderbook - CGT
Panamax Capesize Bulker
Containership (3,000-7,999 TEU) Neo-Panamax Containership 8,000-11,999 TEU
Containership 12,000+ TEU UL/VLCC Orderbook
Suezmax Aframax
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Total delivery - CGT
Brazil China P.R. Germany Italy
Japan South Korea USA World*
Source: Clarkson-SIN, 2018Source: Clarkson-SIN, 2018
Paris, 29th November 2018 - Dr. Alessio Tei 9
The trend in the shipbuilding sector
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Tankers Earnings ($/day) Tanker Newbuilding Price Index*
Tanker Secondhand Price Index*
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Mln
DW
T
Mln
DW
T
Tanker Fleet Development VLCC Tanker Fleet DevelopmentTanker demolition*
Source: Clarkson-SIN, 2018Source: Clarkson-SIN, 2018
Paris, 29th November 2018 - Dr. Alessio Tei 10
The shipbuilding market
• The shipbuilding market, given the cyclicality and cost structure characteristics, has often been “protected” by relevant subsidies (Glenn, 2006):• In the period 1951-1972, 1/3 of Japan Development Bank loans were headed
to shipbuilding related activities
• Until the ‘90s, a ceiling of 28% of operating subsidies was characterising EU countries• And also the phased-out process of EU subsidies was characterised by different domestic
market behaviours
• WTO disputes over Korea (e.g. pre-shipment loans) and EU (e.g. temporary defence measurement)
Paris, 29th November 2018 - Dr. Alessio Tei 11
Anti-dumping and shipbuilding
• Thus, from an economic perspective shipbuilding is characterised by conditions that promote market distortions but is this dumping?• According to the general definition is hard to demonstrate it, given the missing
imported goods• Shipbuilding provides a “good” for an international market and it is hard to identify an import
and export process
• The difficult determination of the dumping margin• Deviation from the market conditions should not be temporary (i.e. determined by specific
cyclical events or normal business practices) and they should not create “entry barriers”
• Difficulties to identifies aids (or subsidies) to specific productions• Yard multiple-productions• R&D funds• Naval and Commercial purposes• General economic aids
Paris, 29th November 2018 - Dr. Alessio Tei 12
The shipbuilding market
• Market concentration• HHI for Capesize equal to 396• HHI for VLCC equal to 910• HHI for cruise equal to 1,398• HHI for +15,000 TEU equal to
1,600
• But indexes do not consider the presence of the same shipbuilder in multiple markets and the possibility to substitute different ship kinds Daewoo (DSME)
Samsung HI
Shanghai Waigaoqiao
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VLCC Capesize Containership +15,000
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Competitive position of sample of shipyards
Source: Clarkson-SIN, 2018
Paris, 29th November 2018 - Dr. Alessio Tei 13
Can anyone affect the market or (unfairly) produce below the market price level?
Current dynamics in the shipbuilding industry
• Shipbuilding is also characterised by:• Shipowners’ investment decision
lag (e.g. Ferrari et al, 2018)
• Dynamics of main production inputs, i.e. labour and steel
• Rigid cost structure
• Ship payment schemes / procurement strategies
• Integrated local markets (e.g. PPP evaluations)
Source: FRED and Clarkson-SIN, 2018
Paris, 29th November 2018 - Dr. Alessio Tei 14
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$m
315-320K DWT VLCC 156-158K DWT Suezmax113-115K DWT Aframax 47-51K DWT Products Tanker73-75K DWT Panamax Tanker
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Steel and Iron price index
Needs for a specialised discipline
• So far, several attempts have been made to introduce an international regulation on anti-dumping practices in the shipbuilding industry but:• OECD Agreement of 1994 (i.e. first definition of injurious pricing) not
successful in identifying an effective regulation
• OECD 2002 outcome has been a “gentlemen” agreement without enforceable rules
• WTO and GATT regulation hardly applies to the characteristics to the shipbuilding practice
There are market distortions but it is hard to identify their “dumping” characteristics unless a proper “ad hoc” regulatory system comes into
place with:- Definitions tailored on shipbuilding reality
- Specific assessment on the distortive effects on shipbuilding market(s) 15
Conclusive remarks
• Market distortions are an essential element of the shipping world, shipbuilding included.• Despite this, distortions are not only generating negative effects but are
necessary to stimulate innovation and shipbuilding investments
• Distortions can cause dumping margins and unfair competition without an agreed international setting that establishes a fair levelled playing field• Probably there is dumping in the industry but current rules hardly allow to
prove it
Paris, 29th November 2018 - Dr. Alessio Tei 16
There is a need for a better economic and business market representation (i.e. definition of the relevant market, economic modelling) as well as clear common legislative framework in
order to clearly separate distortions from dumping strategies
