Modern economic POTENTIAL OF UKRAINE

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Shipbuilding

Till 1991, shipbuilding industry of the Soviet Union was one of the world leaders. It provided a third in the world warship building, and the country was in the top ten developed states in terms of civil shipbuilding.

After the breakdown of the USSR, Ukraine inherited powerful shipbuilding facilities. Most of it was subject to administration by the Ministry of Industrial Policy of Ukraine. These were 11 shipbuilding plants, which used to contribute around 30% to shipbuilding output of the USSR, 7 marine engineering enterprises, 11 companies involved in marine device construction, as well as 27 separate R&D institutes and construction bureaus. Also, Ukraine has a number of shipbuilding plants and docks administered by the Ministry of Transportation and Communication, the Committee of Fishing Business, and the Ministry of Defense.

Most of enterprises and organizations in the industry fall under UkrSudProm Association of Shipbuilders of Ukraine, which was established to represent and protect the interests of its members.

The USSR’s collapse put Ukraine’s shipbuilding into a long-term decline. It lasted until 1999 and was mostly due to a minimum volume of state shipbuilding orders. In general, between 1992 till 2003, the 11 shipyards of the country produced 237 navigation units for a total value of USD 1.5 bn. At the same time, domestic orders were the smallest – 30 units (USD 75 mn).

The increase in shipbuilding volume in the last six years is related to the restructuring of enterprises, export re-orientation of their performance, as well as state support measures.

In 2000-2005 shipbuilding enterprises of Ukraine showed a stable upturn in production.

In 2003-2004 the country’s shipbuilding plants engineered and handed to customers some 72 vessels of gross value USD 140.5 mn. Aggregate value of dock services outran UAH 232 mn, while supplies of gas turbine machinery amounted to UAH 1,128 mn.

Production growth rates were maintained in the first 9 months of 2005: shipbuilding plants completed construction and provided consumers with 17 ships and vessels worth in total USD 66.7 mn, which was by 29% higher than in the respective period of last year. Ship repair volume keeps growing as well – 152 vessels were repaired for a total value of UAH 141 mn – a 20% rise against 2004.

According to estimates of the Ministry of Industrial Policy, with the available production capacities the country can produce output worth USD 400-450 mn each year.

A notable price rise has recently become a reason for particular anxiety among shipbuilders. As prices rise, so does the cost of a ship still in the building process, though its price has already been fixed with the client. This is another peculiarity of shipbuilding, which severely harmed Ukrainian docks back in the period of hyperinflation.

It is almost impossible to drive investments for production upgrades in state-owned enterprises. Hence, the Ukrainian government made the strategic decision to privatize them and start looking for investors and owners who will be able to run effective production. This implies first of all a complete loading of facilities and technical refit.

The following objects have undergone privatization: Okean Plant of Nikolayev, Zaliv Plant (Kerch, the Crimea), SevMorZavod (Sevastopol, the Crimea), and Azovskiy Ship Repair Plant of Mariupol. Kherson Shipbuilding Plant underwent corporatization in 2003, and the corporatization at Izmail Ship Repair Plant was held in 2004. The privatization of Chernomorskiy (Black Sea) Shipbuilding Plant in Nikolayev is still proceeding.

The privatization of Okean Shipbuilding Plant (Nikolayev) to the Damen group of companies (the Netherlands) held several years ago was the most successful example. As a result, after standing idle for some five years, the plant not only came back to work, but turned into the leader of the shipbuilding industry in the country.

This particular plant is fulfilling the first-ever contracts for the construction of a series of ships upon the request of a domestic shipping company. In September 2005, OJSC Damen Shipyards Okean floated out the second universal cargo vessel – one of a series of ships being built upon the request of JSC UkrRichFlot (Ukrainian River Fleet). A new contract was signed in 2005, which increased the series by five more vessels.

Throughout 2005, shipbuilding plants signed new contracts with the traditional clients of Ukrainian shipbuilders – Norway, Denmark, and the Netherlands – for the construction of vessels for total value of USD 136 mn. Meanwhile, an important factor is the growing share of full-set vessels in the total volume of orders. Works under the new contracts ensure a shipbuilding load for the plants for the whole of 2006.

The draft Program of marine and river transportation development in Ukraine through 2010 spells out that 35-40% of the industry’s facilities should be oriented toward the local market. The rest may be focused on foreign markets.

Export products are traditional for Ukraine. This includes tankers with deadweights up to 100 ths. tons, bulk carriers, refrigerator and fishing vessels, as well as a technical fleet of ships that has matured recently.

The Zarya-Mashproject Scientific and Production Complex of Gas Turbine Engineering state enterprise is an example of the growing efficiency due to structural transformations and the concentration of production and scientific potential. Besides unique ship turbines, the enterprise put out series production of new energy-producing turbines of 16 and 25 MW power and an engine developing 110 MW.

State support and the opening of free economic zones, foremost at enterprises based in Nikolayev were of crucial recent developments in Ukraine’s shipbuilding industry.

46 top companies in the industry received legal preferences. The country’s shipbuilding industry operates under the Law of Ukraine “On State Support Measures for the Shipbuilding Industry in Ukraine”. By implementation the law’s original form, the gross volume of assets left to be administered by the enterprises came close to UAH 270 mn from 2000-2004. This has had a positive effect on growing production by shipbuilding enterprises and their development, as well as higher efficiency of business and the competitiveness of the output.

Within the Nikolayev Special Economic Zone, enterprises like Damen Shipyards Okean, Chernomorskiy (Black Sea) Shipbuilding Plant, 61 Communards Shipbuilding Plant, as well as the Raduga (Rainbow) paint and insulation enterprise are implementing investment projects targeted to raise efficiency and quality in primarily export-oriented vessel building through production upgrades. Gross investment in these projects comes to USD 15 mn. The fulfillment of the projects will secure higher competitiveness in both construction and product capability, as well as an increase and improvement of production capacity

The state has also recently shown direct financial support to the shipbuilding industry. A Cabinet of Ministers’ Decree allowed for a no-interest loan at the More FSK firm to pay for wage arrears of UAH 5.4 mn.

As part of the 2004 budget program, 61 Communards Shipbuilding Plant received UAH 25 mn to complete, among other items, the construction of a refrigerator vessel.

The industry’s plants are commissioning the construction of new vessels. Chernomorskiy (Black Sea) Shipbuilding Plant built five towboats; the Chernomorets Central Construction Bureau commissioned Sevastopol Marine Plant to build fire boat for Druzhba Oil Mainlines; Damen Shipyards Okean is running the construction of full-set combi-freighters, ocean towboats for foreign clients and has also started the construction of river-sea vessels for UkrRichFlot Company. Meanwhile, the 61 Communards Shipbuilding Plant is finishing the construction of towboats for Delta-Lotsman state enterprise. More FSK OJSC launched the production of Kafa high-speed boats and built modernized Grif-T type boats for Turkmenistan. The Leninskaya Kuznitsa Plant, which handles hi-tech production, launched construction of Gurza armed boats for Uzbekistan. Kiev Ship Building and Repair Plant has been involved as well, and has produced three car ferries for the Republic of Gambia.

Regrettably, early 2005 brought serious problems with the removal of the preferences that the industry used to have. There was a hard fight to return these preferences. Some were given back thanks to the decree of the Cabinet of Ministers of Ukraine No.555 of July 12, 2005 “On approval of the Order of adding shipbuilding enterprises to the list of companies subject to state support of shipbuilding industry of Ukraine” and decree of the Cabinet of Ministers of Ukraine No.111-p of April 20, 2005 “On determining of a period of commodity handling at customs territory of Ukraine needed to fulfill repair and recovery of gas turbine aggregates and their parts”. However, to date the previous set of state support measures for the industry has not been restored in full.

Despite a lot of complex problems, the industry looks quite good at the international level. Hence, the British Fairplay journal estimated that Ukraine ranked the tenth in Europe by the level of order portfolios for shipbuilding enterprises as of early 2005. A certain opportunity for the Ukrainian industry’s recovery is a global shift of the entire shipbuilding world to eastern Europe and countries with lower labor and raw costs. Many European dockyards have already benefited from constructing of ship hulls in Romania, Turkey, Bulgaria, and Ukraine (specifically, by Damen).

A real shipbuilding boom has been seen at world dockyards in the last three years. To order the vessel in places where the overwhelming majority of world ships are built, – in South Korea, China, or Japan - there is a waiting list of no less than three years – just because these docks are full with orders for several years ahead.

As of July 1, 2005, world portfolio of orders consisted of 4,324 vessels of gross capacity exceeding 160 mn tons. To compare: the same indicator as of July 1, 2002 was equal to some 75 mn tons. This was influenced by booming demand for marine transportation and high freight charges.

Today’s shipbuilding boom gives a chance to European shipbuilders, which used to suffer and are still suffering severe competition from their Asian colleagues. It is particularly an opportunity to improve the situation in Ukrainian shipbuilding. Besides production facilities, Ukraine has notably professional labor and the sizable steel production volumes essential for shipbuilding. And as experience shows, particular success can be reached through joint activities with shipbuilders of Western Europe, which are also looking to survive, but as opposed to Ukraine boast larger financial reserves and state-of-the-art shipbuilding technologies.

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