Troubled waters
By Karol Chlipalski
April 10, 2003 will be long remembered by the employees of Stocznia Szczecińska Nowa (SSN) as a turning point in the history of the company that rose from the embers of Stocznia Szczecińska Porta Holding, which went bankrupt last summer.
On this day at 10:30 a.m., the first of four new container ships was christened "Louis S." Just a little earlier, at 9 a.m., SSN president Andrzej Stachura had signed contracts for four more ships ordered by Peter Döhle, a German ship owner from Hamburg. In another recent success, SSN sold the first chemical carrier ships ordered by Norway's Odijell - a promising sign, as chemical carrier ships are very complicated to manufacture and bring more added value for their producers than other ships.
The country's shipyards, which have been hard hit by financial problems, insolvencies and bankruptcies, are now slowly trying to regain their footing, thanks largely to alternative forms of operation financing. Most have been forced to seek new means of propping up their operations, as banks increasingly will not even consider issuing them loans.
SSN has recently signed contracts for 21 ships worth a total of €773 million ($830 million). This fills the shipyard's order book for the next two and a half years. Among those 21 ships are serial products, an important factor in the shipyard business.
"We are used to saying that the prototype brings a $1 million loss, and the second ship from the series a $1 million profit, so it's up to the third ship to really earn money," said Andrzej Żarnoch, SSN's marketing director, who looks to the future with more optimism than he used to.
Mirosław Piotrowski, spokesman for Grupa Stocznia Gdynia (GSG), said that his company has won orders for 37 ships worth a total of €1.4 billion ($1.5 billion) and has orders for at least the next three years.
Despite these good prospects, both SSN and GSG are still on the verge of bankruptcy and serious discussions about the future of the country's shipyards are ongoing. Skeptics' arguments are enforced by the main shipyards' weak performance in 2002. GSG's sales, for example, amounted to €395,000 (zł. 1.7 million), a 12% decrease. SSN had a €3.3 million (zł. 14 million) loss in the second half of 2002.
The main problem is that the shipyards must deal with banks that are hesitant to lend them money, given their huge debts. The shipyards are considered difficult debtors, especially since the collapse of Stocznia Szczecińska Porta Holding. Additionally, an insolvency petition filed by GSG has also made the banks unwilling to back the shipyards.
Hence, Shipyard managers are looking for alternative ways to finance their operations. For example, GSG has managed to convince Israeli ship owner Ray Shipping to directly finance the construction of eight RoRo car carriers able to transport 6,000 cars each. But this alone won't solve the shipyards' problems.
Indeed, shipbuilding is seen as a very risky business not only here but also in the rest of Europe. About 70% of ship manufacturing is now concentrated in southeast Asia, where labor costs are one-third those in Europe.
One of the biggest problems facing the shipyard sector is price fluctuation due to varying currency calculations for contracts and purchases of materials. Andrzej Stachura, SSN's president, said that one reason for the weak performance of the sector is the fact that contracts are denominated in dollars, but purchases of materials are done in euro. Last year when SSN signed contracts for ship production the exchange rate was on average about zł. 3.77 to the dollar. Currently the euro exchange rate is around zł. 4.30, meaning that the shipyard has to pay more for purchases of raw materials. And Stachura points out that he cannot afford to hedge against currency fluctuations since the average profit margin for the sector is only about 1%.
Another factor that puts the country's shipbuilding industry in such a difficult situation is a labor productivity rate of 22 compensated gross tons (CGT) per person. (CGT is a rate of measuring productivity specific to the shipbuilding industry.) This is one half the rate of shipyards in France, Germany and Spain.
Stachura said that outdated equipment was the main reason for the overall low productivity of the shipyards.
"We work with worn equipment," Stachura said. "There has been no investment (in equipment) for a long time. Some technologies we use are from the 1970s."
The yards of the former German Democratic Republic, on the other hand, received huge financial injections at the beginning of the 1990s and were sold to new investors who upgraded their equipment and turned them into modern ship manufacturers, he noted.
Despite these problems, some bankers deny that they have abandoned the sector completely and blame the state for its financial dire straits.
"Banks did not back out from financing the shipyard sector," said Sebastian Łuczak, spokesman of Bank Pekao. "The bankruptcy of Stocznia Szczecińska has proven that the sector worldwide is undergoing hard times. Polish shipyards are not an exception and require some support from the state."
Banks say that they might provide some support for the shipyards if SSN and GSG - the country's two largest facilities - consolidate their operations together with H.Cegielski Poznań, the state-owned producer of ship engines. The government's Industrial Development Agency (ARP) will oversee the consolidation, to be completed by the end of 2004, said Arkadiusz Krężel, the agency's president.
According to documents from the ministry of economy, labor and social policy, the new group that would be created by the consolidation would hold 90% of shares of SSN, 24.9% of GSG and 100% of H.Cegielski.
In the meantime, necessary restructuring must be completed while the shipyards hold talks with their main creditors - banks, steelworks and suppliers. Krężel said that during the consolidation process the ARP or SSN would purchase the companies that are part of the holding group formed after the bankruptcy of Stocznia Szczecińska Porta Holding as well as those that are valuable suppliers, including Towimor Toruń, Nord Porta Styl and Porta Transport. He did not exclude the possibility of financial help from the government.
"At present, companies are preparing their restructuring programs, which must be ready by April 22; then we can give more details," says Roma Sarzyńska, the ARP's spokeswoman. After the restructuring and consolidation of the shipyards, the ARP will try to find a strategic investor for the holding company.
The consolidation of the shipyard sector has aroused many objections. Andrzej Sadowski, an economist from the Adam Smith Institute, is skeptical about the sector's future and believes that providing help to shipyards is a waste of public means.
"The economy is a dynamic sphere, (but) it is not said that Poland has to produce ships forever," Sadowski said. He pointed out that the U.K., once the world's largest ship producer, abandoned this branch of business. Sadowski thinks Poland should do the same, as firms here cannot compete with south Asian shipyards.
Skeptics also reproach the government for wasting time and money trying to resuscitate a dying industry, especially since the economy ministry gave SSN €4 million (zł. 231 million) worth of shares of the government's stakes in three public companies.
However, SSN's Żarnoch argues that the sector is still worth the efforts.
"If I was 17, I would not connect my future with shipbuilding, but we still have good prospects for the next 15-20 years," he said.
Żarnoch believes that the number of contracts the shipyards were recently awarded proves they have a future. His colleague Stachura says that the holding company should focus on niche markets by producing multifunctional ships and chemical carriers. These kinds of vessels require dedicated engineering solutions and, for that reason, are less suited to the computer-managed production techniques prevalent in Korean yards, he said.
"In building bulk carrier ships we will never be cheaper than the Koreans," Stachura said.
Furthermore, they argue that the shipbuilding sector is a vital part of the country's economy and must be supported. The shipyard sector generates 5.2% of the country's exports, and contributes about €931.6 million ($1 billion) to the nation's GDP each year, with most of that amount coming from the 90% of shipyard customers located outside the country.
Shipyard employees expect Krężel, who succeeded in restructuring the country's defense sector, to now resurrect their still ailing industry. They know they have a strong political position, as the sector's bankruptcy would trigger the collapse of 10 companies throughout the country, starting from H.Cegielski Poznań and Huta Częstochowa, both of which have been besieged by their own financial problems. According to the economy ministry, 60,000 people would lose their jobs in the shipbuilding sector and its related industries if the sector were to collapse.
