Romania’s Mangalia shipyard in stormy waters

Romania’s Mangalia shipyard in stormy waters
A bulk carrier built for Anangel Maritime Services.
By Clare Nuttall in Bucharest June 7, 2016

“Angajam” (we’re hiring) say the signs posted in shop windows all over the Romanian Black Sea resort of Mangalia. At the beginning of the summer season, the sound of sawing almost drowns out the seagulls as businesses get ready for the arrival of thousands of tourists. But while shops, bars and restaurants are taking on new staff, the future of the town’s single largest employer – the Daewoo-Mangalia Heavy Industries (DMHI) shipyard – is uncertain.

Its owner, South Korea’s Daewoo Shipbuilding & Marine Engineering (DSME), had to be bailed out in mid-2015, with Korea Development Bank and the Export-Import Bank of Korea injecting KRW4.2trn (€3.2bn), on the condition the company would cut costs and increase efficiency. This included a requirement to look for a buyer for the loss-making Mangalia shipyard. The company also plans to sell other assets including its yard in Shandong, China.

In May, the troubled Korean shipbuilder submitted a new restructuring plan to its creditors, outlining its plans in more detail, according to reports in the Korean press. It plans to initially turn the Mangalia shipyard into a repair yard once its current orders have been fulfilled, as well as looking for a buyer.

The company has not elaborated on what the restructuring would mean for the shipyard and its employees, but job losses at DMHI would be a heavy blow for the small resort town, where its cranes and gantries are visible from most street corners beyond the pastel painted apartment blocks.

It is also not clear who, if anyone, would be a potential buyer of the shipyard. Built in the 1970s, during the last but one great shipbuilding boom, the 2 Mai Shipyard formed a joint venture with DSME in 1997 to create DHMI. Unlike most European shipyards, the DMHI shipyard mainly churns out tankers and other large, simple ships, which today are mainly produced in the Far East, where labour costs are lower and shipbuilders can benefit from economies of scale.

“Daewoo Mangalia made sense 20 years ago when DSME invested, trying to get a foothold in Europe, but since then demand collapsed, prices collapsed and labour costs are rising,” says Paul Stott, senior lecturer at the School of Marine Science and Technology, University of Newcastle upon Tyne.

While the Mangalia shipyard used to be highly competitive on cost within Europe, labour costs are rising in Romania. In any case, as Stott points out, “Now, comparisons with other European shipbuilders are irrelevant because these kinds of ships are no longer being built in Europe. They are competing with South Korea, China and Japan, and it is very difficult to compete on cost as the economies of scale [in the Far East] are enormous.”

In an emailed statement, Stephen Gordon, managing director of Clarkson’s Research, a provider of intelligence for global shipping, points out that the production volume in Romania is modest compared to that of the world’s largest shipbuilding nations. In 2014, Romanian shipyards delivered commercial ships totalling over 200,000 gross tonnes (GT). By contrast, China produced ships of 22.9mn GT, South Korea 22mn GT and Japan 13.3mn GT.

The sheer size of the ships produced in Mangalia mean that by volume Romania is the largest shipbuilder in Europe, with Mangalia accounting for over 80% of the total. However, by the more meaningful measure of value, Romania is quite low on the list of European shipbuilders; contract value in 2014 was around $500mn – equivalent to the value of a single cruise ship from one of the high-tech German or Italian shipbuilders such as Meyer Werft or Fincantieri.

Half speed

The problems at DSME come in the context of a dramatic global downturn in the global shipbuilding industry. “There has been a strong pattern of the industry lurching from crisis to crisis over the last 200 years. Builders of big ships have a real rollercoaster ride, and about every 25-30 years we see a massive peak and a collapse,” says Stott.

The peak in the 1970s was followed by the closure of many shipyards (including many of those in the UK). The next peak for orders came in 2008. “The economic crisis may have been a trigger for the subsequent collapse, but basically it was because the market overheated. We now have huge over-capacity globally, which means that prices have fallen to little more than half of the pre-crisis levels for some types of ships,” says Stott. “Now we have to wait for the shipping industry to absorb the excess capacity built, which can take decades. Things are not happy in the sector DSME is in, though the market for smaller ships is more sustainable.”

DSME is not the only major global shipbuilder to be affected. South Korea’s shipyards are “in disarray”, says Stott, as there are no longer enough orders. “There has to be a big question over Daewoo Mangalia. If DSME pulls out, I don’t believe they would find another investor who would want to continue building the big simple ships they are building.”

Gelu Stan, executive managing director of the Romanian Shipbuilders Association (Anconav), tells bne IntelliNews that despite the global crisis in the industry, shipbuilding is “still alive” in Romania and he expects the sector to remain healthy in future.

However, he points to strict EU rules on state aid to shipbuilders that would rule out a rescue for the Mangalia shipyard should DSME be unable to continue operating in Romania. In 2013, the European Commission ruled that a planned aid package for Spain’s struggling shipbuilders was illegal, despite warnings from Madrid of the risk of over 80,000 jobs being lost at Spanish shipyards.

Meanwhile, the picture for other Romanian shipyards is more positive. Positioned on the Black Sea coast and the Danube delta, Romania has a long tradition of shipbuilding. Small craftsmen have been building and repairing ships for centuries, and larger shipyards were built in towns such as Braila, Constanta, Galati and Giurgiu back in the 19th century.

Since the collapse of communism in Romania, most have been taken over by international shipbuilding companies and moved into profitable niche markets – a pattern pursued by shipbuilders across Europe.

For example, the Galati shipyard, which was founded in 1893, started cooperation with Netherlands-based Damen Shipyards in 1994, and was taken over by Damen five years later. Since then it has produced an average of 24 vessels a year including passenger ferries, oil tankers, dredgers and patrol boats. “Damen’s shipbuilding concept is based on what our customers want... We operate in every niche market where we see an opportunity to improve, innovate or invest,” the company’s website says.

It is a similar story at the Braila and Tulcea shipyards, which were taken over by Norway’s Vard. The company builds specialised vehicles used in the offshore oil and gas industry.