Shipbuilding in Ukraine: Investments and Government Support

Geographical position of Ukraine is very advantageous. The main advantages of Ukraine are the outlets to the Black Sea and the Sea of Azov. So it is doubtless that in such country shipbuilding has to prosper.

Shipbuilding is very specific field of heavy industry. Using the products and achievements of many contiguous branches of industry to create its own product (metallurgy, machine-building, electronics, etc.) shipbuilding stimulates the development of these industries and raises the standards of required scientific and technical capabilities. Creation of one workplace in shipbuilding is followed by the creation of 4-5 workplaces in contiguous industries. On the one hand situation in the shipbuilding indicates the level of economic development of the country and on the other hand it stimulates the economic development.

In the time of Soviet Union about 20% of USSR’ production of ship engineering products and almost 10% of navigational, hydroacoustic and radar equipment were made in Ukraine. The collapse of the USSR forced many Ukrainian shipbuilding companies to become unprofitable.

Many shipyards have been broken within the long period of downturn but at the present moment the process of economical upturn of shipbuilding industry in Ukraine has begun. Overloaded production capacities of shipbuilding companies in Asia and metal price increase in the world markets are the main two reasons for the activity in the Ukrainian shipbuilding industry. Because of such situation in the world shipbuilding market customers have to search for additional production capacities in different countries including Ukraine.

There are 49 shipbuilding companies registered in Ukraine. They are able to build a wide range of vessel types: powerboats, barges, bulk carriers(dry cargo ship), tankers, liquefied gas carriers, etc.

The 11 largest shipbuilding companies of Ukraine are the following:

  1. JSC “Shipbuilding Yard Liman” (Nikolaev)
  2. National Corporation “Shipyard named after 61 Communards” (Nikolaev)
  3. JSC “Damen Shipyard Okean” (Nikolaev)
  4. “Leninska Kuznya” Plant Joint Stock Co. (Kiev)
  5. JSC “Sevastopol Marine Plant” (Sevastopol’)
  6. JSC “ZALIV Shipyard” (Kerch’)
  7. JSC “Khersonkiy Shipyard” (Kherson)
  8. Production association “More” (Feodosia)
  9. Production association “Kiliyskiy Shipyard” (Kiliya)
  10. Close Corporation “Zaporozhskiy Shipyard” (Zaporozh’e)
  11. Black Sea Shipyard Stock Holding Company

There are several examples of the shipbuilding companies that have achieved successful business growth for the short period of time: National Corporation “Shipyard named after 61 Communards”, “Leninska Kuznya” Plant Joint Stock Co., JSC “Sevastopol Marine Plant”, JSC “Damen Shipyard Okean”, etc. In the year of 2005 the shipyards of Ukraine have built and sold 27 vessels with total value of 117 million USD. It is 32% increase comparing to the 2004. In 2005 the growth rate of make quantity in shipbuilding was 20,4%, in 2004 – 15%, in 2003 – 10%. The main contribution to the overall growth of production is made by the largest abovementioned companies.

The magazine “Fairplay Solution” stated that Ukraine is one of the 10 largest shipbuilding countries in Europe.

Ten largest shipbuilding countries in Europe (2005)

Investments made a major contribution to the revival of shipbuilding in Ukraine otherwise the depression in this industry would not stop. Nowadays investors have a chance to invest in profitable and promising production while shipbuilding companies have a chance for the growth, development and modernization. Many investors from different countries of the world, such as Germany, Japan, Saudi Arabia, Sweden, Holland, etc. are interested exactly in investments into Ukrainian shipbuilding industry

The most attractive objects of Ukrainian shipbuilding industry for placing investments are the shipyards that build tankers, liquefied gas carriers (there are only 20 companies in the world that build this type of vessels) or small tonnage ships. Small tonnage shipbuilding is always attractive for investments because it has high profitability of building and operation. The demand on this type of vessels is quite stable because the world market is swiftly growing and there is always an obvious need for the small tonnage ships.

For many years quality of the vessels built in Ukraine attracts foreign customers from all over the world. Ukrainian shipyards use modern technologies to assemble hulls and to mount necessary equipment; have ship-ways, graving docks and deep-water fitting-out wharfs equipped with high capacity cranes. Particularly customers value the quality of welding operations and painting that is done by the Ukrainian shipyards’ workers. Shipbuilding industry in Ukraine is highly attractive for investments particularly because of the designers that work in the Ukrainian shipbuilding companies. The new engineering developments and high potential of Ukrainian designers give ability to build high quality vessels with competitive prices.

JSC “Khersonskiy Shipyard” can be considered as one of the examples of effective shipbuilding investment. The shipyard was founded in 1951. It specializes in building tankers, dry cargo ships, ice-breakers, multy-purpose vessels, container ships, arctic suppliers, etc. But for the previous 10 years this shipyard dealt only with ship-repair tasks. The revival of “Khersonskiy Shipyard” began in 2004 when company “Evroresurs” decided to invest in it. This shareholder invested about 5 million USD for the development of the shipyard. Besides, the most important strategic and tactical issues were settled during a short period of time. As the result the indexes of economical activity of the shipyard have significantly increased: 2 times increase of production output in the 2005 (compared to 2004), the sales volume 140% increase, the sales income 130% increase, the net profit of 0.6 million USD. Shipyard has made 2 contracts with Reserved Capital Enterprises Corporation for building ferry hulls.

The activity of shipyard “Okean” (Nikolaev) which has been bought by Dutch Damen Shipyard Group Company in 2001 continues to improve. Up to now this purchase is the most successful privatization and foreign investor’s activity in the Ukrainian shipbuilding market. Since the purchase the shipyard has built 21 vessels and is loaded with orders till the end of the 2006. In March of 2006 the shipyard has started the building of new multi-purpose dry cargo ship ordered by the Ukrainian marine company – “Ukrrechflot”. This vessel is part of series of vessels that are to be constructed on the shipyard using the new modern engineering processes.

Despite all the examples of positive investments, obviously, investors need to consider in depth all positive and negative aspects of investment in every single case. For instance, Helvic Investment Ltd (Kyiv) had bought 25% of shares of Meridian Shipyard Public Corporation but has not discharged its obligations given to State Property Fund of Ukraine (production volume increase not less than to the level of 55% of maximum production capacity). As the result the bought shares have been relinquished to the state.

Despite all positive and negative changes in the individual shipbuilding businesses the overall industry situation characterizes by the following features:

  • Financial and economical situation of many shipyards is difficult. They have turnover means famine.
  • The banks in Ukraine do not meet the needs of business principle of shipbuilding industry. As usual banks do not provide long-term credits with low credit interest.
  • In general the make quantity of Ukrainian shipbuilding industry is being exported (95 %).
  • There is no sufficient government support for shipbuilding.

There are only two methods to change this situation for better: investments and government programs. Shipbuilding is one of the industries that are in lack of government support and this lack may cause stagnation. In many other countries of the world, for example, in South Korea, Germany, etc. shipbuilding companies have a strong government support including the million state subsidies aimed to stimulate the production. Analyzing the situation in Ukraine it can be clearly seen that state policy does not meet the needs and does not provide the necessary government support for the shipbuilding industry. Though many attempts of government support have been made but only few of them are effective.

“Actions directed to support the shipbuilding industry of Ukraine” law is one of the positive examples of government support. This law states that shipbuilding companies are exempted from the following taxes: land-tax (on lands used for production facilities), import duty and VAT on purchasing the foreign-made equipment for the purpose of assembling ships, VAT on the research and development projects which are done by request of Ukrainian shipyards. As the result in 2000-2001 the circulating assets of shipbuilding companies for the total value of 190 million UAH (about 36 million USD) have remained at the disposal of owners and the financial situation of these companies has been greatly improved giving the prospects to develop and attract investors and costumers.

Ukraine has a great potential to develop the shipbuilding industry but this process is slowed down for lack of government support. Currently the initiative is taken by investors who make well thought-out estimations on the situation and see the priority directions for their investments. In this case the government assistance would effectively help to achieve the positive result both for investor and for shipbuilding industry. There is clear necessity to improve the government regulation for a better security of investments and equal rules of competition.

Despite the slowness of governmental positive actions the situation in the shipbuilding industry has significantly improved during the last several years. The main reasons are the situation in the world market and establishing the favorable procedures for privatization both for Ukrainian and foreign investors. Today the most attractive enterprises for investments are the following: “Shipyard named after 61 Communards” and Black Sea Shipyard. In general the situation in the Ukrainian shipbuilding industry is attractive for the investments, the demand on the market is far from being filled now and in foreseeable future and the largest shipyards of Ukraine are developing and are already competitive in the world market of shipbuilding.