Crown Copyright Catalogue Reference
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(c) crown copyright Catalogue Reference:CAB/129/149 Image Reference:0014 DOCUMENT IS THE PROPERTY OF HER BRITANNIC MAJESTY*S GOVERNMENT 63 C(70) 54 COPY NO 28 April 1970 CABINET SITUATION IN THE SHIPBUILDING INDUSTRY Memorandum by the Paymaster General In view of the current public interest in the shipbuilding industry, my colleagues will v/ish to have my assessment of the present position. BACKGROUND 2. Following the report of the Geddes Committee published in' March 1966, the Shipbuilding Industry Act was passed in June 1967, This set up the Shipbuilding Industry Board (SIB) which under the Act as amended was authorised to make i. grants of up to £20 million ii. loans (or equity investments) of up to £32f million The Minister was also authorised, subject to SIB recommendation, to guarantee bank loans for United Kingdom ship orders placed with United Kingdom yards up to a total of £400 million. Anneir A shows the expenditure and commitments of SIB grants and loans. 3, During 1966-67 the world new orders rose from 18 to 22 million gross tons as compared with an average of 10 million gross tons in the first half of the 1960s, but the British industry was being priced out of the market and obtained only a small proportion of new world orders 2.2 per cent in 1966 and 5 per cent In 1967. Orders in 1967 included however five giant tankers and two container ships, the earliest of which will not be delivered until later this year. 4. In 1968-69 the industry was able to build up its order book and obtained, in tonnage terms, 9.8 per cent of new world orders in 1968 and 7 per cent in 1969. The British order book at the end of 1969 amounted to £600 million of merchant ships and £200 million of home and overseas orders for naval vessels. 1 5. Because, even when order books are low, a vessel is not usually completed and delivered for two years, the output amounted to only one million gross tons in 1968 and 0. 8 million gross tons in 1969. Output is expected to rise to 1, 5 million gross tons in 1970 and higher still in 1971, reflecting the influx of orders in 1968-69. PRESENT FINANCIAL DIFFICULTIES 6. The poor financial results now appearing from the shipbuilding companies is mainly attributable to the following factors; i. Productivity has grown less quickly than hoped, ii. Ships are built on fixed price contracts and the industry has therefore been placed in great difficulty by the considerable increases in wages and the cost of materials and components for which it often cannot obtain fixed prices at the time tenders for ships are taken. iii. It is now the usual accounting practice to make provision for any future losses expected on existing contracts. INDIVIDUAL COMPANIES 7* Annex B summarises the order book, employment and turnover of the main shipbuilding companies, 8, Annex C shows the latest estimate of the financial position of these companies in three categories? a. Those which are in known difficulty and clearly have no reserves to meet the problem. b. Two small builders who have specialised and are earning good profits. c. Companies caught with long order books and some losses in prospect and whose ability to ride out the problem is not certain. POSITION ABROAD 9. Long order books and rising costs have produced similar difficulties abroad, and one of the two major Dutch companies (Verolme) has had to be rescued by the Netherlands Government, In some countries the impact is less because the "home market" is reserved to the national shipbuilding industry. For example, the Japanese have a home shipbuilding programme of 2-3 million gross tons a year and support this construction programme in their own yards by credit on terms more favourable than the internationally agreed minimum export credit rate for ships. The European Economic Community (EEC) allows shipbuilding subsidies of up 2 to 10 per cent; Italy gives more, while France not only subsidises at the agreed EEC rate but also operates a scheme by which shipbuilders are able to insure against the effect of cost escalation. A large number of other countries restrict ship purchases abroad and give large subsidies (for example USA, Canada, Australia, South Africa, Greece and Spain, as well as many Communist countries). Sweden has supported her shipbuilding industry by way of limited credits, and the fact that her main yards have been constructed or re-equipped in recent years to specialise in tankers and large bulk carriers has put them in a relatively favourable position, although profits have been very low. PROSPECTS 10. It is possible that the present series of bad financial statements represent the bottom cf a trough, although confidence could be further sapped when the poor Swan Hunter results are published shortly-. Favourable factors include the benefits of specialisation and re-equipment gradually appearing, the working through of older orders which made insufficient provision for receixt cost increases; and the possible profits on other orders which have yet to be brought in to the accounts. But these factors could be offset if there are further increases in labour or other costs, if productivity fails to improve or if the redundancies necessary in certain areas (e.g. Upper Clyde and Birkenhead) are not carried through quickly. SHIP REPAIRING INDUSTRY 11. Ship repairing was not covered by the Geddes Report or the Shipbuilding Industry Act. There has been a general world decline in demand for ship repairing and the United Kingdom, partly for geographical reasons, is not well placed to maintain its share of the market. (The announcement last week that the Palmers yard at He bourn, owned by Vickers, would close is attributable to this general problem). Repair yards are often under separate ownership and even when dwned by shipbuilders are usually separately managed. They have traditionally been casual employers in the port areas, but the position is changing. To avoid giving £all-back pay when there is no work, some repairers are said to be taking business at below cost. The Shipbuilding and Ship Repairing Council, consisting of the SIB and representatives of management and unions in these industries, is at present considering the problems and prospects of ship repairing. ACTION BEING TAKEN 12. The Shipbuilding Industry Bill which is to have its Second Reading on 30 April, will raise the limit on guarantees for the financing of United Kingdom orders to £600 million,, Because the SIB are statutorily concerned with the administration of the guarantee scheme, and because it would be awkward at this time to announce its dissolution at the end of 1970, the Minister of Technology proposes to use his powers under the Shipbuilding Industry Act, 1957, to prolong the SIB*s life by one year. 3 13. My colleagues will already be aware of the special problems of Upper Clyde Shipbuilders and Cammell Laird. For the rest, la m discussing with the SIB how the remaining funds available to them under the Shipbuilding Industry Act can best be used to secure both the immediate and longer term improvement of the industry^ position with particular attention to Swan Hunter and Harland and Wolff, I shall of course keep my colleagues informed of the outcome, 14. Meanwhile for the longer term, the Ministry of Technology will, in the light of the present discussions in the Organisation for Economic Co-operation and Development Shipbuilding Working Party about both credit and other forms of Government assistance to shipbuilding, study the implications of the current developments in the industry for future Government policy when the SIB comes to the end of its statutory life. H L Ministry of Technology SW1 28 April 1970 4 ASSISTANCE UNDER SECTIONS 5, h & 6 OF THE SHIPBUILDING- INDUSTRY ACT, I967 Grants (Section 3) - £million Total available Already Paid Firmly Committed Balance 20 11.253 1.867 6.880 Against this balance, proposals by the SIE to give grants totalling £l.h m. to Scott Lithgov/ and £.089 m. to Vosper Ltd. are under consideration. Prom the £5.h m. remaining Cammell Laird, Harland & Wolff and Swan Hunter, have all approached the SIB seeking substantial financial support. There is also the possibility of applications from other firms in the shipbuilding and engine building industries. Loans (Section k) and Share Subscription (Section 6) £million Total available Already Paid Firmly Committed Balance 32.5 16.055 0.1450 15.995 (including £3 m. share subscription s UCS) Against this balance, we are currently considering proposals by the SIB to lend up to £2.3 m. to Scott Lithgow. UCS hope to obtain a further £1 m. for capital equipment but it is unlikely that this loan will be made until they have demonstrated that they are on the road to viability. The balance should be more than adequate to meet any foreseeable proposals for loan assistance by the SIB during the remainder of their life. Ministry of Technology, S.W.1. 28th April, 1970 Shipbuilding (2) Order Book SIB Grants SIB Loans etc Company Employment Turnover paid or DecembeDecemberr IS6IS699 paid or March 1970 committed committed £ m. £ m. £ m . £ m. UCS Group 10,254 22 70(D 6.1 7.7.7 (inc.Yarrow) Yarrow Shipbuilding 2,954 - 50 (all - naval) Cammell Laird Shipbuilders & Engineers 7,925 23 65 NIL NIL Harland & Wolff 6,216 N/A 80 2.5 8.0 AustiAustinn && Pickersgilll BartraBartramm GrouGroupp 2,509 12 P" 25 NIL NIL z Appledore 581 2.5 6 NIL 0.25 Q Swan Hunter Group 19,036 62 210 5.05 NIL z Doxford & Sunderland Ltd.