In 2004, the world's maritime community was euphoric with healthy market conditions prevailing in every related sector. It was the best year in decades, with all three major shipping markets-tanker, liner, and bulk-reaching concurrent highs and every major shipyard in the world fully booked for the next three years. While the cyclical nature of shipping markets was never in question, what was uncertain was how precipitous the market decline would be after the 2004 historic highs. Last year's annual review predicted good conditions well into 2005, barring any unforeseen circumstances. Despite some extraordinarily calamitous events, the year proved to be yet another good one for the maritime industry.
A number of major maritime developments during the year are worth noting. Internationally, these include the ongoing dominance of the Chinese economy living up to its sheet anchor role for the shipping industry and the evolving true globalization of the maritime sector. Asian companies once again led the charge in the ongoing international maritime rejuvenation. Although the 2004 Boxing Day tsunami was unmatched in 2005 in terms of the sheer number of people killed, the death and destruction caused by the most active hurricane season in North America on record, in particular the devastation of the port city of New Orleans, also provided absorbing human drama. A political storm that started unnoticed in 2005 and brewed well into a tempest by 2006 over the proposed Dubai Ports World acquisition of P&O Ports' assets in this country drew unprecedented international attention.
Market Developments
Estimates indicate that Asia is currently responsible for 50% of world gross domestic product growth. The liberalization of global trade and China's entry into the World Trade Organization unleashed a flurry of activity responsible for the prolonged exceptionally good market conditions in the shipping industry. One could argue that innovations in the shipping industry have greatly lowered the landed cost of goods in target markets, thereby directly accelerating globalization. The interdependency between global commerce and the merchant marine sector has never been so transparent as it is today.
China's ongoing economic growth and its increasing trade surplus were the most important drivers of another solid year of shipping market performance. China posted a global trade surplus of $102 billion in 2005 and has now become the world's third-largest trading nation. The U.S. trade deficit with China has increased from $28 billion in 2001 to $114.7 billion in 2005, according to Chinese statistics, which most analysts believe are severely underreported. Interestingly, if trade with the United States is excluded from these statistics, China has a trade deficit with the rest of the world.
Dry Bulk Market. The supply of dry bulk tonnage grew at a faster rate in 2005 compared to its demand, resulting in excess capacity. The Norwegian shipbroker R. S. Platou estimated a reduction in capacity utilization from 97% in 2004 to 94% in 2005. Accordingly, 2005 average freight rates dropped by as much as a third from 2004 rates. It is noteworthy, however, that 2005 rates were still far higher than those in 2003, once again highlighting the 2004 anomaly.
Liquid Bulk Market. The market for oil tankers is considered highly volatile and difficult to predict because of the complex variables involved. This was very evident in 2005, sending mixed messages to investors and analysts alike. The market for crude tankers did not match the record highs set in 2004, and the capacity use level dropped to 88.5% in 2005. Although world oil production and trade increased, the demand for tanker tonnage was tempered by unanticipated conditions such as a significant decline in demand for oil imports in China, stagnation at non-OPEC oil-production sources, hurricane-related delays in the Gulf of Mexico, and strikes and delays at various ports.
Despite all these factors, the average 2005 rates were significantly better than those in 2003, with a modern very large crude carrier (VLCC) averaging $55,000 per day, more than doubling the $27,000 per day level established in the 1990s. In November 2005, VLCCs reported their highest earnings for the year on the route from the Persian Gulf to South Korea, earning $100,880 per day on the 39-day round trip. It has been reported that Frontline, the world's largest VLCC owner, requires less than $28,000 per day to break even.
Royal Dutch Shell PLC was the leading charterer of oil tankers in 2005, hiring 762 crude oil tankers, constituting 7.5% of the world total. British Petroleum PLC was the second largest with 4.9%. The present cost of delivering a barrel of oil to the United States from the Persian Gulf is about $4.00. The liquefied natural gas (LNG) tanker market, which received considerable attention last year, had relatively low demand growth (6%) and a high supply of new tonnage (14%). This resulted in lower tonnage use and also low spot market rates for LNG tankers in 2005.
Liner Market. This was a comforting year for the liner sector for many reasons, even though operating costs continued to increase. Port congestion that plagued container operations in many European and North American ports in 2004 was not an issue in 2005. The world container trade grew at a slightly faster rate than the rate of capacity growth in the sector. This led to increased capacity use as well as a rise in overall charter hires for container ships. Accordingly, freight rates went up in all arterial trade routes except the trans-Pacific trade, where they went down marginally.
Liner operators are faced with increased operating costs resulting from high bunker prices as well as increased cost of vessel chartering and cargo security. Voyage cost per 20-foot equivalent unit (TEU) has reportedly gone up by as much as 25%. It costs $900 million a year to operate a fleet of five 8,200 TEU ships in a weekly transpacific service today. A large number of new container ships are to be delivered in 2006. which will increase the supply and lower average freight rates. In general, with an anticipated drop in freight rates, carriers are positioning themselves to lower costs and aggressively pursue more lucrative cargoes.
Cruise Market. This is one market that continued its upward trend in 2005, unlike the others. Increased earnings through higher ticket prices, on-board activities, and higher occupancy rates have more than exceeded the rise in cruise operating costs. 11.2 million North American passengers cruised in 2005, a 4.5% increase from the previous year. Carnival Cruise Lines, the market leader, increased its 2005 profits by 21% to $2.3 billion on revenues of $11.1 billion. This is despite increased fuel costs and a particularly bad North Atlantic hurricane season.
Royal Caribbean International, the second-largest cruise operator, has placed an order with a Norwegian shipbuilder for the world's biggest cruise ship. The ship, slightly bigger than a Nimitz-class aircraft carrier and capable of carrying 6,400 passengers, is expected to cost $1.24 billion and be ready by late 2009. Meanwhile, Royal Caribbean will soon start operating Freedom of the Seas, which will temporarily take over the title as the world's biggest passenger ship from Cunard Line's Queen Mary 2. Freedom of the Seas will accommodate 3.634 passengers and will have a crew of 1,400.
At present. 28 large cruise vessels are under construction, averaging $500 million in construction cost. At current exchange rates, total cruise ship orders are valued at around $16 billion. Thus, we are entering a new era, with increasing ship sizes and an unbelievable array of on-board conveniences and spectacular attractions. What is not clear is whether the market is ready for such ships. Not many ports can accommodate such big ships and their large volume of passengers, who could be forced to spend considerable vacation time embarking or disembarking, especially given current security concerns.
One issue for cruise operators was the proposed new U.S. requirement that its citizens possess a passport when returning from the Caribbean, Bermuda, and Central/South America. Only one in five Americans has a valid passport. The government has revised its plans after serious lobbying by cruise interests and will introduce a new ID card for this purpose, which will cost far less than purchasing a new passport. Another area of concern for the industry is the media attention paid to unsolved deaths on board cruise ships. A recent study estimated that more than 50 people have gone overboard from cruise ships in the last decade.
A completely new offshoot of the cruise sector is now mushrooming. CaIa Corporation, a Houston-based company, has begun marketing shipboard condominiums located above and below sea level. Ships with 320 condominiums, priced between $2.5-8 million, will be placed in key ports such as Miami-Dade and Cancun, Mexico. Each ship will have 250 residences above sea level, 20 at sea level and 50 undersea with aquarium views. At least three ships are being planned, and additional sites in the United States and abroad are under consideration. Other players in this market include Four Seasons, the Residential Cruise Line, and The World of ResidenSea.
Shipbuilding Market. The fast-growing world economy and increasing trade volumes created unprecedented demand for new tonnage in 2004. but the price peaked in mid-2005 and is now on a gradual downward trend. South Korean shipyards continue to be most aggressive, increasing their market share to 38% in 2005.
China is making strong gains on second-place Japan and is expected to surpass even the Korean builders within the next ten years. The country has nearly 600 shipyards, most of which are state-owned. The Chinese typically price new ships at about 10% less than their competitors' and are building a reputation for flexibility in accommodating customer needs. Japanese ship owners have more orders for new ships than any other nation.
Despite seemingly excellent market conditions, the shipyards' financial returns have not improved significantly from 2004. The ships being delivered now are those contracted in 2002 or 2003, whereas the current market price of steel and other inputs have escalated significantly, and exchange-rate fluctuations have had an adverse effect. Korean and Japanese yards are becoming more selective with new contracts.
Ship-Demolition Market. Ship-demolition prices are dictated by the market price for steel. The current high price of that commodity has increased the price for scrap iron globally. However, given the exceptionally good prevailing market conditions, very little tonnage is being scrapped today. Only one-half of the total tonnage scrapped in 2004 was scrapped in 2005. Bangladesh was the most active market for ship demolition in 2005, followed by India.
Clemenceau, a decommissioned French aircraft carrier, drew international attention in 2005 for all the wrong reasons. The ship was sold to a broker in Alang, India, without decontaminating its high asbestos content. This resulted in worldwide condemnation led by Greenpeace. The ship, which had been towed to India through the Suez Canal, was ultimately ordered back by President Jacques Chirac at a cost of Euro 3.5 million to the French taxpayers.
The U.S. Merchant Marine
The past year will go down as a remarkably good one in the history of the U.S. Merchant Marine. Even though major developments in 2005 are unlikely to reverse the U.S. decline in this sector, much less restore the preeminence of a bygone era, they did bring a glimmer of optimism to American shipping and shipbuilding sectors that had been missing for a number of years. Nonetheless, Wall Street's new-found enthusiasm for shipping initial public offerings (IPOs) waned significantly in 2005, which led some companies to cut their price and scale back their offers. The usual mix of intrigue, controversy, and a few indictments added flavor to the mix.
An independent economic impact study of port operations in New York and New Jersey clearly documents the contributions of the maritime sector to local and national economies. The study found biport activities supported 232,910 full-time jobs in the region and $12.6 billion in salaries in 2004. Port activities generated $5.8 billion in local, state, and federal tax revenues, $2 billion of which remained in the region. The most significant direct job growth occurred in container, cruise-passenger, and auto-handling operations.
The Jones Act Scenario. The requirements of the Jones Act, that U.S.-flagged vessels be U.S.-built, -owned, and -staffed for domestic cargo movements, attracted considerable attention in 2005. President George W. Bush temporarily relaxed those restrictions in the wake of the devastation caused by hurricane Katrina, allowing foreign-flag tankers to distribute oil and gasoline where needed. This primarily benefited European tanker owners. However, their antagonism (and that of other trading partners) toward the Jones Act picked up further steam in 2005 with many of them referring the issue to the World Trade Organization for scrutiny. In Guam political circles is a demand to end the Jones Act because of its impact on freight costs.
The high price of commercial shipbuilding in the United States has resulted in most Jones Act ship owners opting to prolong the life of their ships rather than replace them with new ones. About 100 Jones Act tankers will soon reach the end of their operating lives because of the single-hull phase out provisions of the Oil Pollution Act of 1990. Unlike the international tanker market, which is highly volatile and difficult, the Jones Act tanker trade is relatively stable.
The Jones Act product tanker market is estimated to be growing at 2% per annum. Overseas Shipholding Group (OSG), a U.S.-based tanker operator with significant international presence, has made this the cornerstone of its strategy. It placed orders with the Aker shipyard in Philadelphia to build ten 46,000 dead-weight-ton (dwt) product tankers by 2010, with options for two more.
The parent company's equity issue of $ 120 million in Norway to secure the start-up financing was oversubscribed four times. The rest of the financing will be provided by Norwegian banks. OSG will bareboat charter the ships from Aker American Shipping ASA. The overall project is priced at more than $1 billion, with each ship priced in the $80-85 million range. The yard will build roughly three ships a year, and also will benefit from the learning curve thereby bringing down cost and making a profit when the project is completed. OSG expects all ten ships to be under charter agreement by the end of 2006 and is likely to order even more ships from Aker.
With this strategy, OSG will double its Jones Act fleet capacity, which now includes two Panamax tankers, four handysize tankers, two dry bulk carriers and a car carrier. OSG was involved in about $3.5 billion in major financial transactions in its 2005 worldwide operations.
Horizon Lines, the largest Jones Act carrier, successfully completed its IPO in September 2005. The company is planning to pay down its debts and grow through acquisitions in the near future. The carrier is planning to update its fleet and increase business in Alaska, Guam, Hawaii, and Puerto Rico. Horizon is also exploring short sea shipping options along the east coast. Maison, another traditional Jones Act carrier, has launched a China-U.S. service. Its proposed business model is to carry Chinese exports to the West coast, followed by westbound cargo to Hawaii and then empties from there to China. The likely success of this cross subsidization move is yet to be proved.
Title XI Loan Guarantee Program. This program gives U.S. shipowners and builders longer-term loans at interest rates lower than the commercial rate. It was more than $300 million in default since 2000. the bulk of that deficit coming from the bankruptcy of cruise ship operator American Classic Voyages in 2001. This has led the program to be characterized as corporate welfare and subject to severe Government Accountability Office (GAO) scrutiny.
In 2003, the GAO recommended that no new funds be allocated to the program until the Maritime Administration had tightened its oversight of the loan portfolio. Thus, a departmental credit committee was established in 2004 to review Title XI and other Department of Transportation lending programs. The perception in the industry is that the committee is blatantly hostile to Title XI, as evidenced by its proposed 2007 rule changes, and that the proposed 2007 budget will effectively terminate the program.
The Katrina Controversy. The Federal Emergency Management Agency's (FEMA's) $236 million, six-month contract with Carnival Cruise Lines to provide three of its ships (Ecstasy, Sensation, and Holiday) in the Mississippi River and Mobile Bay elicited controversial comments from both sides of the political aisle. It was alleged that Carnival was charging the government $1,275 per week per passenger, assuming full occupation, compared to $599 a passenger would pay in the commercial market.
Critics view this as a grossly overpriced sweetheart deal, but Carnival argues that it would barely break even monetarily. The deal has come under special scrutiny, especially the company's tax status, which is being investigated by congressional investigators. Carnival, headquartered in Miami, is incorporated in Panama, which gave a tax liability of $3 million for the $1.9 billion in pre-tax income made in 2004 rather than the $475 million it would have had to pay had it been incorporated in the United States.
Legal Problems. The legal problems of the International Longshoreman's Association (ILA) and its alleged mob connections worsened in 2005. A onetime heir-apparent to the ILA president and a long-time president of ILA Local 1235 in Newark, New Jersey, pleaded guilty to steering contracts of the ILA-Management benefit program to companies controlled by the Genovese crime family. As stipulated in the consent decree, he resigned from his union responsibilities.
Others involved in the case include ILA's assistant general organizer and president of the union's New York-New Jersey maintenance local, international vice president for Miami, and an alleged Genovese crime family capo (Mafia boss) on bail. They were acquitted of an alleged wire- and mail-fraud conspiracy, but the capo disappeared in the middle of the federal trial in early October, and his body was later discovered in the trunk of a car parked behind a New Jersey diner in late November.
Apart from these, in mid-2005 federal prosecutors filed a civil racketeering lawsuit accusing the ILA of being a mob-controlled organization under the Racketeer-Influenced and Corrupt Organizations (RICO) Act. The lawsuit would impose trusteeship on the ILA and its benefits programs, and require new elections under the supervision of a court appointed officer. All six top officials of ILA were named as defendants under the charge. The ILA denied all charges vehemently.
Another union leader who ran afoul of the law was the president of the American Maritime Officers (AMO) union which represents merchant marine officers on board U.S.-flag ships. The 13-count federal indictment against the AMO president, his brother, and two other union officials include charges of racketeering, embezzlement, fraud, and witness tampering. Two former executives of Stelmar, a tanker operator acquired by OSG in 2005 violated the Sarbanes-Oxley Act provisions. They gave each other interest-free loans from Stelmar funds prior to its sale and claimed they were perfectly legal.
Pollution Penalties. The crackdown on those violating the pollution rules in U.S. waters was particularly strong in 2005. Seven criminal cases were successfully prosecuted in 2005 compared to 23 between 1995 and 2004. According to reports, a new investigation is being launched every two to three weeks with more than a quarter of those being initiated by whistleblowers. In extreme cases such as repeat violation, the operator would be banned from U.S. waters.
In an incident in Massachusetts, MSC Ship Management (Hong Kong) Limited pleaded guilty to charges that it engaged in conspiracy, obstruction of justice, destruction of evidence, false statements, and violated the Act to Prevent Pollution from Ships, and received a $10.5 million fine. The company will also be on probation for five years and must operate under the terms of a government-approved Environmental Compliance Plan during this period. The ship's two senior engineers pleaded guilty and will be sentenced in 2006.
In an almost identical case in New Jersey, a chief engineer was sentenced to imprisonment for one year and one day, and three years of probation. The operations manager of the Fishers Island Ferry in Connecticut was sentenced to spend 30 days in jail and pay a fine of $10,000 for dumping untreated sludge into the Thames River and Long Island Sound. Meanwhile, 17 years after the Exxon Valdez oil spill, the $5 billion judgment against Exxon went to the federal court of appeals in early February 2006.
Global Issues
The 4th BIMCO/International Shipping Federation manpower study found a shortage of 10,000 qualified merchant marine officers and a surplus of 135,000 ratings. Although the officer shortage is less than what it was in 2000, it is expected to worsen in coming years. Some ship managers are already finding it difficult to comply with the provisions of the International Safety Management (ISM) Code because of the current shortage. Officers are also being lured to more lucrative sectors, such as liquefied natural gas and liquefied petroleum gas operations.
One contributing factor for the loss of officers is the increase in security regulations at sea. A recent International Transport Workers Federation survey of 17,000 seafarers found 86% believe that the International Ship and Port Facility Security (ISPS) Code has resulted in extra work and adversely affected their performance and well-being. They perceive a lack of trust and discrimination against seafarers. Of the respondents, 70% pointed out that they had been denied shore leave in the United States. They also find the U.S visa process to be costly, inconvenient, and impractical. Seafarers from Vietnam, China, and the Middle East have the greatest difficulty in getting U.S. entry visas. Australia is also following the U.S. model, which will likely lead to more seafarer shore-leave denials.
The U.S. Coast Guard began issuing documents with new security provisions to prevent forgery and fraud. Most commercial vessels operating in U.S. waters are now required to carry alcohol-testing kits on board so that ship's personnel can be tested within two hours of a serious marine incident. Trade associations and vessel operators are opposed to the new requirement because of the additional costs involved.
Shipping Casualties. Various safety and pollution-prevention rules and regulations are having a tangible impact on the industry; ships today have better machinery and communication and navigational capabilities. Unfortunately, such improvements do not receive much public attention. The number of casualties has decreased among bulk, roll-on/roll-off, and tanker vessels in various parts of the world.
Oil tankers in particular have made dramatic progress and cut down spill incidents drastically. In the last 10 years, tanker incidents have dropped by 47%. More than two out of every three very large crude carriers in the world is now double hulled. Despite an increasing number of tanker inspections, their detention ratio today is at an all time low of 3.6%. Panama and Liberia, the top two open registries, have an enviable safety record of 1.44% and 1.5% of their fleet respectively compared to the top ten flags' average safety record of 2.19% and the world average of 2.48%. With the safety regulations getting even tougher, maritime casualty statistics are expected to improve further.
End of the Single-Hull Tanker Era. International Maritime Organization Regulation 13G amended the International Convention for the Prevention of Pollution from Ships (MARPOL) rules following the sinking of the single-hull tanker Prestige off the Spanish coast in 2003. The new regulation mandates that all singlehull tankers be phased out by 2010 or by their 25th anniversary, and it came into force in April 2005. An accompanying Regulation 13H prohibits the carriage of heavy crude oil and fuel oil cargoes from April 2005 in single-hull tankers.
A large number of single-hull vessels are expected to reach the end of their operational lives from 2010 onward. A strict application of the phase-out rule will create significant shortfall in capacity, especially in very large crude carrier tonnage. However, the law does have an opt-out provision, whereby flag states may allow vessels to sail beyond 2010 until a final 2015 deadline, provided ships have not reached 25 years. They may be allowed to operate even beyond 2015 by flag states if they have double bottoms or double sides, but these exceptions can be overridden by foreign port states through entry denial. Big oil-importing nations such as Japan and India have clarified that they will allow single-hull tankers approved by the flag administration to trade into their ports.
Piracy. Piracy at sea continues to haunt the merchant marine. Some marginal improvements were made in traditional piracy-prone areas in 2005, only to be more than offset by new trouble-torn areas. A total of 440 crew members were captured as hostages in 2005, the highest number ever in a year. Attacks in Indonesian waters dropped by 16% and those in the Malacca Strait dropped to 12 from 38 in 2004. This is believed to be an outcome of active joint air patrols in the region by Malaysian, Indonesian, Thai, and Singaporean authorities and also the peace agreement reached between the Aceh rebels and the Indonesian government. The U.S. Pacific fleet has also been playing a visible background role in the area.
An Indonesian soldier was arrested for kidnapping two ship's crewmen, proving the alleged complicity of military personnel in some of these activities. Piracy attacks using guns, knives, and hand-held grenade launchers have increased significantly in other regions such as off Somalia, the country with the longest coastline in Africa. Another surprisingly new troublesome area is off Basra in Iraq, in the close proximity of Coalition forces.
Pirate attacks off Somalia received global attention when the cruise liner Seabourne Spirit was attacked by two 25foot inflatable pirate boats 100 miles off the coast with rocket-propelled grenades and machine guns. The activation of the long-range acoustic device (LRAD), which releases earsplitting 150-decibel bangs, combined with ship maneuvers is believed to have repelled the attackers. The device is used in some commercial and many naval vessels after the attack on USS Cole (DDG-67) off Yemen in 2000.
Pirates have become creative, luring vessels closer to the shore by firing distress signals. Somali pirates even hijacked three ships carrying U.S. humanitarian aid for that nation's starving citizens. Ships are now advised to stay 200 miles off the Somali coast. In early 2006, the USS Wmston S. Churchill (DDG-81) intercepted a pirate dhow on notification from the International Maritime Bureau. The Churchill is part of a multinational task force patrolling the western Indian Ocean and Horn of Africa region.
This particular action resulted in the capture of ten Somali pirates and the rescue of 16 Indian hostages. The suspects were handed over to Kenyan authorities for hijacking a ship, threatening the lives of crew members, and demanding a $450,000 ransom. The pirates allegedly attempted to hijack three more ships while holding the hostages on board.
The 24th Assembly of the International Maritime Organization passed a resolution to bring the issue of maritime piracy and robbery in waters off Somalia to the attention of the U.N. Security Council. Accordingly, the Security Council has urged member states to use naval vessels and military aircraft in the fight. Meanwhile, Somalia has outsourced its maritime security operations to TopCat, a private American security firm. The $55 million two-year contract calls for guarding the coastline from sea pirates. TopCat will conduct boat and air patrol to foil piracy attempts and capture the pirates, and supply equipment and training to help Somalian authorities.
Maritime Security. The 2004 annual review referred to the emerging trend of ports charging carriers for added security costs. An association of 13 deepwater ports in the Pacific Northwest has implemented a fee of $250-600 per vessel per day to defray these expenses. Some perceive shipping containers as potential Trojan Horses. With about 14 containers coming to a U.S. port every minute of the day and increasing concerns about terrorism, the attention paid to maritime security went up a few notches again over the past year.
The crux of the U.S. strategy is to stop potentially harmful containers from leaving their foreign port of origin. Efforts undertaken include the Customs-Trade Partnership Against Terrorism (CTPAT), Container security Initiative (CSI), the 24-hour notification rule, and the use of technology. A C-TPAT company has an approved supply chain security program, and imports are inspected once every 306 times rather than once every 47 times, the usual standard. Although there were about 5,000 CTPAT participants in early 2005, only about 10% of them had their compliance verified by the U.S. Customs and Border Protection (CBP) agency. In April 2005, the privileges given to 4,000 of these companies were withdrawn until CBP could hire more auditors.
All major ports that export containers to the United States are now part of the CSI network. The shipper or agent is required to provide extensive information about the cargo 24 hours before loading it on board a ship. CBP works in collaboration with foreign customs service authorities at the CSI ports to screen containers; high-risk containers are physically examined. Areas of concern include whether or not all high-risk containers are identified, the adequacy of training given to foreign customs officers, and the speed with which radiation detection equipment is placed in some of those ports.
The C-TPAT criteria for carriers introduced in 2002 are being upgraded, which will make the best practices in the industry a minimum standard. A carrier is expected to benefit if it exceeds those standards. Other nations are following a similar trend. Canada introduced its mandatory 24-hour notification rule in 2004, Mexico will introduce the same in 2006, and the European Union will institute its rule by 2008.
In addition to C-TPAT validated companies using validated carriers, exporting from CSI ports, and inspecting 100% of all suspect containers, a further expectation is to use smart containers. In this regard, e-seals and container-security devices reached an important stage in 2005 with an International Standards Organization standard for e-seals expected by end 2006. The Department of Homeland Security requires that channel members verify the integrity of container seals.
The carriers and terminal operators are likely to opt for radio frequency identification technology that would go a step beyond and track the electronic seals. However, e-seals are only tracking devices and not security devices that would detect unauthorized entry. GE Security, a subsidiary of General Electric, has begun marketing such a device, which will be placed inside the containers.
Liner Consolidation. While some carriers grow through massive investment in new capacity, some are seeking growth through acquisition and some others through formation of strategic alliances. Consolidation in the liner shipping business reached a crescendo in 2005. driven by three big acquisitions. These include the $2.9 billion acquisition of PONL by the AP Moller group, the $2.3 billion purchase of CP Ships by the TUI Group (Hapag-Lloyd's parent company), and CMA CGM's acquisition of the shipping activities of the Bollore group for $600 million. Those that cannot afford the acquisition strategy are pursuing the alliance option. The top two alliances, the New World Alliance and the Grand World Alliance combined operations in early 2006 and created a new alliance to respond to the Mearsk Line's ascent to supremacy. However, the consolidation trend is expected to continue.
Shippers are justifiably concerned about increased concentration of economic power among the top liner operators and are demanding changes in long-standing trade practices. In the U.S. liner trades alone, the top 50 carriers' market share during the first nine months of 2005 increased by 9.1% compared to the same period in 2004. The European Union adopted a proposal to end the block exemption given to liner conferences under Regulation 4056/86. Although it will be another couple of years before it becomes effective, the conference system has already lost its clout, particularly in the U.S. trades.
The Dubai Ports World Controversy. The recent controversy about DP World's aborted acquisition of P&O Ports' U.S. assets should be evaluated in the context of the ongoing worldwide consolidation in liner shipping and container terminal operations. The episode should be remembered in future years as a sad case of election-year political spin and manipulation.
The success of the well-intentioned but misinformed politicians and the media in convincing the average American that an Arab-controlled company was buying out six major American ports is troubling and even frightening. If a container terminal in an American port is run by a terminal operating company from any part of the world under U.S. rules and regulations, it does not alter our security standard either way. What is most important is where those containers are being loaded and who has access to them before they reach here.
The masterful way in which the spin doctors and the popular media converted this strategic business move by an efficient, fast-growing global container terminal operator into a case of outsourcing and the epicenter of public anger defies rationale, besides hurting America's standing as a champion of the free market. It was American consultants, engineers, and banks that went around the world advocating the efficiency of privati/.ed ports and terminals.
It is a fact that our supply chain security is lacking and needs careful scrutiny, but should it be at the cost of rationality and common sense to the point where even the nomination of a potential maritime administrator was jeopardized solely because of his prior affiliation with a foreign employer?
Outlook
It has been a good year for the merchant marine, operationally as well as financially. Major improvements were made in areas such as safety and security. including the fight against maritime piracy and prevention of oil pollution. U.S.-based operators made incisive moves during the year, in particular OSG's impressive product tanker series building commitment, a rarity in the recent annals of merchant ship construction in this country. None of these negate the fact that the market cycles are definitely on a downward trend.
However, other than the liner market, where significant new tonnage is expected to enter during the next two years, any deterioration in market conditions will be far more tolerable than what the industry has typically witnessed in prior boomand-bust cycles. But there are areas of major concern that one hopes our policymakers will give particular attention. Although the U.S. logistics infrastructure is envied by the rest of the world, our marine terminals and road and rail capability will be incapable of handling the nation's international trade volumes within the next 15 years. International container movements alone are expected to quadruple in the next 20 years, choking our gateway ports and hurting their efficiency. If no major improvements are made in our ports, congestion will become routine at the major ports within five years.
Dr. Kumar is a master mariner and associate dean at the Loeb-Sullivan School of International Business and Logistics. Maine Maritime Academy. He holds a Ph.D. from the University of Wales and is an internationally recognized maritime economist and transportation/logistics management authority.