There was no shortage of government inducements to turn the lackluster tide in 2012—stimulus spending in China and Japan, quantitative easing by the U.S. Federal Reserve, and multiple actions by the European Central Bank to strengthen the Eurozone. But as the year evolved, weak macroeconomic fundamentals decisively trumped monetary policy initiatives and continued their choke on global commerce, hence the maritime sector. Anyone who characterizes 2012 as even marginally better for shipping than 2011 can do so only because the bar was set far too low. Both last year and the current one will go down in maritime business annals as part of a bleak, monotonous, and particularly long period of volatility that began in 2009. This was yet another excruciating year for the global maritime community.
The Big Picture
Initial estimates from the International Monetary Fund show a 3.2 percent growth in the 2012 world gross domestic product, one of the slowest in recent years. Remarkably, even the Chinese and the Indian economies cooled and did not reach their anticipated targets. Rampant wage inflation is holding back the Chinese manufacturing prowess, and their containerized exports to the United States dropped for the second year in a row. India too is experiencing its slowest rate of economic growth in a decade. Russia’s entry into the World Trade Organization in September 2012 did not have any perceptible effect on global commerce, unlike the Chinese entry a decade ago that unleashed an unprecedented shipping boom in 2003.
Overall, worldwide sluggish economic growth, along with prolonged excess capacity and escalating operating costs, worsened the market stagnation. The much-awaited resurgence in global commerce and maritime trade is still on hold, and instability continues to plague major trade regions and shipping routes.
The 2013 PricewaterhouseCoopers’ annual Global Shipping Benchmarking Survey provides revealing insights on the sector’s plight. It reports 1 percent average return on net operating assets for the shipping industry in 2011, well below the 18 percent that existed in 2007, when the shipping boom was at its peak. For the dry-bulk sector in particular, the return was 35 percent in 2007. Shipping companies included in this survey posted a negative 2 percent average return on equity in 2011, versus 21 percent in 2007. The ratios for 2012 are currently not available, but are estimated to be worse.
Not surprisingly, a recent Moore Stephens report rated one out of every ten British shipping companies as a “zombie,” a colorful addition to the shipping finance vernacular. These are companies with a low asset base, barely covering their variable costs and close to bankruptcy. Trade journals report that the value of publicly traded shipping companies has declined on average 75 percent, in some cases up to 90 percent. The general feeling among investment gurus is that few public shipping companies today have any equity, let alone goodwill value. The current risk exposure of banks engaged in shipping finance is $475 billion, according to an estimate from the shipping consultancy Petrofin. This explains the recent Lloyd’s List finding that barely 15 banks are actively engaged in new shipping-finance initiatives.
Drewry Shipping Consultants believe the unprecedented 2004–8 shipping-business peaks are unlikely to be repeated. We may indeed be back to the “old normal” cycles, with the last couple of years being extraordinarily humbling.
Market Developments
All major shipping markets experienced tough conditions in 2012, which ended somewhat similarly to 2011. But at least there is wider acknowledgment that—barring unpredictable happenstance—we have indeed reached the nadir; there is nowhere to go but up. The liquefied natural gas (LNG) market was one odd exception in 2012; it registered strong performance. Worldwide shipping capacity utilization dropped yet another notch, to 84 percent, per recent R. S. Platou statistics. This is the second lowest it has ever been during the past decade. Increased labor and fuel costs and new environmental regulations are escalating operating costs, while the freight revenue is declining or at best remaining stagnant.
On the positive side has been a sharp decline in orders for building new ships, even though the cost of construction today is the lowest it has been in a decade. This is not because the owners have suddenly become more rational in their investment decisions. On the contrary, most are experiencing a tough cash-flow situation, with bank loans hard to get. Furthermore, shipping asset values are still declining, although the rate stabilized somewhat in 2012. Thirty-nine percent of companies reported lowering the value of their ships, including two out of every three container shipping companies.
The recent Moore Stephens Shipping Confidence Survey registers a slight uptick, indicating signs of optimism in the market. Other promising developments include improving Chinese domestic consumption and anticipated good economic recovery by leading non-OECD (Organization for Economic Cooperation and Development) nations in 2013. The U.S. export of shale gas is another major positive change, though this may run afoul of domestic politics and seriously impact those making huge investments in LNG transportation.
Dry Bulk Market
The Baltic Dry Bulk Index (BDI), a barometer of that type of carrier’s earnings, averaged 920 points in 2012. This is the second lowest it has ever been, the worst being 715 in 1986, shortly after the introduction of BDI in 1985. The main reason for this is ship owners’ indiscretion and persistent overbuilding during the past four years. For example, Clarkson Research Services statistics show a 36 percent increase in the number of bulk carriers from 2009, despite worsening market conditions. In 2012 alone, while tonnage demand increased 7 percent, the fleet expanded 12 percent. The large bulk carriers (referred to as Capesize) that earned an average $116,049 per day in 2007 during the peak years averaged a meager $7,680 per day in 2012. The RS Platou–weighted dry-bulk index for 2012 dropped to $9,400 per day, from $15,200 in 2011. The figure here shows the decline in average daily freight rate for each of the four categories of dry-bulk carriers. Ship owners attempted to control the excess capacity by slowing the speed of their vessels and recycling older tonnage. This led to the removal of 529 bulk carriers, 37 percent of the total 1,414 ships recycled in 2012.
Vale, the Brazilian mining giant, has also inadvertently contributed to the extremis situation faced by Capesize bulk carriers. Its strategy revolves around using 32 very large ore carriers (VLOCs) of around 400,000 deadweight tons (DWT) to better control their supply chain and lower the total logistics cost. Twenty-four of these giant ships are now in operation, and 8 more are on order. A Lloyd’s List analysis shows that the volumes shipped on Vale’s own fleet went up as planned, from 30 percent in 2011 to 46.1 percent in the last quarter of 2012. However, contrary to Vale’s expectations, the supply-chain costs including maritime freight costs escalated. There is widespread belief that the VLOCs are inefficient and costly, in addition to having various operational challenges. Nevertheless, these massive ships have directly impacted the demand for Capesize bulk carriers and worsened the excess-capacity situation.
Tanker Market
This turned out to be the most complicated shipping market in 2012 for a number of reasons. Major developments included a wide embargo on Iranian oil and the near-total return of Libyan oil, as well as the stunning bankruptcy of tanker giant Overseas Shipholding Group (OSG), a venerable name in American shipping. AP Moller-Maersk, another tanker giant, with 116 owned and 46 chartered ships, posted a net deficit of $314 million for the year, surpassing its $153 million loss incurred in 2011. The value of modern very large crude carriers continued its downward slide. The older tankers are now worth only their value in scrap iron.
The first half of the year provided good trading conditions for crude carriers, whereas the second half favored product carriers. Because the big Asian importers substituted Iranian oil with West African crude, while the United States replaced West African crude with Saudi Arabian exports, both the crude-oil and refined-product sectors benefited from increased sailing distances. Sixty-seven percent of the 1.1 billion tons of crude oil exported from the Middle East, the world’s largest exporting region, went to the Indian subcontinent, Southeast Asia, and the Far East.
India in particular has also attracted sizable crude traffic from the Caribbean to source its 1-million-barrel-per-day super refinery in Jamnagar, from where the products are distributed globally. The combined effect of a small increase in total oil traded, greater sailing distances, and lower fleet productivity through slow steaming (with the average speed dropping to 12 knots from 12.5, per RS Platou statistics) was not enough to boost the market returns in this sector. The medium-size crude tankers in particular became victims of the change in the U.S. oil-sourcing pattern.
The current tanker fleet is exceptionally young, at an average age of eight years. Relative to its size, new orders placed in 2012 were the lowest ever. Among notable new-building orders was the recent decision by BP (British Petroleum) to build 13 new “green” tankers. Another was the Frontline plan to spend $2.6 billion on 53 new fuel-efficient tankers. This will help it emerge as the world’s largest eco-ship fleet and hopefully, the most profitable as well, taking advantage of the current low cost of new ship construction. The global fleet of small-product tankers (27,000-42,000 deadweight capacity, often referred to as handysize tankers) is shrinking, whereas the medium-range tonnage is growing rapidly. This reflects the changing dynamics in oil trade caused by India’s and China’s building of huge refineries, while several older refineries shut down in the Atlantic basin and Europe.
Liner Market
This was a difficult year for the liner sector despite being a substantial improvement from the $5 billion collective loss suffered in 2011. Indeed, the average freight rate per container registered an increase, even though 2012 saw high volatility and a loss of over $3 billion. The charter rate for containerships took a significant hit during the year because of surplus tonnage in the market. The operators appeared to exercise self-discipline and work toward rate restoration rather than pursue market share at any cost, their traditional Achilles’ heel. Additionally, they were successful in controlling fleet productivity and capacity. In the Asia-Europe trade, one group of carriers lengthened the typical 63-day round trip to between 72 and 84 days, which provided employment for two additional vessels.
At this point, carriers have done everything possible to enhance market returns, yet prosperity seems far off unless demand picks up significantly, especially with the 11 percent new capacity infusion expected in 2013. Even Maersk, the market leader, has announced new strategic moves to lower network costs. It plans to serve U.S. East Coast gateway ports from Asia through the Suez Canal, leveraging bigger ships and reconfiguring the current Asia-Europe service. At least for Maersk, the ongoing political risk and associated Suez transit costs do not exceed the escalating cost of Panama Canal transits.
Maersk’s first Triple-E ship (for economy of scale, energy-efficient, and environmentally improved) came out of the Daewoo dry dock for fitting in early March 2013. These “dream” containerships will be designed for a speed of 19 knots, 21 percent slower than the typical (until recently) 24 knots. The United Arab Shipping Company (UASC), another major container operator, took delivery of a fleet of nine 13,500-TEU (20-foot-equivalent-unit) ships and reported a network-wide savings of $200 million. UASC now plans to invest in even bigger ships similar to the Triple-Es. Carriers’ benefits from slow steaming and energy efficiency are obvious, but the ultimate impact on shippers remains unclear. They certainly face additional in-transit inventories and associated carrying costs. The enhanced reliability of a global supply chain built around vessels operating at 19 knots adds value to shippers’ business strategy, but the overall net effects may well parallel those of the Vale VLOC strategy outcome.
Shipbuilding Market
The prolonged uninspiring market conditions have had a perceptible impact on the shipbuilding sector. Furthermore, with all new shipbuilding orders, there is an emphasis on fuel efficiency and energy sustainability. The South Korean lead in this field is now limited to tankers and LNG ships, while the Chinese have surged ahead in other sectors, including containerships. Chinese yards received 40 percent of all new orders in 2012, followed by South Korea with 38 percent and Japan with 15 percent.
However, it is far from smooth sailing for the Chinese. The massive 13-fold expansion in their shipbuilding capacity from 2002 to 2011, discussed in reviews of previous years, has now become a liability, and the country cannot meet the planned $80 billion annual export value of ships constructed. Three large state-owned shipping companies placed a $4.5 billion order for 50 supertankers to be built in China in 2012, a timely gesture of solidarity with their struggling yards. This is also an important strategic move, as the nation will have greater control over its energy supply chain—critical for continued economic growth.
The tight market conditions again led to significant slippage in the delivery of new tonnage, and this is expected to continue. Furthermore, a number of dry-bulk and tanker new-construction orders were canceled despite unavoidable financial penalties. New-construction prices have been dropping throughout the year, not only because of surplus shipbuilding capacity and stringent bank financing conditions, but also a major drop in the price of steel. It is estimated that the cost of building new ships today is 40 percent below what it was in 2008; as evidence, the Clarksons’ new-building price index dropped to 73 at the end of 2012, from 95 in 2011 and 124 in 2007. The 2013 RS Platou Report estimates the worldwide decline in steel price alone has brought down the cost of constructing a Korean-built Aframax tanker by $8 million. Global shipbuilding capacity has shrunk one-third from its 2008 peak through yard closures and cutbacks.
Cruise Market
On 13 January 2012, the Costa Concordia ran aground and capsized after the ill-advised decision by Captain Francesco Shettino to cruise too close to the shoreline of Giglio, an island off Italy. Thirty-two drowned, in tragic and avoidable stories and with legal repercussions that are covered here later. Despite that negative beginning for the cruise sector, 2012 turned out to be another banner year, attracting 5.4 percent more passengers worldwide than in 2011.
According to Cruise Lines International Association (CLIA) statistics, the total fleet today consists of 336 ships of 1,000 gross tons or more, with an annual passenger-carrying capacity of more than 17 million. Two of every three who boarded a CLIA-owned cruise ship in 2012 were from the United States or Canada, with Australia the fastest-growing market. The average fares dropped in 2012, reflecting the prevailing market conditions. There are 24 cruise ships (valued at $15.8 billion) for delivery between now and 2017. All but six of are of the megaship type (2,000-plus berths), the biggest being the $1.32 billion Oasis-class ship for Royal Caribbean International, due for delivery in 2016. Another anticipated delivery that same year is a nostalgic replica of RMS Titanic.
News in the U.S. Merchant Marine
In the domestic maritime industry, despite some remarkable positive developments and initiatives, as a whole the year was unpleasant and discomforting. On the plus side, President Barack Obama signed off on seven fast-track port projects. Five are expected to boost the competitive advantage of large East Coast ports when the Panama Canal widening is complete. A Maritime Administration report on Great Lakes Shipping found healthy signs of recovery from severe recessionary effects that began in 2009. With the sole exception of coal, the report finds that all other major cargoes traded in the region, such as iron ore and limestone, are either fully back to pre-recession levels or making significant inroads. The demand for medium-size supply vessels supporting the Gulf of Mexico offshore oil and drilling industry rose significantly, with daily rates reaching $27,000. Some U.S.-flag supply vessels returned to the gulf to benefit from this.
Business Developments
Matson Lines acquired Reef Shipping, a regional operator serving New Zealand and nearby islands. This is new territory for Matson, the sole trade operator between the mainland United States and Guam (it has now also entered China trade), but an integral part of its global strategy includes a network of Pacific Island services.
TOTE, a Jones Act carrier, ordered two new ships to be built at the General Dynamics National Steel and Shipbuilding Company (NASSCO) yard in San Diego. At 3,100 TEU each, they will replace two 1,200 TEU vintage containerships in the Puerto Rican trade. The new ships will have LNG propulsion, the first such purpose-built vessels in the world. They will carry enough LNG for two and a half round-trip voyages between Jacksonville, Florida, and Puerto Rico, and their greenhouse-gas emission will be very low. It is perhaps poetic justice that LNG-propelled containerships are pioneered by the very nation that introduced the whole concept of containerized shipping services in 1956. NASSCO has also finalized plans to convert two roll-on, roll-off ships (also owned by TOTE) to LNG propulsion.
Unprecedented drought conditions in the U.S. Midwest and limited dredging of the Mississippi River from Cairo, Illinois, to St. Louis, Missouri would have caused a cessation of river traffic this year and a major economic crisis for the region. It was resolved through timely actions by the U.S. Army Corps of Engineers, which began blasting rock formations in the affected areas in December 2012. River traffic continued uninterrupted. Kirby, the biggest coastwise barge operator in the nation, reported $209 million profit in 2012 because of high-capacity use and robust pricing. A market leader in inland and coastwise barge transportation, Kirby has made a number of key acquisitions in the recent past.
Financial and Legislative Outcomes
On the negative side, the automatic cuts to federal spending (sequestration) that began on 1 March 2013 will impact economic recovery, international commerce, and the maritime economy, including the critical U.S. maritime-security program. Bottlenecks are expected in cargo clearance and other essential functions carried out by the U.S. Coast Guard and the Department of Homeland Security. There were more additions to the long list of U.S. carriers delisted by the stock market in recent years in addition to OSG, the big tanker operator that had a market value greater than $3 billion barely four years ago and is now under ignominious Chapter 11 bankruptcy protection.
The agony of Jones Act carriers continues unabated, including an unanticipated legislative setback. The 2012 Surface Transportation Act in its final version has a provision to lower the U.S.-flagged ships’ requirement to carry international food-aid cargo. The Maritime Administration estimates this will lead to a loss of $90 million in revenue and 2,000 direct (mariner) and indirect jobs (such as training and ship repairs), including 640 mariner jobs. There are concerns about the declining number of U.S.-based ship owners in the Maritime Security Program (MSP) that supports 60 commercial vessels with military-use potential. True American ownership has declined among MSP carriers, through mergers and acquisitions. If sequestration is ongoing, this may have further impact on the motivation of some carriers to remain as MSP participants. The Government Accountability Office recently released a cost-benefit analysis of the Jones Act on commerce in Puerto Rico. It is likely to rekindle highly emotive debates on maritime promotional policies in general, and the Jones Act in particular.
In early 2012, APM Terminals made an unsolicited bid to take over all container terminal operations at the Port of Hampton Roads, Virginia. This natural deep-water port can accommodate the large containerships likely to visit East Coast ports after the Panama Canal widening. For the past 30 years, the terminals were operated by a nonprofit arm of the Virginia Port Authority, Virginia International Terminals. APM’s offer is to lease the facilities for 48 years in return for a potential $3.8 billion revenue for the Commonwealth of Virginia.
The state also received another unsolicited competing bid from banking giant JP Morgan, in partnership with Maher Terminals and JP Morgan affiliate Noatum Ports, proposing a similar option for $3.1 billion. The privatization proposals ran into considerable opposition from the local maritime community, and the port authority’s state-appointed board of commissioners decided to continue the status quo with a revitalized and restructured company operating the terminals.
American Petroleum Tankers, a fuel-shipping company majority owned by the Blackstone Group on behalf of their investors, has announced plans to build two new product tankers at the San Diego NASSCO yard. The contract is contingent on receiving a $340 million Title XI loan guarantee to refinance APT’s existing five double-hulled Jones Act product tankers that were delivered by NASSCO in 2009 and 2010. Should the loan guarantee be approved, product tanker construction will resume in a U.S. shipyard after a two-year hiatus.
The New York-based, innovative marine highways operator American Feeder Lines (AFL) did not complete its first year of operation and went out of business in April 2012. It abruptly canceled its nine-month-long feeder service with a chartered 700 TEU feeder vessel between Halifax, Nova Scotia; Portland, Maine; and Boston, Massachusetts, citing insufficient volume to support the endeavor. German investors withdrew support, although the province of Nova Scotia was willing to extend a $500,000 loan guarantee to support the weekly service. AFL had been hoping to get a waiver from the build-USA requirement until it could raise funds to build ten ships in U.S. yards and commence weekly short-sea services linking 18 ports under the Jones Act.
Regulatory Developments
BP Exploration and Production Inc. pleaded guilty to 14 criminal counts (11 of felony manslaughter, 1 of felony obstruction of Congress, and also violations of the Clean Water and Migratory Bird Treaty Acts) for illegal conduct leading to and after the 2010 Deepwater Horizon incident, the nation’s worst environmental disaster to date. BP was sentenced to pay $4 billion in fines and penalties, the largest in U.S. history. In addition, civil proceedings are under way against the company. The rig owner Transocean, another major player, also pleaded guilty to violation of the Clean Water Act for its illegal conduct leading to the incident, and was sentenced to pay $400 million in criminal fines and penalties, making it second only to the punishment levied on BP.
A U.S. District Court jury in San Juan, Puerto Rico, found the former president of Sea Star Line and a former Vice President of Crowley Liner Services guilty of antitrust conspiracy in the continuing saga of price-fixing by carriers in the U.S.–Puerto Rico trade between late 2005 and early 2008. Violations include colluding with others to rig bids, fixing rates and surcharges, and allocating customers through manipulation of bids. This follows guilty pleas by five other carrier officials: two from Sea Star and three from Horizon. It could result in a maximum penalty of ten years in prison and a $1 million fine per individual. Sea Star Line, Horizon Lines, and Crowley Liner Services have paid upwards of $46 million in criminal settlements, and the investigation is continuing. Horizon Lines pled guilty to violations of international and national pollution laws relating to transfers and discharges of oil and oily waste onboard the container ship Horizon Enterprise, and was sentenced to pay a fine of $1.5 million.
Following the Costa Concordia disaster, a number of cases were filed in Florida against the Miami-based Carnival Cruise Corp. seeking redress. Given the many inefficiencies of the Italian legal system and the low probability of getting a verdict in favor of the claimants despite high costs, this was widely expected. As an example, Italy has a cap on damages, and claimants are required to post 10 percent of the expected damage award before filing a lawsuit, unlike in the United States, where payment is made only if the clients succeed. A U.S. District Court Judge dismissed the case filed by affected Italian businesses in the Tuscan island of Giglio, off which the ship ran aground. The judge advised them to seek grievance under the Italian legal system. However, on 15 February 2013, two cases filed on behalf of 104 survivors were approved for trial under the Florida court system. The plaintiffs are seeking at least $2 million in compensation per passenger, and $590 million in punitive damages.
Costs associated with the Concordia tragedy continue to haunt the cruise sector. The cost of removing the ship’s wreck alone is expected to exceed $800 million. Italy failed to complete the final technical report that was to be published within one year of the accident. To regain consumer trust and confidence, the cruise industry voluntarily undertook a thorough review of its operating policies. The panel of experts has proposed ten new policies that surpass current international regulatory standards. Regardless of the industry’s resilience, a recent spate of technical problems on board four Carnival Cruise ships (the Legend, Elation, Triumph, and Dream) makes one highly skeptical of the market leader’s safety standards and quality assurance system. There are increasing calls in the United States for a Cruise Ship Passenger Bill of Rights.
In November 2012, 15 members of the Transpacific Stabilization Agreement filed an amendment with the Federal Maritime Commission to expand their scope to include the nine-member Westbound Transpacific Stabilization Agreement. Under the provisions of the U.S. Shipping Act of 1984 as amended, a research and discussion carrier group such as the Transpacific Stabilization Agreement can make recommendations to member carriers in their service contract negotiations with customers, but it has no rate-setting authority.
Carriers expect the stabilization agreement’s expanded scope to help resolve the traditional imbalance in capacity utilization between eastbound and westbound transpacific container movements. The National Industrial Transportation League, the body representing major shippers, has asked the Federal Maritime Commission to “examine the ramifications and impacts” of the proposed merger, although in principle it supports the consolidation. The proposed merger is likely to be approved and will go into effect from mid-April this year. This will help bring down overheads and other avoidable expenses, while adding efficiency in transpacific container services.
Overseas Shipholding Group
Five years ago, OSG stock was trading around $100 a share; even mentioning its name and bankruptcy in the same breath would have been sacrilege. Nevertheless, in November 2012, the biggest U.S.-based shipping company, with a fleet of 112 ships (67 owned and 45 chartered) sought Chapter 11 protection. The company’s market capital value had dropped from a peak of $2.7 billion five years ago to $38 million prior to its bankruptcy, an astonishing fall for the nation’s first publicly traded ocean shipping company and one of the world leaders in oil transportation.
Earlier, the Standard & Poor’s rating agency had downgraded its long-term corporate credit rating, as well as its senior unsecured debt to CCC- (from CCC+). The company became a casualty of the highly volatile spot market for large tankers with weak liquidity and unsustainable financial leverage. It reported losses throughout the past four years, and its $1.5 billion revolving line of credit was fully exhausted by summer 2012. OSG’s attempts to raise funds through long-term bank financing and other arrangements such as sale and leaseback could not stop the inevitable. It joined the ranks of other recent U.S. shipping companies seeking Chapter 11 protection, such as American Commercial Lines, General Maritime, Horizon Lines, Trailer Bridge, and TBS International.
OSG reported a pre-tax net loss of an additional $20.5 million during the six weeks between Chapter 11 filing and the end of the year. Its attempt to repudiate some of its charter agreements to serve the best interests of creditors has received legal approval. By the same token, the unilateral plan by BP to liquidate Alaska Tanker Company (ATC) will be a major blow for OSG’s bankruptcy estate if it goes through. ATC is a joint venture between BP, OSG, and Keystone, featuring four BP-owned tankers. BP and OSG own 37.5 percent each in ATC; Keystone owns the rest. Also, law firms that specialize in securities class actions are pursuing OSG for likely violations of the federal securities laws. This relates to certain statements issued by the company between May 2009 and October 2012.
Longshoremen Contract Negotiations
The protracted master contract negotiations between the International Longshoremen’s Association (ILA) and U.S. Maritime Alliance (USMX) have given rise to considerable drama, with strong indications that a massive port strike would begin on 6 February 2013. ILA represents 14,500 dockworkers in 15 ports on the East and Gulf coasts of the country; USMX represents management. The tense negotiations, brokered by Federal Mediation and Conciliation Service, began in March 2012 and involved two contract extensions before reaching a tentative agreement on 1 February 2013. The final agreement was subject to ratification by both parties and also to crucial local agreements, notably in the Port of New York and New Jersey, which employs roughly one out of every three ILA members.
But the local agreement between ILA members and New York Shipping Association, representing management (in that region; USMX is federal), continued to be a tense challenge for another month, with other local chapters awaiting its outcome. A deal was finally reached in New York on 8 March 2013, and the master contract was approved in principle by the ILA rank and file on 13 March, with ratification expected later.
International Developments
Green Shipping
As 2012 began, considerable consternation in shipping circles included fears that the European Union might implement unilateral green shipping initiatives. This was worrisome, given the slow pace of progress in global efforts toward emission control. Several nations and trade organizations were among those who worried the EU could repeat what it had done in the aviation sector the previous year. The subsequent EU decision to abstain from independent action was well received by the shipping community.
The North American Emissions Control Area (ECA) went into effect on 1 August 2012, mandating the use of 1 percent sulfur heavy fuel oil or residual fuel oil for ships within 200 miles of the continent of North America. The EPA interpretation of 1 percent fuel requirement has been of considerable help to ship owners and operators, who were concerned about switching over to lower distillate that caused major engine problems on the California coast in 2009. The U.S. Coast Guard has started enforcing the fuel-oil regulations, and two ships were detained in March 2013 for noncompliance.
In all ECAs, maximum sulfur content will drop to 0.1 percent by 2015 (this will be the equivalent of gasoline or clean distillate) from the current level. The global standard for maximum sulfur content in non-ECAs will become 0.5 percent as of 2020, although this will be mitigated in part by the introduction of energy-efficiency measures in ships. Future plans to meet these requirements, other than switching to low-sulfur marine fuel oil, include installing exhaust cleaning system and using natural gas propellant. The natural-gas option is getting considerable attention worldwide, including in the United States and EU.
The EU is strongly pushing 130 LNG bunkering stations for coastal and inland ports. A recent report from Det Norske Veritas states that 10 percent of all ships being built during the next eight years will have gas-fueled engines. The same report states that by 2020, new ships will emit up to 35 percent less CO2 than today. The Energy Efficient Design Index regulation went into effect in January 2013 and requires ships to be 30 percent more energy-efficient by 2025 than is today’s average ship. This may drive more ship owners to follow the TOTE leadership in LNG propulsion.
Pirates: Declining but Brutal
Pirates attacked 239 ships in 2012, the lowest number in five years, according to statistics released by the International Maritime Bureau, a division of the International Chamber of Commerce. In contrast, there were 439 ship attacks in 2011. The number of incidents off Somalia dropped considerably, with only 75 reported ship attacks in 2012 as opposed to 237 in 2011. However, East and West African coasts still remain most piracy-prone, with 150 attacks in 2012.
Brigands boarded 174 ships last year and hijacked 28, 14 of them off Somalia; 585 crew members were taken hostage in 2012 (compared with 802 in 2011); six crew members were killed, and 32 assaulted or injured. Vessels under most risk continue to be fully loaded tankers, bulk carriers, fishing vessels, smaller boats, and also containerships. As of 13 March, Somali bandits are holding on to 5 ships and 65 hostages. In 2013 so far, there have been 47 attacks and 3 hijacks, with 4 of the attempted attacks being in Somali waters.
One reason for the decline in piracy off Somalia is the adherence to best-management practices by the vast majority of ships transiting the area. Another reason is the presence of armed security guards, which has increased from one in 20 ships in 2011 to two out of every three today. More than 50 percent of ships transiting the region are insured against piracy now, and receive up to a 50 percent reduction in premium for carrying armed guards. BIMCO (the Baltic and International Maritime Council) is recommending minimum four-man security teams on board to provide adequate all-around coverage; this includes one person staying with the master at all times. The case of the two armed guards on board the Italian tanker Enrica Lexie who erroneously shot and killed two Indian fishermen off the coast of Kollam, India, on 15 February 2012 caused a major diplomatic row between India and Italy. The Italian ambassador (Daniele Mancini) was prohibited from leaving India, with his diplomatic immunity in jeopardy. Ultimately, the marines returned to India, and Italian foreign minister Giulio Terzi tendered his resignation in protest.
It should be noted that piracy remains a serious threat. In fact, hostage captivity is now longer than ever before; from 68 days in 2008, the average time now exceeds 320 days. Also, average ransom payments have doubled since 2008, to well over $3.5 million today, with some exceeding $25 million.
The barbaric torture inflicted upon the crew of MV Iceberg by Somali pirates is a sad illustration of inhumanity. The ship, with its crew of 24, was captured on 29 March 2010 off the port of Aden, Yemen, and remained under captivity for 33 months. But the criminals broke off negotiations after owners rejected their $10 million ransom demand; they then turned their wrath on their helpless hostages. The prolonged severe physical and psychological atrocities committed against these innocent merchant mariners included starvation, hanging upside down, and even sawing off the ear of one person. The brutalization reached an apex when pirates threatened to take out hostages’ internal organs and sell them on the lucrative medical black market. One frightened mariner jumped overboard, committing suicide. Somali security forces finally freed 22 of the remaining 23 hostages in December 2012. The ship’s chief officer is presumed to have been killed by pirates.
The Greek-owned MT Smyrni, a fully loaded million-barrel crude tanker hijacked in May 2012, was finally released on 11 March 2013. The owners reportedly paid a ransom of $9.5 million for the safe release of the ship and its 26 crew members, including Captain Harish Upadhyay, my classmate, who spent ten long months in captivity.
The Gulf of Guinea (off Nigeria, Togo, and Benin) is quickly emerging as the next hotbed of activities. Fifty-eight incidents in the area in 2012 included 10 hijackings and 207 hostages. Piracy on this side of Africa is particularly violent, with frequent use of guns. Nigerian law prohibits the use of third-party armed personnel on board ships. The focus here appears to be on the petroleum cargo that is often sold off within 48 hours of capture. In the case of hostages, the average detention time so far has been eight days. In general, piracy is escalating rapidly here, with fears of considerable underreporting.
Bloomsburg Business Week reports that a private navy is being set up in the UK to deal with piracy and will recruit 240 former marines and sailors. The plan is to establish a fleet consisting of a UK-flagged mother ship, high-speed armored patrol boats, and armed soldiers whose mission will be to deter pirates. It will be financed by shipping companies unhappy with the current level of available protection and the inefficiency in prosecuting captured criminals. The average daily cost of pirate court trials is estimated to be around $40,000. Additionally, trials and incarceration have had little impact on bringing ringleaders to justice or curtailing activities. A more logical strategy would be to rebuild Somalia and create jobs to keep its youth legally employed. Shell International Trading and Shipping is taking the lead in promoting this cause. It has brought together many top-tier global shipping companies and donated $1 million to support job creation and capacity-building projects in Somalia, pledging an additional $1.5 million for the United Nations initiatives there.
Mariner Issues
The International Labor Organization has been working for more than a decade with the International Transport Workers Federation (representing seafarer unions worldwide) and the International Shipping Federation (representing employers) to codify all previous rules related to seafarer employment on board ships. This compendium, referred to as the Maritime Labor Convention (MLC 2006), is truly the long awaited magna carta of the fundamental worldwide rights and privileges of mariners. It is perceived as the fourth pillar of shipping regulation, along with the Safety of Life at Sea Convention, Marine Pollution Prevention Convention, and Standardization of Training, Certification, and Watchkeeping Convention. It will go into effect on 20 August. Thirty-five countries have ratified MLC 2006, France being the latest. The United States is not a signatory, but this does not absolve U.S.-flag ships from compliance with its provisions when calling on a port in a country that has ratified the convention.
MLC 2006 will have a far-reaching impact on seafarers and the quality of their work life. Although the vast majority of shipping companies provide a good professional work environment on today’s ships, trade journals continue to report abuse of seafarers by unscrupulous owners, operators, manning agents, and senior officers on board. Such allegations typically include contractual violations such as non-payment of wages earned, abandoning the crew in a foreign port because of owners’ financial problems, inhumane working conditions, and unsafe ships. The new convention will put an end to such abusive practices, long abhorred by civilized society, and provide a decent, self-respecting work environment for the estimated 1.2 million seafarers worldwide who often toil in waters far from their native lands in pursuit of an honest livelihood.
Once MLC 2006 is implemented, seafarer-employment contracts will have to provide basic health and social-security benefits, as in any other profession. Seafarer work and rest hours will be regulated, as will be their training, medical care, and workplace safety.
Beginning in August, Port State Control inspectors will inspect not only a ship’s compliance with global safety standards of operation and maintenance, but also the existence of minimum acceptable working conditions for the crew. All ships over 500 gross tons operating in international waters must carry appropriate compliance documents issued by the flag administration after an inspection, and they must demonstrate ongoing compliance. Hospitality crews on board cruise ships will have the same protection as traditional crews. MLC will become part of the national maritime legislation of signatory nations, and seafarers will have the ability to report violations without fear of retribution.
In general, it is expected that inspectors will pay increased attention to seafarers’ work and rest hours. The Oil Companies International Marine Forum is advising members to invest in customized computer programs to manage seafarer hours and demonstrate compliance. The U.S. Coast Guard is proposing a voluntary inspection program for ships calling on MLC-compliant foreign ports, with approved classification societies conducting the inspections.
The Manila Amendments commonly referred to as STCW (Standardization of Training, Certification, and Watchkeeping) 2010 came into effect on 1 January 2012, with a five-year transition period until 1 January 2017. They constitute major revisions to the original STCW Convention. In addition to a general tightening of educational and training requirements, the amendments include strict mandatory limits on alcohol consumption (not greater than 0.05 percent blood alcohol level, or 0.25 milligrams-per-liter alcohol in breathalyzer test) and at least 10 hours of rest in any 24-hour period, with a minimum of 77 hours’ rest in any seven-day period. A U.S. Coast Guard policy letter issued in October 2012 lays the framework for implementing the new work-hour rules and has warned that some ships engaged in foreign trade may need to amend their crew strength to ensure compliance.
International Problems Persist
According to a recent survey of 2,000 shore and sea staff conducted by the international maritime recruiter Faststream, only half of all deck officers would choose the same career if given a second chance. Such sentiments are not difficult to decipher. One simple example is the increasing difficulty in stepping ashore at many foreign ports, even after long and often arduous voyages. The number of countries that require mariners to have visas prior to ship arrival for going ashore is on the rise. This might be feasible for seafarers working in containerships, but it is impractical in tramps.
The International Shipping Federation has taken the position that if visas are required, seafarers should have the opportunity to apply for them immediately upon arrival or just before. The common courtesy of allowing mariners to step ashore and visit the port of call is a long-established custom and the humane way to treat mariners given the nature of their employment. It is time to review and reconsider shore-leave privileges for merchant mariners.
Another demotivating factor many face is maritime criminalization. The tendency toward disregarding the basic legal principle of innocent until proven guilty is becoming disturbingly repetitive when shipping accidents occur. The increasing number of incidents in which seafarers have been perceived to be guilty and treated like common criminals, even after taking all possible measures to avoid accidents or oil spills, is particularly troubling.
This was clearly visible in the case of the Stolt Valor, a parcel tanker that was wrecked by a terrible fire and explosion in the Persian Gulf in March 2012. The ship’s master and chief engineer, who survived the accident, were served with arrest warrants prior to any investigation. In a separate case, Apostolos Mangouras, former captain of the ill-fated tanker Prestige, is now standing trial in Spain, along with his chief engineer, for the 20-million-gallon oil-spill tragedy of 19 November 2002. Like a true professional and law-abiding global citizen, he sought port of refuge upon detecting structural problems on board. The Spanish authorities denied his request and asked him to steer farther away from the coast, as if that would solve the ship’s structural-integrity problems.
After seven tense days, with no coastal state willing to help, the ship broke apart and spilled oil in an environmentally sensitive area. The captain was picked up and brought ashore, then treated as if it had been a premeditated act on his part—despite the weeklong tragic saga of irrational shore-based decisions. The captain’s actions in extremis conditions were exemplary, yet he was denied legal help and prohibited from returning home until later. The long-delayed trial began on 16 October 2012, and the prosecutor is seeking 12 years’ imprisonment for 77-year-old Captain Mangouras. No wonder many deck (and engine) officers would choose a different career today!
Safety Issues
An 11-year-old containership in distress, the MSC Flaminia, met with a fate similar to that of the Prestige during summer 2012. Despite being badly damaged by fire and explosion on 14 July, the ship was refused entry into a port of refuge for almost two months before she was finally towed into Germany, her flag-state, on 9 September. It is believed the cargo-owner did not declare the flammable properties that led to wrongful stowage and the consequent fire, resulting in three deaths. The German Classification Society Germanischer Lloyd is seeking the establishment of designated places of shelter for crippled ships; this is long overdue and a welcome development.
The 15,500 TEU Emma Maersk, the first ship in the world of its size and torch-bearer of the ultra-large containership breed, was humbled when her engine room flooded because of problems with her stern thruster. It is unknown whether this was due to a structural flaw or a freak accident. The ship was towed from Port Said, site of the accident, to Palermo, Sicily, where water will be pumped out. The Emma Maersk’s seven sister ships have been ordered to stop using their stern thrusters until the cause has been clarified. These E-class ships were the last containerships built in AP Moller Maersk’s Odense Steel Shipyard in Odense, Denmark, before it closed.
A recent report from the International Tanker Operators Pollution Fund provides good endorsement of improving safety standards in the industry. It classifies all oil spills from the past 43 years into three categories—large, medium, small—and determines that only 5 percent have been large, that is, exceeding 5,000 barrels. More important, 55 percent of those occurred in the 1970s, although oil volumes traded today are substantially higher.
There were only 33 large spills in the 2000s, just 7 percent of all large spills recorded. The rest of the spills (95 percent) were in either the medium (50–5,000 barrels) or the small (less than 50) categories. Among the small-spills category, the International Tanker Operators Pollution Fund found that 40 percent occurred during loading, and 29 percent during discharging operations.
Furthermore, 46 percent of all operational spills (caused during loading and discharging) were from hull and equipment failures rather than human errors. Collision, allision (caused when a ship comes into contact with a structure such as a bridge pillar), and groundings caused 39 percent of the medium spills and 2 percent of the small spills.
These excellent outcomes are a result of various safety measures introduced over the past 40 years, including the International Safety Management (ISM) Code and, more important, the professionalism and commitment to safety of most men and women sailing commercial ships today. Regretfully, the ISM Code itself is coming under increasing criticism for its tendency to generate unnecessary paperwork for mariners.
A recent survey of shipping experts, owners, managers, classification societies, surveyors, and senior officers by Captain Naveen Singhal, a maritime quality-assurance consultant, shows an overwhelming consensus that seafarers are being tasked with excessive paperwork, most of which is duplicative and difficult to read or understand. While survey respondents agree that simple, concise, effective documentation is essential, the prevailing sentiment is that the current level of ISM requirements is not assisting them to ensure safe and seaworthy ships. Captain Singhal argues that the current trend is increasing crew fatigue and nonchalance that does not engender a safety culture. He articulates the need for a lean safety-management system and a thorough revision of the ISM Code.
Looking Forward
No drastic economic improvements are expected in 2013, other than getting a bit closer to the end of the tunnel. Although growth in OECD countries will continue to be anemic, it is expected to pick up steam in other fast-growing countries such as China and India. New capacity will enter all major markets, but it will be at the slowest pace witnessed in recent memory, with the exception of liner trades. There, record new levels of capacity will once again enter the market. This, along with the shifting world consumption patterns, will begin to turn the tide in 2013. However, new maritime investments will remain highly volatile and risky, except for the offshore sector. So 2013 will not be the year of salvation, but should certainly start paving the way toward seemingly long-forgotten good times in the industry and a more optimistic 2014. Au revoir!