In August 1997, a number of Asian nations, including Indonesia, Japan, Malaysia, South Korea, and Thailand, began to experience currency crises and faltering economies. U.S. traders, many of whom knew little about the baht, ringgit, or won, began to experience a deflationary trend, which triggered fears of an Asian meltdown—or at least some major challenges—and threatened to upset the stability of international trade in the region. Such developments could create unforeseen setbacks in 1998, with potentially a negative impact on the business operations of the major ocean carriers and their customers. The long-term view for international trade, however, remains optimistic.
Status of the U.S. Maritime Industry
In 1997, the U.S. Maritime Administration reported that there were 286 privately owned commercial oceangoing ships trading in the U.S.-flag fleet serving international commerce. An additional 33,000 cargo-carrying vessels and 8,000 tugs, ferries, and passenger vessels were engaged in the domestic trade, i.e., coastal rivers, sounds, and bays. One hundred seventy thousand people work in the maritime industry on board ships and in supporting shore side occupations, and an additional 34,000 workers are employed in production jobs at major shipyards.
The United States is the world's largest trading nation, accounting for nearly 20% of world oceanborne trade, but the U.S. merchant fleet generally has failed to compete in the international shipping market. Its market share of cargo carried has dropped from 5.3% to 3% in the past 25 years, primarily because foreign-flag operators enjoy lower operating, tax, capital, and crewing costs, and less regulation.
Under the Maritime Security Act of 1996, 47 ships operated by 17 companies were authorized to receive an operating subsidy under a ten-year program to retain militarily useful U.S.-flag and citizen-crewed vessels. The program provides subsidy payments of $2.3 million per ship the first year, and $2.1 million for nine consecutive years, subject to annual appropriations by Congress. Fortyfour ships are expected to sail under this program in 1998, with $64.5 million appropriated in fiscal year 1998, and an additional $35.5 million required to fund the program fully. The major U.S. recipients of operating subsidies in the 1996 Maritime Security Program are:
- American President Lines
- Crowley American Transport
- Maersk Line, Ltd.
- Overseas Shipholding Group Car Carriers
- Central Gulf/Waterman Steamship
- Lykes Lines (since acquired by Canadian-Pacific, under review)
- Farrell Lines
Other than these subsidized cargo ships, relatively few U.S.-flag vessels are expected to remain in international trade.
A previous multibillion dollar construction and operating differential subsidy system did not help the industry to prosper or even survive. Critics claim that federal subsidies were nothing more than a soft pillow upon which the industry languished comfortably for decades, out of touch with new ideas and the forces and trends of the competitive marketplace. In addition, federal tax policies and an adverse litigation and costly legal liability environment (such as the Oil Pollution Act of 1990) have provided other powerful disincentives and obstacles in the path of U.S.-flag maritime industry development and investment.
Overcapacity of containerships on most liner trade routes continued during 1997, as did the wave of consolidations, mergers, and reorganizations. Two hundred seventy-nine new containerships were placed in service in 1997, with 164 additional vessels scheduled in 1998. Thereafter, orders for new ships are expected to decline, with about ten ships per year planned to enter service in 1999 and 2000. Ships now under construction are designed to carry between 5,000 and 6,000 TEUs.
Ocean carrier service alliances continued to be developed on most liner trade routes. These alliances usually consist of multicarrier pooling of ship container capacity via slot charter and container sharing agreements, common sailing schedules and usage of ports and terminals, container capacity management, and joint service along a trade lane. They generally do not include joint marketing and sales activity, thus the carriers are free to compete on price and customer service. While exempt under the Shipping Act from antitrust provisions, carriers must publish their agreements and tariffs with the Federal Maritime Commission. Many carriers have invested considerable time and effort in attempts to improve their efficiency, boost overall quality, and control costs, but there is more work to be done. These accomplishments have been made against the backdrop of low or constantly dropping freight rates on major trade routes.
A number of mergers and acquisitions took place in 1997:
- Neptune Orient Lines of Singapore acquired American President Lines for $825 million.
- Transportacion Maritima Mexicana acquired Flota Mercante Grancolumbiana.
- Safmarine (Rennies) acquired 75% of CMBT Lines.
- Hanjin Shipping Co. acquired a majority position in DSR-Senator Lines.
- Canadian Pacific acquired Cast, Lykes, and Contship Container Lines.
- Hapag-Lloyd, 150 years old in 1997, was acquired by Preussag, a German steel, shipbuilding, and engineering concern, for $1.5 billion.
The large liner alliances/consortia are: the New Grand Alliance—P & O/Nedlloyd, Nippon Yusen Kaisah, Hapag Lloyd, Orient Overseas Container Line, and Malaysia International Shipping Co. (limited member)—which operates more than 100 ships in Transpacific, Asia, and European routes; the New Global Alliance—Neptune Orient Lines/American President Lines, Mitsui OSK Lines, and Hyundai Merchant Marine—which operates about 100 ships in Transpacific, Asia, Europe, Transatlantic, and Latin American routes; and the Hanjin-DSR-Senator Cho Yang Alliance—Hanjin, DSR-Senator Line, Cho Yang, and United Arab Shipping Company (limited member)—which operates about 85 ships in Transpacific, Asia, Europe, Transatlantic, and Mid-East routes.
There clearly has been a continuation of the trend to form truly global companies within the shipping alliances, with declining significance attached to being a particular national flag carrier. The goal of all of these cooperative working agreements is to control costs. Outside of the alliances, Sea-Land and Maersk Lines are partners in a global vessel and terminal sharing alliance, and there has been speculation that the eventual outcome will be the acquisition of Sea-Land by Maersk—when the price is right.
The cruise industry enjoyed another year of record passenger and sales growth, with 5.1 million people embarking on cruises in 1997, compared with 4.7 million in 1996; an increase of 8.5%.
In 1998, the U.S.-based international passenger ship fleet is expected to grow from 115 to 123 ships, boosting passenger capacity from 5.8 million to 6.7 million. Bookings for 1998 are running about 35% ahead of last year's levels, indicating prospects for another good year, with cabin occupancy rates running at an impressive 88%. Royal Caribbean Cruises, for example, will increase capacity by more than 50%, with new ship orders totaling $3 billion, raising its capacity from 29,000 passengers to 45,000. The new ships will be built by Kvaerner Masa in Finland, Chantiers de l'Atlantique in France, and Meyer Werft in Germany. Disney Cruise Line will commence operation in mid-1998 with the introduction of the Disney Magic , built at Fincantieri in Italy, to be based in Port Canaveral. In fact, many shipyards in Europe are so busy that new passenger ship deliveries may be delayed because of reported shortages of skilled subcontractor labor for detailed finishing and technical work.
In 1997, seven new passenger ships were introduced into the U.S. market, and an equal number of old ships were sold or redeployed elsewhere. Look for the industry to offer special discounts, two-for-one offers, and other sales incentives, including sea and land tour combination vacations, to help sell cruises on their new and larger ships.
As with other segments of the industry, consolidation has taken place, with the integration of Norwegian Cruise Line, Cunard, and Premier Cruises, and the acquisition of Celebrity cruises by Royal Caribbean.
Tankers, Bulk and Specialized Carriers
The demand for bulk cargoes revived somewhat in 1997, according to UNCTAD data, with dry bulk cargoes increasing by 5.1%, and crude oil movements increasing by about 4%.
Freight rates improved for most types of crude oil tankers. Charter rates for Very Large Crude Carriers (VLCCs) reached $50,000 per day in November 1997, compared to $15,000 per day in 1994, with primary cargo suppliers being Latin America, Persian Gulf nations, and North Africa. By December, the rates had fallen back to $38,000 per day as a result of currency and market turmoil in Far East markets.
There are about 442 VLCCs actively trading worldwide. Forecasts indicate a 2 million barrel increase for crude oil shipments in 1998 over the 73.8 million barrels shipped in 1997, according to the International Energy Agency. This is confirmed by OPEC's announced intentions to increase production quotas from 25.03 million to 27.5 million barrels a day, which is reassuring news for tanker owners. There are approximately 760 million DWTs (dead weight tons) of tankers in active world trade. Sixteen new tankers are scheduled to enter service in 1998, with an additional 30 ships scheduled for commissioning in 1990. With new construction prices falling in the Far East because of currency devaluation, some owners must be thinking of placing new orders; a new VLCC can be built for less than $80 million, a 20% discount from prices quoted a year or two ago.
Scrapping activity amounted to 487 bulk/tank vessels of 15.6 million DWTs in 1997, down 3 million DWTs from 1996. Overage tankers accounted for 65 ships totaling 5.6 million deadweight tons, down from 93 ships totaling 8.8 million tons in 1996. Nine of these tankers were VLCCs. The amount of tankers scrapped has been declining steadily since 1994, when 120 ships totaling 16 million DWTs were sent to the breakers. In general, the reduction in scrapping activity is directly related to improved earnings potential for older VLCCs and large tankers, whose owners will try to keep them trading for one more year, if the market holds up.
Bulk carriers sold for scrapping totaled 156 units in 1997 and 146 in 1996. Geared tween deckers scrapped were 200 in 1997 versus 140 in 1996.
Prices paid by scrap dealers ranged from $155-$160 per lightweight ton for dry cargo vessels, and $170-$175 for tankers.
Inland Waterway Transportation
The nation's barge and Great Lakes traffic covers more than 25,000 miles of inland and intracoastal waters and the St. Lawrence Seaway. More than one billion tons of cargo and 65 million passengers travel annually in this inland system, and domestic water carriers move 24% of the total, at less than 2% of the entire domestic freight bill, each year. The principal commodities moved are bulk coal, grains, steel, and petroleum products.
American Commercial Barge Line, a unit of CSX, remains the nation's largest inland barge operator, with about 3,500 barges and 120 tugs. Kirby Corps, with $400 million revenues, is a specialist in the transportation of hazardous materials, with an impressive safety record. Having recently sold its offshore supply and insurance operations, this company is refocusing on its core inland barge operations.
Shipbuilding and Ship Repair
There are 18 major shipbuilding yards in the United States and an additional 260 smaller privately owned building and repair yards situated primarily along the Gulf and Atlantic coasts. The commercial order book for new construction at the end of 1997 included 182 ships (639,217 G/T), of which 108 were 1,000 G/T or greater.
The largest U.S. shipyards are:
- Newport News
- General Dynamics/Electric Boat
- Bath Iron Works
- Avondale Shipyards
- National Steel Co.
The first commercial ship to be delivered by a U.S. shipyard to an international operator in 40 years was built by Newport News Shipbuilding. The 46,000 DWT product tanker M/T Agathonissos was delivered to Eletson Corp. of Greece early in 1988, and is one of three Double Eagle designs ordered by the company, one of which was sold to Mobil Corp. in 1997.
Avondale Industries recently signed a technology transfer agreement with Italian shipbuilder Fincantieri as a way of diversifying and lessening its dependency on naval shipbuilding. Also, the Kvaerner Group of Norway acquired the former Philadelphia Naval Shipyard facility in 1997. A portion of the General Dynamics-Electric Boat Shipyard in New London has been converted by Pequot Shipyard to the construction of high-speed passenger ferries. There is speculation that the growing demand for passenger and gambling ships will stimulate the market for Jones Act (U.S. coastwise) related shipbuilding.
Maritime Regulatory Reform
This has centered around attempts to deregulate the liner shipping industry by eliminating the Federal Maritime Commission. Under the Shipping Act, shipping lines are permitted to establish conferences, which can act together to set rates, and receive antitrust immunity. In spite of this privilege, which enables them to capture large (50%) market shares, the lines continue to engage in destructive, nearly suicidal rate competition, and in many cases, erode earnings potential or lose a lot of money. Some container carriers wish also to enter into capacity management programs, which would give the lines more market control.
It is unlikely that capacity management schemes will win official approval from U.S. or European regulatory authorities.
Ocean Shipping Reform Act
Crafted by the National Industrial Transportation League of big cargo shippers with the help of Sea-Land, this bill is intended to supersede the Shipping Act of 1984 and terminate, or reorganize, the Federal Maritime and Interstate Commerce Commissions. Essentially, the big industrial cargo shippers wanted confidential shipping contracts. Some major lines are willing to give them, provided the lines can retain the liner conference system and antitrust immunity.
However, many port authorities, some individual lines, and maritime labor grew increasingly uncomfortable over the scheme, and succeeded in having the measure shelved in 1997. Another effort by proponents is anticipated this year. As a rule, there has been very little sustained interest or responsiveness by Congress to shipping reform legislation, primarily because of the industry's inability to develop a quorum or consensus on almost any issue.
This act is defined by its adherents as the U.S. maritime industry's lifeline to the future, and the cornerstone of maritime promotional policy. It requires that vessels used to transport cargo between U.S. ports be owned by U.S. citizens, built in U.S. shipyards, and crewed by U.S. citizens. First enacted in 1789, and now defined in the present Jones Act (1920) and a companion law, the Passenger Shipping Act of 1896, these statutes are designed to protect our domestic coastwise shipping and shipbuilding industries and to encourage a national flag merchant marine for defense purposes.
The Jones Act
Reform Coalition claims that the protection afforded by cabotage laws does nothing more than restrict competition, restrict markets, and artificially increase shippers' costs. Their proposal, the Coast Shipping Competition Act, would abolish the Jones Act requirement mandating U.S.-built and -flagged vessels in the internationally accessible domestic and noncontiguous trades, i.e., Puerto Rico, Hawaii, and mainland ocean ports. In addition, World Trade Organization negotiations in Geneva and recent General Accounting Office and International Trade Commission reports also could weaken the rationale supporting the Jones Act.
Jones Act-related business is conducted in 42 states. This represents a large community of cargo shippers and marine operators who have diverse opinions about, and could be affected by, a repeal or substantial amendment of its present restrictive provisions.
A group of U.S. Jones Act trade ship owners who sponsor the Maritime Cabotage Task Force claim that the Jones Act provides a level playing field for operators in U.S. domestic commerce and shipbuilding, and provides for a measure of military security through its base of maritime employment and infrastructure. As of 23 April 1997, a congressional resolution has attracted 235 sponsors supporting continuation of the Jones Act.
Maritime Personnel, Human Factors, and Safety
International safety conventions and treaties, including the International Maritime Organization's Standards of Training, Certification, and Watchkeeping Convention, took effect in February 1997. The International Safety Management Code (IMO), applicable to about 19,000 vessels, becomes effective in July 1998, when responsibility for the training and certification standards for international seafarers will be placed on ship owners by shipping nations who are members of IMO. An additional 20,000 ships and oil rigs also must comply by July 2002.
In December 1996, the MN Bright Field , a Chinese registered bulk carrier owned by China Ocean Shipping Company, lost engine power and crashed into the New Orleans waterfront, demolishing 10 stores, 40 Hilton Hotel rooms, and a parking garage, causing $18 million in property damage. There were no deaths, but 100 people were injured and the ship narrowly avoided colliding with a docked gaming ship with hundreds of people on board. The ship's state pilot was credited with broadcasting advance warnings and taking a series of emergency actions that helped to minimize the catastrophic effects that could have developed from this casualty. The National Transportation Safety Board, in its investigation report, pointed to a history of chronic engine problems with the vessel and a lack of adequate oversight of the ship's personnel and operations by the owner. This casualty received extensive media coverage, but it is widely known in the maritime industry that casualties of this sort occur in U.S. ports on a regular basis, but are not often publicized.
The new international safety and certification initiatives will place added emphasis directly on ship owners with respect to the competency of shipboard personnel and the shipboard systems they manage.
Ports and Harbors
There are 355 ports and 4,000 marine terminals in the United States. One hundred fifty of these ports handle 99% of all cargo tonnage. Ports on the Atlantic, Gulf, and Pacific coasts experienced increased trade volumes during 1997, primarily because of better import and export container volumes and increased shipments of bulk commodities such as grain, steel, and oil. With a strong economy, shippers experienced heartburn during the year with severe rail congestion in the Southwest and a series of port congestion problems in Los Angeles and Long Beach, California.
The most frustrating problem continues to be the in obtaining dredging permits for channel and berth deepening. Hopelessly bureaucratic federal and state dredged-material disposal requirements make the permitting process a contentious nightmare, with little relief in sight. There are about 400 commercial ports and more than 25,000 miles of navigation channels in the United States that require periodic maintenance dredging. To complicate matters, the Harbor Maintenance Tax, and ad valorem surcharge, has been challenged by shippers and found to be unconstitutional by federal courts.
The nation's ten leading ports (with channel depth) in terms of container cargo volume handled are:
- Long Beach, California 76'
- Los Angeles, California 46'
- New York, Port of NY/NJ 40-45' (ranked #1 when oil is included)
- Seattle, Washington 175'
- Oakland, California 42'
- Charleston, S.C. 40'
- Hampton Roads, Virginia 50'
- Houston, Texas 40'
- Tacoma, Washington 40-50'
- Miami, Florida 42'
During 1997, the big picture looked quite positive, but if you were battling in the trenches of international maritime commerce, there were plenty of challenges—labor disruptions on the West Coast, ship delays in the Panama Canal, severe rail congestion and routing problems in the Southwest, a Teamsters strike, adverse weather conditions on all coasts, and turmoil in the Asian financial markets. Ocean carriers faced strong economic and profit pressures, and these forces have continued the momentum of consolidation within the industry. How will this play out in 1998? There should be more mergers and alliances, and cooperation will extend beyond vessel space and terminal sharing. The ability of carriers to cooperate on intermodal services, equipment control and maintenance, and logistics services to customers will be refined.
During 1998, we should begin to see the culmination of the consolidations, mergers, and cooperative working alliances. The next focus will be on evaluating customer service and value for transportation money received, and on how best to achieve an adequate return on the enormous capital investment that has been made in the international maritime industry during the past five years.
The result will be more results-oriented managements, who will pay more attention to the need to increase shareholder value, a goal that has proved elusive to many shipping companies. The conventional wisdom in this business is that the customer rules. There can be little argument that in most cases, the customer has received good transportation value for his money.
Robert Pouch , a graduate of the Maine Maritime Academy, has devoted his entire career to the maritime industry. Currently, he is Director of the Board of Commissioners of Pilots of the State of New York and chairs the Port of New York/New Jersey’s Military Cargo Task Force. He also has served in the Naval Reserve.