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The U.S. economy, as measured by the leading economic indicators, is affected by many forces that are constantly at work in the marketplace. For the average person on the street, however, U.S. maritime shipping generally is not thought of as one of the significant components. Rather, shipping often is perceived as a fringe activity. A few facts should help highlight the true value of shipping:
> 40% of the oil consumed in the United States is brought here by ship. Of this amount, 75% is carried on internationally owned and flagged (non-U.S.-flag) ships. The ocean freight cost for oil, which is imported all the way from the Persian Gulf for sale at gas stations nationwide, amounts to about three cents per gallon. ► As an international business, maritime shipping sees diversified business conditions not often faced by land-based businesses. For example, a company that invests in a fleet of nine ships costing, on average, S60 million each, has a total capital investment of about $550 million. It is under enormous pressure to operate at a profit from “day one,” because those ships generally only depreciate in value. And at the end of 20 years, the ship owner will have to dispose of a technologically obsolete ship, usually at scrap value. By contrast, if an investor buys a piece of property and builds a fried chicken or doughnut franchise on it, there is a good chance that both the property and franchise will appreciate in value.
In addition, there are weather abnormalities, such as hurricanes, floods, and typhoons; fluctuating fuel prices; variable interest rates; currency exchange fluctuations; ship and space use factors in various markets; and political upheavals along the trade routes—all of which intensify the business variables, which can affect ship operations. This is not a business for the speculator, the inexperienced, or the “asset player.”
94
The U.S. Merchant Marine and Maritime Industry in Review
By Robert H. Pouch
For those who have followed and r worked in the U.S. maritime industry, ; 1993 brought into ever-clearer focus the ’ fact that the work force in the U.S.-flag and international-flag maritime shipping industry has become and probably will continue to be “globalized.” Simply put, ; this means that companies wishing to in
Proceedings / May 1994
vest in shipping must decide how their ships will be operated if they ever want to see a competitive advantage.
Early in 1993, CSX/Sea-Land and American President Lines—the country’s largest ocean and intermodal carriers— announced that to remain competitive, they would remove their ships from U.S. registry and “flag out” overseas unless there was a fundamental change in U.S. maritime policy as evidenced by maritime reform legislation. To no one’s surprise, there was no change in maritime policy.
For most traditional U.S.-flag operators, “flagging out” has become a painful yet almost inevitable option. When competitors can operate for less by using foreign crews, paying lower taxes, and registering in a host country that offers hospitable incentives and cost-avoidance regulations, there are few other options. America’s mariners gradually are being displaced by a cadre of globally sourced international mariners, who come from countries with lower standards of living and lower costs.
Many of these international mariners are very well trained and educated— among the very top in their profession. Others lack training and fluency and have minimal skills. As noted in Lloyd’s List:
There are operators and managers who have spent the last 20 years ruthlessly searching for the cheapest possible crewing cocktail, who will now look you in the eye and recite the new mantra about human “resources” with the utmost conviction. ... A master returns from leave to find that his crew of Kiribati ratings who he had spent seven months getting used to have been replaced with Burmese, while the officers have now been obtained from three different Eastern European countries. There are officers on the labour market who speak only in “Seaspeak" and believe that this is conversational English.
Because U.S. shipping investors must meet international competition in the marketplace, they will be forced to migrate toward the lowest common denominator of cost, and this means more flagging out.
To remain competitive in the international marketplace, more and more carriers are flagging out—removing their ships from U.S. registry. This means fewer jobs for U.S. mariners, less work for U.S. shipyards, and little hope for meaningful reform.
more jobs for international mariners on U.S.-owned (but foreign-flag) ships, and less work for American shipboard personnel and U.S. shipyards in the commercial sector, at least in the short term.
So, there definitely will continue to be an active role for U.S. investors in international shipping, but in this increasingly global marketplace, it is hard to say what role a U.S.- flagged and U.S.-built ship operated by U.S. citizens will play. There are many challenges ahead.
Status of the Industry
In 1993, the U.S. fleet consisted of 600 ships (241 were inactive, e.g.. National Defense Reserve and Ready Reserve fleets) totaling 2,296,000 dead-weight tons (of which only 1,205,900 deadweight tons were in active service). It was broken down as shown in Figure 1.
America’s waterborne trade statistics showed that approximately 850 million long tons of cargo moved to or from the country in 1993. Of this amount. 35 million tons—or less than 4%—were carried by U.S. ships, and this figure has been dropping every year.
In the liner trades, 100 million long tons were transported. Of this amount, about 15% was carried by U.S.-flag ships. The higher percentage is accounted for by modern container carriers, such as
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U.S. shipyards, already finding it difficult to compete in the world market, are facing a drastic loss of military orders, as well. Here, the USS Valley Forge (CG-50) undergoes overhaul at Southwest Marine Corporation. Joint ventures with Japanese shipbuilding firms may help improve U.S. competitiveness.
U.S. Shipping Trade Patterns
Liners. Overcapacity of ships and carrying capacity on most liner trade routes continued in 1993. Freight rates continue to be depressed, with some minor exceptions, and on some trade routes, freight tariff rates for certain commodities continue at or below actual cost. As in the case of the airlines, pricing battles continue to plague the industry.
Figure 1: The U.S.-Flag Seagoing Fleet
(DoD estimate)
(Maritime Administration estimate)
Note: Some cargo liners and tankers that were removed from the registry of active U.S. ships have been converted to oceangoing bulk barges by removing the accommodations and machinery and adding cargo hatches. The ships thus converted are then moved by oceangoing contract tugs, at prices far below the former cost of crewing, operating, and insuring.
Source: U.S. Maritime Administration
359
70
117
Passenger Ships 8
General Cargo Ships 30
Intermodal (Container) Ships 127 Bulk Carriers 17
Tankers 177
1993 Total 2000 Total
1. | Liberia | 12 | 1. | Greece | 21 |
2. | Panama | 16 | 2. | Japan | 9 |
3. | Greece | 23 | 3. | United States | 20 |
4. | Japan | 9 | 4. | Norway | 19 |
5. | Cyprus | 15 | 5. | Hong Kong (Br.) | 14 |
6. | Norway (NIS) | 13 | 6. | China | 16 |
7. | Bahamas | 13 | 7. | United Kingdom | 17 |
8. | China | 16 | 8. | Russia | 16 |
9. | United States | 26 | 9. | South Korea | 14 |
10. | Malta | 19 | 10. | Germany | 15 |
Source: Lloyd’s Register of Shipping
Figure 3: U.S. Shipping Companies’ Operating Results
12-Month Return 12-Month Return 12-Month % Company on Equity on Capital Sales Profit
CSX/Sea-Land | 92: | Deficit | Deficit | $8,765 mil | Deficit |
| 93: | 12.1% | 6.6% | $8,870 mil | 4.1% |
Alexander | 92: | 11.9% | 8.2% | $722 mil | 12.2% |
& Baldwin | 93: | 1.4% | 6.0% | $869 mil | 7.4% |
Overseas | 92: | -5.0% | 5.1% | $399 mil | 9.5% |
Shipholding | 93: | .4% | 1.9% | $386 mil | .8% |
American | 92: | 15.9% | 9.9% | $2,504 mil | 3.2% |
President | 93: | 14.5% | 9.2% | $2,502 mil | 2.8% |
The controversial Trans Atlantic Agreement (TAA), which was established by a majority of lines serving Europe last year, has been partly successful in raising freight rates and limiting ship capacity along the route. Rates were hiked 7%-15% last year and 4%-7% in 1994. These increases have caused some alarm and hard feelings among cargo shippers in the United States and Europe, who have asked the Federal Maritime Commission and the European Commission in Brussels to investigate TAA members for antitrust and conference violations of European Union law. The European Commission recently ruled that the TAA does in fact violate certain EEC antimonopoly laws, i.e, the two-tier rate system, the westbound capacity management program, and inland freight rate setting.
American President Lines, CSX/Sea- Land, and Lykes, which have invested in maritime and inland transport systems within the framework of a highly developed intermodal transport service system (including rail and truck modes).
Employment on board U.S. oceangoing ships in 1993 was 11,685 licensed and unlicensed mariners, which continues the decline of recent years.
The 1993 ranking of international merchant marine countries is shown in Figure 2.
U.S.-registered ships have slipped to ninth place in the world’s national flag fleet, but U.S. beneficially owned (including international flagged) ships hold third place in the world. The average age of the U.S. fleet (20+ years), however.
indicates that older vessels are not being replaced. This is a result of the high taxes associated with U.S.-citizen ownership of vessels.
A summary of the leading U.S. maritime shipping companies’ operating results covering 1992-1993, according to information published in the 5 January 1994 edition of Forbes, appears in Figure 3.
In general, the U.S. maritime sector registered a slight overall improvement in sales and carryings compared to the prior year. Shipments of grain and oil have been relatively high, and exports to Asia have increased. Shipments to Europe have declined, however, because of recession there, and shipments to the former Soviet Union have been disappointingly low after an initial burst of activity.
In the meantime, TAA member lines admit that they have lost some market share, but they have managed to obtain increased sales revenues as a result of the agreement. They claim that current (1994) rate levels have reduced but not yet eliminated the losses that the lines have experienced over the past decade.
Tankers, Bulk, and Specialized Carriers. The market for bulk cargoes continued at unsatisfactory levels during
1993. Freight rates were depressed, and, once again, only owners operating in certain niche markets achieved satisfactory results.
If conditions are going to improve in
Proceedings / May 1994
1994, more tankers and bulkers (older than 20 years) will have to be scrapped. Worldwide, there are recessions in many
countries, and economic conditions have forced the closure of many shipyards and reduced governmental interest in subsidizing shipyards and shipping. Banks, which saw sky- high markets in the 1970s, are looking with great scrutiny and skepticism at ship finance, as a result of the beating they took on mortgage defaults in the late 1980s and early 1990s.
Today, due diligence is the guideline.
Last year, some owners, such as OMI Corp. and Teekay Shipping Group, financed more than $225 million in noninvestment grade (junk) bonds through corporate debt financing. There is increasing hope that tanker and bulk rates will improve as the oversupply of ships is reduced over the next few years.
On 22 September 1993, a tug pushing six loaded barges struck a CSX railroad bridge and caused the derailment of Amtrak’s Sunset Limited. Forty-seven people died.
Ship Building and Ship Repair. People have wondered how the United States can hold a leadership position in the construction of high technology, competitive aircraft, computer design and software, and now, once again, in automobiles, with worldwide customers, but is incapable of building ships that can compete in the world market.
What is behind this anomaly?
To be sure, foreign shipbuilders receive a variety of subsidies, but the real answer lies in lessons learned more than 50 years ago in World War II.
In the early 1940s, the United States urgently required merchant ships to replace those being lost to submarine attacks in the Atlantic and Pacific and to meet the massive war supply requirements. Industrialists such as Henry Kaiser built brand new shipyards, designed advanced production and engineering methods, and brought forth Liberty and Victory ships that were built in as little as three days. These special ships, launched in the 1940s, were still trading in the 1960s and 1970s. Little effort has been made to reinvest and modernize commercial U.S. shipyard and production methods since World War II.
Recently, some U.S. shipyards, which now are also facing a drastic loss of military orders, are turning to Japan for assistance in learning modern shipbuilding and production methods and in rebuilding their infrastructures to pursue commercial shipbuilding contracts. For example. National Steel and Shipbuilding Company and Kawasaki and New-
port News Shipbuilding and Ishikawa Harima Heavy Industries recently announced cooperative joint ventures to improve U.S. commercial shipbuilding competitiveness.
Quality Assurance. The focus on maritime safety and quality assurance has continued. The U.S. Oil Pollution Act of 1990 continues to be the prime mover, but not exclusively so. For example, the International Oil Spill Compensation Fund paid out $115 million last year for oil spill remediation at sites around the world—and the cost is likely to go up as many more miles of coastline than had been anticipated may experience oil-spill contamination and cleanup in the future.
Maritime accidents based on deteriorating standards of operation, implied negligence, and subsequent oil pollution or loss of life continued in 1993:
>• The explosion on board the U.S. tanker OMI Charger in Galveston Bay, Texas, caused the total constructive loss of the vessel.
>■ The accident in Alabama involving the
tug Mauvilla, which was pushing six loaded barges and allegedly got lost on a foggy night and struck the CSX railroad bridge in Big Bayou Canot near Mobile, caused the derailment of Amtrak’s Sunset Limited and the subsequent loss of 47 lives.
► The grounding by the tug Emily of the towed petroleum barge Morris Berman off Es- cambron Point in Puerto Rico, spilled 750,000 gallons of heavy fuel oil and polluted much of San Juan’s resort beaches at the height of the tourist season. Cleanup costs will exceed $20 million.
These accidents have continued to elevate the public’s consciousness and put pressure on the Coast Guard, the states, and ship classification societies to upgrade policy, procedures, regulations, and laws in the face of deteriorating quality and personnel standards. As the United States becomes less of a flag state, it will continue to evolve as a port state, and governmental agencies will refocus their attentions on the safety, quality of operation, and seaworthy conditions of all vessels operating in U.S. waters.
Most ship managers, regardless of the nationality of the personnel they employ on board their ships, generally have made serious efforts to improve training and provide personnel resource management support to their maritime staff in an effort to upgrade quality, avoid accidents, and build closer cooperation between shipboard staff and shoreside management teams. It is the few exceptions, however, that bring frontpage attention to what has been perceived as deteriorating standards in the industry.
Ports and Harbors. Ports on the Atlantic, Gulf, and Pacific coasts boast the world’s best maritime and inland transport facilities. Most ports are operated by state or bistate port authorities. Competition among ports to attract cargo is intense; therefore, investment in modernized infrastructure within the ports has grown.
The one serious warning signal for ports continues to be limitations and delays placed on dredging permits as a result of strict and often unrealistic environmental requirements. Some ports have had to limit the draft of vessels using their facilities because of delays in dredging projects, which are years behind sched-
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Proceedings / May 1994
ule. Environmentalists are pitted against port and commercial interests over the dredging issue. Permits are hard to obtain. Ship owners and port interests, who have invested billions in new ships and facilities, must now limit use of their facilities as a result of shoaling in berths and terminals.
Ultimately, this exposes the operators, port authorities, states, and consumers to significant extra costs nationwide and contributes to inflation. The federal government needs to take an active role in curing the gridlock and develop a national policy on harbor dredging permits for national defense reasons.
Shipping atul Defense. The Navy’s decision to rely more on its own ships and units under its direct control continued during 1993. Military Sealift Command’s role as the operator of additional dedicated vessels, with the increase in the Ready Reserve Fleet; its use in the support of the relief operation in Somalia; the acquisition of additional training vessels for the maritime academies (which also can be used as RRF ships); and the Navy’s Mobility Requirements Study decision to obtain 20 large roll-on/roll- off strategic sealift ships all point to movement toward the Navy’s goal of a self-contained maritime logistics system within the Department of Defense, with less reliance on the merchant marine in future years.
Conclusion
H ISltoFKC SrSLlls
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On 7 September 1993, Vice President A1 Gore issued his National Performance Review, one of the recommendations of which was to establish an independent commission to review the U.S. maritime industry. His preliminary conclusion was that “current U.S. maritime policy is a hodgepodge of subsidies, protectionism, regulation, and taxation that is a mockery to sensible industrial policy.”
To date, no legislative initiatives have passed the Congress as a result of the Vice President’s report, which, in its original form, created a tense confrontation between advocates of free trade (deregulation) and the traditional U.S.-flag maritime community. It is too early to tell whether any meaningful reforms helpful to the U.S.-flag maritime industry will be enacted, but prior studies have yielded little in the way of results, except in times of national emergency.
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This authentic image is based on an 1888 available through the Naval Institute photo archives and as a Naval Institute print. This 50/50 cotton/poly t-shirt is sure to be popular with young and old alike.
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Mr. Pouch, a graduate of the Maine Maritime Academy, is a consultant with Barber International, a firm engaged in international ship management and marine consulting for a fleet of 175 commercial vessels. He served as an officer in the U.S. Naval Reserve in positions involving Naval Control of Shipping, Military Sealift Command, and amphibious warfare.
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