It was a year of exceptional profitability rarely witnessed in the shipping industry that led one Scandinavian analyst to remark, "Not since the days of the Vikings." Last year's review referred to the remarkable longevity of the shipping market recovery that began in 2002. As predicted then, 2004 turned out to be a spectacular year for the industry in all major shipping markets, far exceeding the expectations of industry analysts. This is a completely new experience for ship owners and maritime observers who had grown accustomed to the industry's mediocre levels of profitability during the past two decades.
The impetus for this comes from a global economy that grew at a blistering annual rate of 5% in 2004, led primarily by China, but also spurred by India, Brazil, and other developing nations. In 2004, Chinese exports grew by 37% from 2003 to $95.3 billion, and its imports to $84.2 billion. With tonnage demand up by 10% and only a 5% increase in fleet supply, the value of the merchant fleet increased by 30%, from $391 billion in 2003 to $508 billion in 2004, as estimated by Norwegian shipbroker R.S. Platou. All three major shipping markets-liners, tankers, and dry bulk-hitting their market highs concurrently is extraordinary, with no recent parallels in the industry. It is not surprising that a 2004 Deloitte and Touche CEO/CFO Corporate Strategy Survey found a significant majority in the industry anticipating a return on equity exceeding 15%.
The balance of power in the maritime sector has swung undeniably toward Asia. The continent is now home to the bulk of maritime human resources besides being home to a majority of the busiest ports and the largest shipping companies. Add to this the fastest growing emerging markets, with China alone accounting for 28.7% of the U.S. trade and being responsible for a quarter of the annual world-wide GDP growth in 2004. China has surpassed the U.S. in the consumption of all basic raw materials except petroleum and solidified its position as the world's production line. China Shipping Group, the world's fastest growing shipping company, has recently placed orders for 39 new ships at a cost of close to $1 billion.
The U.S. Merchant Marine
The optimism in global shipping markets permeated usually nonchalant U.S. shipping circles in 2004. This was most visible in the capital markets rather than in traditional ship ownership and operation. It was expected, as there are few U.S.-flag owners and operators still in the international arena that could be lifted by the rising tide. A mid-summer New York Times Magazine article questioned the continuing ability of the U.S. to lead the global economy. One cannot help but contrast the status of the U.S. Merchant Marine with that of the Chinese, who are projected to become the world's largest economy on the basis of purchasing power parity by 2020. By that year, they will likely have two of the world's largest shipping companies, the world's largest shipyard, the world's largest port complex, and two of the world's largest maritime universities besides being the world's largest supplier of crew members for the open registry fleet.
A handful of U.S. operators announced fleet expansion plans in 2004. Among them is the International Shipholding Group, the sole lighter-aboard-ship (LASH) operator in business. With only three 1980-built LASH vessels in operation, the future of the LASH concept was uncertain beyond 2010. These ships provide a niche service for shippers of low value bulk commodities whose small volumes do not justify the need for a dedicated charter or container shipping service. International Shipholding's plan to build an undisclosed number of LASH ships prior to 2010 will keep this uniquely American contribution to merchant shipping alive.
The U.S.-Hawaii trade was the focus of considerable competitive posturing in 2004. Pasha Transport Hawaii announced it would begin sailing in mid-March 2005, hauling Chrysler autos on a long-term contract. A former Maison executive will begin a new service to Hawaii named OceanBlue Express that would double the number of operators in the trade. Maison will exercise their option to buy two new container ships from Kvaerner Philadelphia Shipyard for $315 million. Along with two ships bought in 2003 and 2004 from Kvaerner, the two new deliveries will constitute a formidable Maison fleet in the Hawaii trade. They also have the right of firsl refusal on four additional Kvaerner ships to be delivered by 2010. In the U.S.-Puerto Rico trade, the Jones Act carrier Trailer Bridge has bought all the stock of Kadampanattu Corp, and will reportedly save $4-5 million per year.
* Shipping-related U.S. Capital Market Developments. The Carlyle group's sale of Horizon Lines for $650 million in July 2004 after purchasing it 15 months earlier for $315 million was an eye-opener for maritime skeptics on Wall Street. Castle Harlan, Inc., a New York-based private equity investor, made the purchase. Slocks listed by public U.S. companies have had an outstanding year. Furthermore, there were five successful shipping-related Initial Public Offerings (IPOs) during the year that raised $700 million. It is expected that during the first half of 2005, there may be as many as 10 successful shipping IPOs in the U.S. Although Horizon Lines, the largest Jones Act carrier, is one of those seeking public listing, many are foreign, family-owned shipping enterprises that are exhibiting the confidence to seek public listing. Their choice of the U.S. capital market at a time when there are increasing concerns about the U.S. economy and the dollar is perhaps reassuring for the U.S. in general. It appears investing in quality shipping stocks has become highly attractive for big mutual funds as well as retail investors. Decades of market uncertainty has altered the fundamental business philosophy of the new, publicly traded shipping companies. They run a tight operation with a relatively young fleet and are managed by well educated professionals. Although one might be amazed by the record new tonnage orders and inclined to interpret this as a repetition of the old mantra of overbuilding at the slightest indication of a market recovery, predicted trade volumes appear to justify these investments.
Institutional and Regulatory Developments
Last year was epoch-making for the maritime industry not only for pecuniary reasons but also for institutional and regulatory initiatives and developments. Among these are the introduction of a tonnage tax regime in the U.S., the worldwide adoption of a ship and port security code, and the imminent end of the controversial 130-year-old liner conference.
In the United States:
* U.S.-Flag Incentives. Expectations from a U.S. Department of Transportation (DOT) initiative to enhance the competitiveness of the U.S. Merchant Marine in international shipping (and also that of U.S. shipbuilding) were low. However, the American Jobs Creation Act, signed into law in early November 2004, has a provision that allows shipping companies to opt for taxation based on the tonnage of their U.S. fleet rather than on their income. This gives U.S. ship owners the same tax status as their European competitors. A DOT study found that the tax liability for a U.S.-flag vessel was nine times greater than the same vessel under the Norwegian flag, 32 times greater than under the U.K. flag, and 62 times greater than under the Panamanian flag. The amendment allows U.S. parent companies with internationally active non-U.S. subsidiaries to defer U.S. income tax on those subsidiaries' shipping-related income. Although this is significant and expected to help U.S. operators, it is probably not sufficient to bring back those who left the U.S. flag for bluer waters. Other operating costs, such as crew expenditures, continue to be major hurdles for U.S. operators.
A joint effort between the DOT Maritime Administration (MARAD) and the Export-Import Bank of the United States (Ex-Im Bank) to provide working capital loans to export service providers will help promote U.S.-flag shipping. U.S. companies that elect to ship U.S.-flag will receive up to a 95% working capital guarantee from the Ex-Im Bank. It is too early to judge the effectiveness of this program, however, one should not anticipate any immediate surge in U.S.-flag tonnage.
* Security-Related Developments. The International Ship and Port Security (ISPS) Code and the U.S. Maritime Transportation Security Act (MTSA) went into effect on 1 July 2004 with little fallout. The Container Security Initiative is operational in 33 ports located in 21 countries. The Customs-Trade Partnership Against Terrorism (C-TPAT) has more than 8,200 voluntary members that include importers, carriers, and intermediaries. The U.S. Customs Service will provide expedited clearance for shippers using smart containers. The smart box technology, which detects tampering during transit, is still imperfect with 5% of the boxes setting off false alarms. Smart box use will be mandatory for C-TPAT participants once the false alarm rate drops to 1%. The cost of this technology has fallen significantly and is projected to drop as low as $5 per shipment. Under the MTSA, the U.S. Coast Guard approved 9,200 vessel security plans, 3,100 port facility security plans, and 43 regional security plans. A Coast Guard advisory named seven countries-Albania, Congo, Guinea Bissau, Liberia, Madagascar, Mauritania, and Nauru-non-compliant with port facility requirements of the ISPS Code. A 42-year-old Bolivian-flagged general cargo ship became the first ISPS casualty when the Coast Guard denied her entry into the Port of Miami for non-compliance with the code.
Whether these have made shipping and ports safer is a different issue. There have been many questions about Department of Homeland Security (DHS) allocation and use of port security funds. An Inspector General of the DHS audit stated there has been no improvement in port security. Less than a quarter of the $517 million allocated between June 2002 and December 2003 had been spent by late 2004. The DHS distributes funds not based on strategic priorities but on equality. Hence, there is no assurance that the program is protecting the most critical and vulnerable infrastructure and assets. The Heritage Foundation concluded more could be accomplished by allocating the funds to the Coast Guard rather than individual ports. Meanwhile, the Bush administration recently sent a $1 billion supplemental request to Congress on behalf of the Coast Guard for security enhancements. There was a 28% increase in vessel detentions in the U.S. in 2004 for safety violations although the inspections themselves were held for security reasons. A Congressional Research Service report found that the nation's ports remain highly vulnerable to nuclear threat. A nuclear bomb of the size used over Hiroshima, if detonated in a U.S. port, would kill close to a million people, result in $500 billion worth of direct economic costs, and $ 1.2 trillion worth of indirect costs.
The added security costs will eventually be paid by the consumer. In April 2005. all U.S. Gulf ports started charging shippers and carriers minimum security fees of 5% of the dockage fees for each vessel call. Break-bulk shippers will be assessed 10 cents per ton, and liquid and dry bulk 2 cents per ton. Containers will be assessed $2 per loaded 20-foot equivalent unit (TEU) and cruise ships will pay a fee of $1 per embarking passenger. The Miami terminal operator, the South Carolina State Port Authority, and the Port of Corpus Christi have imposed a variety of assessments. It is expected other ports will also start imposing security surcharges.
A Yemeni appeals court upheld convictions in the suicide attack on USS Cole (DDG-67) in 2000 that killed 17 sailors. The suspected leader, Abdul Raheem AlNashiri, received the death penalty. Five others received jail sentences ranging from five to fifteen years.
* Short Sea Shipping. The U.S. Maritime Administration continues its enthusiasm for the "blue highways" although its fixation with the European model as the ultimate solution has come under criticism. The main objective of the Short Sea Shipping Cooperative Program (SCOOP) is to reduce congestion on coastal interstate highways, especially the east coast's 1-95. The Osprey Line Gulf Coast container-on-barge service that began in 2000 has expanded to cover Mississippi River ports. Columbia Coastal's Albany Expressbarge service between New York and Albany also made significant progress. It began in 2003 with a 25% price advantage compared to the $665 trucking cost between New York and Albany. Recently, the barge rate has dropped to as low as $350 per container. The Port Authority of New York and New Jersey is promoting such moves as part of its Port Inland Distribution Network (PIDN) and is planning additional spokes to Bridgeport, CT, and Providence, RI. Short sea operators have demanded a number of measures such as the elimination of harbor maintenance tax, change in labor laws, and waiver from Jones Act requirements.
* Maritime Security Program (MSP) The 2004 Annual Review discussed details of the revised MSP announced last year. The program is intended to boost the nation's military support capability while assisting the U.S. Merchant Marine and shipbuilding industry. The controversy between Maersk Lines and United States Ship Management (USSM) involving 15 MSP-approved container ships formerly owned by SeaLand has ended. USSM was established as a U.S company to operate the former SeaLand vessels in the MSP fleet when A.P. Moller purchased SeaLand's international services. The Maritime Administration decision to transfer the SeaLand ships to Maersk Lines was hotly contested by USSM who argued that Maersk Lines was not a U.S.-based company. In late February 2005, USSM withdrew its legal challenges. Maersk Lines will operate all ships that were chartered from USSM. The fate of USSM itself is unknown as it had no assets other than the bareboat-chartered former SeaLand ships. MARAD has named the 13 new MSP-approved ships that completes the 60-ship fleet. The new operators are listed in Table 1.
As the intent of the MSP program is to have a balanced fleet in times of national need, the first five slots of the new MSP were to be allocated to U.S.-flag tankers owned by U.S. citizens. Because there are no such ships, the slots have been temporarily allocated to three Maersk tankers under charter to OSG and two heavy-lift ships operated by Patriot Shipping. The intention is to replace them with U.S.-flag tankers to be built with direct subsidies under the National Defense Tank Vessel Construction Assistance (NDTVCA) program. The program was intended to construct five tankers, from 35,000-60,000 DWT in size, with the U.S. government subsidizing 75% of the cost up to a maximum of $50 million per ship. Applicants for the subsidy included OSG, AHL Shipping, Seabulk, Maritrans, Ocean Shipholding, Marine Transport Corp., and Northern Marine. MARAD was to announce the finalist for the initial funding of $75 million in early January. It appears that the entire program is in limbo despite Congressional approval, and the NDTVCA itself may have had a short life.
* MARAD Ship Scrapping Program. The U.S. Maritime Administration has a mandate to scrap 130 rusting ships in its management-the so-called "Ghost Fleet"-by 30 September 2006. This project ran into severe obstacles in 2004. As of February 2005, 121 of the ships anchored in Virginia, Texas, California, and Alabama, remain to be scrapped. Legal problems beset four ships sent to Hartlepool, England, for scrapping by Able UK Ltd., on a $17.8 million contract granted in 2003. In the U.S. and Britain, environmental lawsuits have plagued the program. There are also questions as to whether the company has the necessary permits. These points have led to skepticism about the agency's leadership, management acumen, and contracting practices.
* Liner Deregulation. The 1998 Ocean Shipping Reform Act allowed confidential contracting between shippers and carriers and eliminated carrier tariff filing requirements. Non-Vessel Operating Common Carriers (NVOCCs) were excluded from these benefits. After years of intense lobbying and legislative attempts, the NVO Service Agreement (NSA) was approved in 2004 to nearly match the Shipping Reform Act. This outcome was never in doubt as it was led by logistics heavyweights including UPS, Fedex, and BAX Global. NVOCCs can now offer NSA only to the beneficial owners of cargo, and co-loading is not permitted. Two groups representing shippers' associations have petitioned the Federal Maritime Commission (FMC) to reconsider the rule and halt contracting. NVOCCs must register with the commission before filing the service agreements and are required to publish terms of their NSA in a public tariff format.
Liner operators directly or indirectly controlled by a foreign government are categorized as controlled carriers under the U.S. Shipping Act and must comply with rate change notice provisions intended to restrict their ability to undercut other operators. In early 2004, FMC granted exemption to the two major Chinese operators from the 30-day waiting period for lowering tariffs under the Controlled Carrier Act.
* East Coast Stevedoring Contract and Related Issues. The International Long-shoremen's Association (ILA) ratified a six-year master contract in June 2004 by a narrow margin. There was considerable opposition from the Longshore Workers' Coalition. Their major complaint concerned the two-tier wage scale offered to those who joined the union after 1 October 1996 and the lack of a mechanism for the lower tier workers to move up. The east coast's ILA has less negotiating leverage than the west coast's International Longshore and Warehouse Union (ILWU). The ILWU negotiates for all its ports while ILA locals negotiate separate master and supplementary contracts. Both master and local agreements were rejected in Baltimore, Charleston, and Hampton Roads. By the next contract talks in 2010, veteran workers will no longer have the majority and negotiations are expected to be problematic. United States Maritime Alliance, the employers represented in the master contract negotiations, estimates that the contract will cost them $8.7 billion over six years, a 16% increase compared to current levels.
The investigation of alleged organized crime influence within the ILA gained momentum in 2004 and resulted in several indictments on charges of extortion, conspiracy, and mail and wire fraud conspiracy. Those indicted include the ILA Executive Vice President, the Assistant General Organizer and a vice president.
Globally:
* Security-Related Developments. There is considerable antagonism towards the ISPS Code, enacted globally on 1 July 2004, and its impact on ports and shipping. Figure 1 shows an Organization for Economic Co-operation and Development (OECD) estimate of the code's impact on the global cargo fleet, and Figure 2, the ISPS costs for U.S. ports. These are huge expenses that have fortunately coincided with a period of exceptional profitability in the industry. However, the rapidity with which some ships and ports received their ISPS certification in some parts of the world makes one question their validity.
The shipping community has compiled a list of problems caused by the lack of standardization in the interpretation and implementation of the ISPS code. The most common complaint is crew treatment and the denial of shore leave for certain nationalities. The presumption that every seafarer is a potential terrorist leaves ship owners in a difficult position. It is becoming increasingly difficult to attract and retain quality mariners capable of operating modern ships safely.
* Maritime Piracy. Although there were fewer attacks in 2004 compared to the previous year, piracy-related deaths increased. Pirates were most active in Indonesian waters and the Malacca Strait, with Nigeria being the most dangerous country for armed attacks on ships. For almost a month after the Boxing Day tsunami, attacks in the region declined significantly, lending credence to the belief that many pirates have close links to the Free Aceh Movement, which the Indonesian government treats as a terrorist organization. The lull was short-lived. In March, 35 pirates attacked an Indonesian methane tanker in the Malacca Strait. Although the ship was released, its captain and chief engineer are still being held for ransom. In the same month, the Singapore Navy launched its "Accompanying Sea security Teams" (ASST). Each security team will include eight navy personnel trained to operate a commercial vessel. Although armed, they will not have the power to arrest.
* Liner Shipping Competition Policy. The future of the liner shipping industry self-regulation mechanism-shipping conferences-became clear in 2004. The controversial practice that allows owners to collectively set freight rates and schedule services began in 1875. The system has historically received greater acceptability in Europe where the U.S. Shipping Act was often seen as an unnecessary interference in the market process. Ironically, the 130-year-old institution is coming to an end because of actions by the European Union Competition Directorate. The conditional anti-trust exemption given to conferences by EU in 1986 had met with constant opposition and a 2002 report called for its gradual abolition. In October 2004, the EU Competition Commissioner asked for stakeholder input in the proposed elimination of the system. The European Liner Affairs Association (ELAA), a trade association that includes the top 24 container operators, offered to stop collective rate-making on routes to and from Europe in early fall 2004. The ELAA proposal includes replacing conferences with trade associations responsible for maintaining market supply and data for decision-making by member carriers and use common formulas for estimating surcharges. The proposed model comes close to that currently in vogue in the U.S. trades. It would allow carriers to discuss ancillary charges but not rates. Separately, the Australian Competition and Consumer Commission also recommended putting an end to the anti-trust exemption granted to conferences in Australia's Trade Practices Act.
Market Developments
All major shipping markets reached new peaks in their revenue growth with use of the existing shipping capacity at record levels. It appears that anyone who had a ship could do no wrong in such perfect market conditions. Predictably, this led to drastic increases in both new and used ship prices.
* Dry Bulk Market. The Platou Report cites the 2004 market for dry bulk shipping as the "best market ever." The market's spectacular 2003 performance grew even greater in 2004 with annual capacity use averaging 97%. The average daily earning of Capesize and Panamax-size bulk carriers almost doubled from 2003 levels. Rates were highly volatile, with Capesize tonnage earning as much as $100,000 per day and averaging $62,500 for the year. Although volumes of all bulk commodities registered gains, the most notable increases were in iron ore and steel products. The voracious Chinese steel mills' demand for iron ore in 2004 led to a 41% increase in such imports although their steel imports decreased. U.S. steel imports, however, increased by over 50%.
* Tanker Market. Tanker owners had an outstanding year as shown by the $ 1.02 billion net profit reported by Frontline, the world's largest publicly listed tanker operator. The cause was the high demand for oil despite major hikes in crude oil prices. The increase in tonnage could not match the growth in demand, which led to daily hire rates for VLCCs surpassing $200,000 per day in November 2004 with overall high average rate levels (Figure 3).
* Liner Market. The liner bull market run that began in 2003 continued through 2004. All publicly listed liner operators reported higher profit and operating margins for the year with a few minor exceptions. The Drewry Shipping Report noted the annual revenue per TEU increased 6.4% in 2004. Although a mediocre level of growth was projected even for the trans-Pacific trade, the actual growth for the year was more than 9% overall and 13% for trans-Pacific routes. It appears traditional forecasting models are unable to capture the extraordinary market dynamics. An unfortunate consequence of this has been severe port and intermodal congestion on the West Coast discussed later. In late 2004, trade periodicals speculated about the possibility of Wal-Mart Stores buying out APL, the second largest container operator serving the U.S. trades. Critics believe there are more efficient ways to control shipping problems than through private ownership and vertical integration. Shipping annals dating back to the late 19th century cite many such failed attempts.
Maersk SeaLand resigned from the Trans-Pacific Stabilization Discussion Agreement (TSA) in September 2004. TSA establishes guidelines for rate actions and surcharges in the eastbound Pacific trade but has no enforcement power. Despite the flexibility permitted by current conference agreements, carriers are finding that their membership in cartellike agreements impedes their market agility and the ability to quickly respond to the increasingly sophisticated supply chain needs of their customers.
* Cruise Shipping. The cruise shipping recovery from the effects of 9/11 has been remarkable. Although ticket prices have increased by 40% to 50% in some cases, passenger reservations are at record levels. Carnival Cruise Lines, the world leader, had its most profitable year in 2004. Their net revenue yield increased considerably in 2004. Carnival operates a fleet of 77 ships and at any given time carries 175,000 people. Other major players like RCCL and Star/NCL are also reporting excellent market conditions. With fewer new ships expected to enter the market, cruise prices will continue their upward trend for the immediate future.
* Shipbuilding. The exceptionally buoyant shipping markets have led to increased orders for new construction. Shipyards in South Korea, Japan, and China have significant backlogs with delivery times three years away. Operators anticipate the boom conditions to last at least another four years. Despite a record number of container ships being ordered last year, as of late February 2005, orders had increased 60% over 2004. The majority of new container ships are for the Panamax (5,000-6,000 TEU) and post-Panamax (8,000+ TEU) category. Building prices have also soared over the years. It is believed that the cost of a new VLCC has risen 56% in the last year.
Korean shipyards are well established as the world leaders, gaining twice as many orders as Japanese yards in 2004. Although these orders will keep them busy for the next three years, contrary to expectations, two Korean yards, Hyundai and Samsung, posted a loss for 2004. A third, Daewoo, saw a significant decline in profit. All three yards have cut back on their order targets for 2005. The reasons cited for this anomaly include the increasing price of steel plates and marine equipment, and the appreciation of the Korean won. Chinese shipyards have also made important strides during the year. China State Shipbuilding Corp. (CSSC), the largest, is now among the top five builders in the world and is meeting its orders ahead of schedule. CSSC has established cooperative ties with Japanese yards as part of their aggressive market expansion. China Shipbuilding Industry Corp., the other major Chinese yard, has also posted significant growth in new construction.
Port and Terminal Operations
The year 2004 was notable for massive bottlenecks in major container ports including Long Beach and Los Angeles, as well as European ports. The West Coast ports introduced automation measures including computerized yard management programs and radio frequency identification (RFID) tags to track truck movements in the yard. The expected increase in terminal productivity did not materialize because of greater than anticipated cargo volumes, the introduction of the postPanamax 8,000+ TEU containerships, insufficient labor and truckers, increased security measures, poor infrastructure, and inadequate rail and intermodal capability. In addition to supply chain disruptions, consequences include carrier imposed surcharges and increased fuel costs. With trade volumes expected to post doubledigit growth in 2005, there is little comfort room for the ports and carriers. This will be further aggravated by the more than 80 post-Panamax ships expected to enter the trans-Pacific trade this year.
With a view to reducing congestion, West Coast marine terminal operators are planning to introduce PierPass, a program to divert cargo into off-peak hours. The $20 per TEU fee on daytime traffic at the ports of Los Angeles and Long Beach will offset additional costs incurred in night and weekend operations. Empty containers, bare chassis, containers using the Alameda corridor, and those containers that transit the terminal gates during offpeak hours will be exempt.
On the East Coast, the Port of New York and New Jersey's on-dock rail service is breaking records and the port is pushing ahead with a $600 million plan to build three new or expanded on-dock or near-dock rail terminals. The FastShip project appears to have resurfaced with a $40 million appropriation for building a marine terminal in Philadelphia. This will be combined with $75 million from the Delaware Valley Port Authority to build the terminal next to Packer Avenue Marine Terminal.
West Coast congestion problems have prompted carriers to increase their allwater services to the East Coast and major importers are establishing distribution centers there. However, more ships are required for fixed-day weekly service through the Panama Canal compared to the West Coast intermodal route. This has become a problem for some operators who are facing unprecedented hires for all container ships. A large number of new 8,000 TEU+ container ships are scheduled to enter the trans-Pacific and the Asia-Europe markets in 2005. It is expected that these will displace the current genre of 6,000 TEU ships presently active on West Coast-East Coast routes.
The Panama Canal
In retrospect, the 1997 acquisition of Southern Pacific Railroad by Union Pacific and the subsequent intermodal disruptions were a precursor of the West Coast congestion problems. The 9/11 disruptions, the 2002 West Coast port strike, and now the 2004 cargo surge have emphasized the fragility of a supply chain based on West Coast nodes. Accordingly, shippers have been demanding and carriers have been obliging them with increased services via the Panama Canal. The canal has entered into strategic partnerships with many ports on the East and Gulf coasts to promote all-water services. Although the all-water route would increase cycle time by close to two weeks, it offers the reliability that contemporary just-in-time supply chains need. It is not surprising that in 2004, the Canal posted a 10% annual increase in tonnage handled and a 6.7% increase in the number of transits for the year. More than 5,000 of the 14,035 transits in 2004 were made by Panamax vessels, whose approximate 950-foot length and 40-foot draft is the maximum size that the canal can handle. This increased the average canal transit time to 26.7 hours, a 17.4% increase compared to 2003 transits. The Canal Authority has taken steps to deal with the higher demand for its waterway. These include changes to the Panama Canal Transit Reservation (Booking) System, and an updated measurement and pricing system for container ships and other vessels with on-deck container capacity. The authority is widening the Gaillard Cut, deepening Gatun Lake and channels, installing a GPS-enabled traffic management system, and replacing locomotives. Further, there is a multibillion dollar expansion of the waterway subject to a forthcoming nation-wide referendum.
The Liquefied Natural Gas Era
Virtually every trade publication has a positive view on the future of liquefied natural gas (LNG), with the Economist magazine citing the 21st century as the "century of natural gas." The growth of LNG has been hampered by the expense of liquefying, transporting, and re-gasifying. However, current geopolitical realities have resulted in escalating oil prices with countries desiring to diversify energy sources while adhering to the stringent Kyoto Protocol. Conditions are ideal for extensive investment in LNG; it is available at many locations, is less harmful to the environment than oil, and new technology has lowered its associated costs. Although Japan and South Korea have been the historical LNG markets, it is anticipated that demand will rise significantly in the U.S., China, and India; all nations with a high thirst for oil. Currently, the U.S. energy consumption is about 1% LNG but is expected to rise to 20% in the next two decades.
The dominant LNG fields are in Iran, Russia, and Qatar. More than $30 billion is expected to be invested in the LNG market in the next 20 years by which time gas could very well rival-if not exceedthe oil market. World consumption will double in the next 15 years to almost five trillion cubic meters. This optimism is reflected in the shipbuilding market with a large number of LNG tankers being built despite their high cost.
There is a global rush to build LNG infrastructure to handle the anticipated traffic increase. The U.S. has four LNG terminals, the last one having been built 20 years ago, but new construction plans have emerged in coastal states from Maine to California. Despite an enviable safety record and the potential for significant economic gain, communities remain skeptical of the sector, including the potential for terrorist acts. Industry associations have undertaken concerted educational efforts. A 2004 Sandia Laboratory study for the U.S. Department of Energy found that "risks from accidental LNG spills... are small and manageable with current safety policies and practices."
The Human Element
Market conditions and the jubilant mood of ship owners may have been partly responsible for a unique international collective bargaining agreement that went into effect in 2004. Parties to the pact include the International Transport Workers Federation (ITF) and the Joint Negotiations Group representing employers. This agreement-the world's first global collective bargaining contract-is expected to bring stability for both parties. With open registry fleets now constituting seven of the top 10 flags, the two-year agreement may lead to a better working relationship between the traditional adversaries.
Overall, crew costs have risen, especially for specialized vessels. A 2004 Moore Stephens study found that crew costs for VLCCs went up by 7.8%. About 40% of the operating cost of a VLCC comprises crew costs, while that for a Panamax bulk carrier is about 46%. Although the ratings labor market is forecast to remain stable, there is a shortage of senior officers for the international fleet, especially of those working on specialized vessels such as VLCCs and LNG carriers. This situation will worsen with the delivery of an unusually large number of new ships, many of them specialized. The LNG sector faces a severe shortage of trained personnel. The going rate for an LNG Master under openregistry is close to $10,000 per month, almost twice the pay of a master on a traditional open-registry cargo ship. The International Association of Maritime Universities (IAMU), a global organization of premier maritime colleges and universities, is embarking on a joint effort to promote LNG education among member institutions and raise the standards based on a common curriculum.
Although the monetary conditions for seafarers may have stabilized, the profession is losing its charm. New anti-terrorism rules have been highly demoralizing for merchant mariners from most developing countries and the issue of shore leave denial in developed countries has become very sensitive. In November 2002, the U.S. made a strong case to the International Maritime Organization to introduce biometric identification for seafarers and replace the Seafarers' Identity Documents (SID) introduced in 1958. The standards for SID were developed at a record pace within 18 months under the auspices of the International Labor Organization (ILO). The ILO card would contain two finger-prints of the cardholder and other pertinent information to allow its use as a travel document. The U.S. State Department rejected the ILO card in 2004 and insists on each individual getting an entry visa from a U.S. embassy. The U.S. Transportation security Administration (TSA) is meanwhile developing the Transportation Worker Identification Card (TWIC). The TWIC technology is considered to be superior to the ILO card technology.
Foreign mariners find U.S. treatment to be arrogant while investigating environmental pollution incidents. A recent incident involving 13 Filipino sailors resulted in a diplomatic protest from the Philippines government after the crew had been restrained with shackles and leg irons in a Los Angeles jail. Gone are the days when merchant mariners were welcome in every port and treated as global citizens. The retention of quality merchant mariners is becoming increasingly difficult, especially when there is a desperate need for those with specialized vessel expertise.
Outlook
Will shipping continue its brilliant performance in 2005, making us run out of superlatives once again? All analysts are predicting that shipping's current bull market will continue in 2005 and perhaps into most of 2006. The Chinese economic engine will continue its spectacular growth in 2005 in most sectors, once again serving as global shipping's sheet anchor. Every shipping market is expected to do well despite the large new tonnages entering the trade, although some softening is likely in the dry bulk market. In the U.S. LNG sector, the recently opened Excelerate Energy Bridge terminal may be the harbinger of the future.
One cannot complete an annual review of the 2004 merchant marine without refleeting on how the year ended, punctuated by the catastrophic tsunami that reshaped major segments of coastline from Southeast Asia to the east coast of Africa. It served as an apocalyptic reminder that human ingenuity can only go so far and that we are at the mercy of the basic elements of nature. Although the maritime sector was spared from much of the havoc caused by the tsunami, it provided a timely lesson. The sea is too unpredictable to be lulled into complacency and the maritime sector, despite what appears to be its 21st century reincarnation, is only as stable as the next market downturn. Merchant marine stakeholders are still susceptible to unexpected tsunami-like conditions far beyond the predicting capability of industry analysts and observers. So, here's wishing our mariners "safe seas and fair winds" until next year.
Dr. Kumar is a master mariner and associate dean at the Loeb-Sullivan School of International Business & Logistics, Maine Maritime Academy. An internationally recognized maritime economist and transportation/logistics management educator with a distinguished record of scholarly publication, he had a successful decade-long operational career in the merchant marine. Dr. Kumar holds a Ph.D. in applied economics from the University of Wales, a master's in maritime business management from the Maine Maritime Academy, and is a graduate of the Indian Maritime Academy. He is a naturalized U.S. citizen.