The 2008 Annual Review referred to ominous signs of a change in market dynamics for the worse, replete with many lurking signs of uncertainty. There were clear signals, a year ago, that indicated a turbulent year ahead in general and a cloudy maritime horizon in particular. Although a decline was expected, the magnitude of the current downward economic spiral has far exceeded the predictions of every analyst in the field. Its impact has been so draconian that most players in the market seem perplexed. While the first half of 2008 left the maritime world confounded by high inflationary pressures and bunker prices that climbed as high as $750 per metric ton, the latter half provided the antithesis through a global financial meltdown and impending deflation. Sadly, the decline continues unabated in 2009. New terms like deglobalization are entering our lexicon. Every shipping market is in turmoil today, with the nations of the world and their citizens in disarray.
The dramatic growth of the Chinese economy, and its role as the mainsail of global maritime prosperity, has come to a sudden pause. There were indications in the past that despite economic slowdowns in developed nations, the momentum set off by growth in China, India, and other fast-developing countries could sustain the longevity of the upward cycle in shipping. This has proved wrong. The phenomenal growth in the Chinese gross domestic product (GDP) has slowed from 13 percent in 2007 to 9 percent in 2008 and may reach 6 percent in 2009—despite a $586 billion economic stimulus package that recently was enacted. Both imports and exports from China posted drastically lower numbers in the last quarter of 2008, compared with prior years. The trend intensified in early 2009. Empty containers are piling up in Chinese ports, and some of the nation's ambitious shipyard ventures are unlikely to see the light of day.
The International Monetary Fund revised downward its forecast of world trade growth; indeed, the very mention of any growth in 2009 is overly optimistic. Developed nations are expected to post a contraction in their GDP growth in 2009, a first in the post-World War II era.
The anchorage off hubs like Singapore is being transformed into maritime parking lots, filled with ships awaiting business. Many illustrious names in shipping have announced major cutbacks and vessel layups; and some have even ceased operations during the past year. They did not make national headlines only because of the more spectacular failures in the broader market.
There was, however, at least one shipping story that did enthrall the average citizen—unfortunately, it was about rampant escalation in maritime piracy and ship hijacking off the Gulf of Aden and Somalia. The latest in this saga was the U.S. Navy SEALs' 12 April 2009 rescue of hostage Richard Phillips, captain of the U.S.-flag containership Maersk Alabama. Most other stories in the industry have been comparatively lame and lack the pizzazz of the high-profile global macroeconomic developments mentioned previously. Nevertheless, they are important for maritime connoisseurs and are discussed here.
Market Developments
The 5 percent sustained growth in global economy over the past five years was exceptional and induced 8 percent annual tonnage growth in shipping capacity. Despite high oil prices, the first few months of 2008 continued that trend, the lull before the storm. It was during the latter months, in particular the fourth quarter, that the bottom fell out from the dry bulk and liner markets. The tanker sector maintained good returns almost until the very end of the year. Even the relatively nascent liquefied natural gas market contracted in 2008, with about 10 percent of the global fleet unemployed. Confidence level in the industry dropped 20 percent last year.
Dry Bulk
This was unquestionably the star attraction in 2007, with Capesize bulkers earning well over $200,000 per day. But the 2008 average daily hire of $97,000 posted by these ships masks the extreme income variations experienced. The 2008 Baltic Dry Index began at 8,702, peaked at 11,793 in mid-May, and then dropped precipitously to 773 by the end of the year, completing the most volatile year in history. Some Capesize ships did fetch reportedly $230,000 per day in June 2008—but in December they were earning as little as $5,000 per day. Along with the drastic reduction in demand resulting from the global credit crunch and the cooling Chinese economy, the supply of dry bulk carriers grew about 6.5 percent in 2008, aggravating the imbalance.
Tanker
Here was a winner in 2008. Average earnings approached $90,000 per day for very large crude carriers (VLCCs). Although the tanker supply increased 8.4 percent in 2008 through new deliveries, it was partially offset by many single-hull ships exiting the market.
Furthermore, the decline in oil price toward the year's end created a novel market for storage tankers. Reportedly, at least 30 VLCCs are currently used for storage. For the first time after 1983, the global demand for oil is forecast to decline in 2009. This, along with the planned delivery of replacement tonnage for single-hull tankers mandated for phase-out by 2010, started in early 2009 to impact market conditions and lower time charter rates. Oil consumption in 2009 is forecast to decline worldwide, including in the United States. The recent OPEC production cutback alone will eliminate the need for one VLCC per day, worsening the anticipated excess supply.
Liner
All forecasters were in unison a year ago that the projected increase in container-carrying capacity would exceed demand growth and impact carrier profitability. However, the pace at which the liner market collapsed in 2008 and early 2009 is simply stunning. A particularly painful indicator is the number of laid-up container ships. In late fall 2008, whereas 70 ships with a cellular carrying capacity of 150,000 20-foot-equivalent units (TEUs) were laid up, by mid-March 2009 the worldwide figure catapulted to 484 ships with a carrying capacity of 1.41 million TEUs.
As every container slot needs roughly three suits of containers, more than 4 million empty TEUs are now stacked up in ports all over the world. German owners who maintain beneficial ownership (meaning they own the ships, leasing them to operators who charter the ships and operate them commercially) of a number of the laid-up containerships have reactivated a mutually funded compensation scheme from 1 January 2009. (Carrier strategies under these severe conditions are analyzed later.)
Cruise
According to Cruise Line International Association statistics, the North American cruise industry grew 7 percent in 2007, created 354,700 jobs, and generated $18.7 billion in direct spending and $38 billion in total economic output. Florida continues to be the primary beneficiary of these activities, followed by California, Alaska, and New York. The active global cruise fleet now consists of 326 ships of 1,000 gross tons. All new ships delivered in 2008 were megaships carrying more than 2,000 passengers; such vessels now account for 51 percent of the global berth capacity. Thirty-eight cruise ships valued at $21.6 billion—roughly one-quarter of the existing fleet—are now under construction, including Royal Caribbean's 5,400-passenger ship Oasis of the Seas.
The top four North American cruise operators—Carnival, Royal Caribbean, Norwegian Cruise Line, and Princess—now carry more than a million passengers, with Carnival having a third of the market share. The Norwegian Cruise Line withdrew two of its three U.S.-flag ships, the Norwegian Sky and the Norwegian Jade.
The Queen Elizabeth 2 made her final call to the United States when she sailed into New York City's harbor in late fall 2008, then went on her final transatlantic crossing. This was the ship's 710th call to New York. She was Cunard Line's flagship for almost 35 years, traveling more than 5.9 million nautical miles and carrying more than 2.5 million passengers during her service life. The much-revered QE2 is destined to become a luxury hotel cum maritime museum in Dubai.
The U.S. Merchant Marine
The U.S. merchant marine experienced a lackluster 2008. There were no spectacular industrial developments of which to boast, nor private-sector milestones to chronicle. The message that reverberated throughout the year was one of extreme concern and negativity, initially driven by escalating fuel costs and stringent antitrust investigations; later by the ongoing credit crunch. Unsurprisingly, most of the notable maritime developments were driven, directly or indirectly, by a government agency.
MARAD Initiatives
The multi-pronged activism of a rejuvenated Maritime Administration under the leadership of former administrator Sean Connaughton, begun in late 2006, picked up momentum in late 2008. The promotional agency reached a number of epoch-making milestones before the recent change in presidential administrations, earning accolades from industry pundits domestically and overseas.
The agency released two insightful documents in early 2009, both highly noteworthy for substantive contributions and their potential to reopen long-simmering debates. An Evaluation of Maritime Policy in Meeting the Commercial and Security Needs of the U.S. argues that our policy does not support participation in international trades, the same conclusion that I reached in 1993. Very little has changed in 16 years in this regard. America's Ports and Intermodal Transportation System, the second report released in January 2009, promotes investing in a national port and intermodal system to better integrate the American economy with global developments and facilitate seamless cargo movements. These two documents constitute a powerful one-two punch in national maritime policymaking, though the timing is far from ideal.
The Stimulus Bill
The American Recovery and Reinvestment Act, referred to as the economic stimulus package, includes $100 million for the Maritime Administration of the total $52 billion to be spent on infrastructural improvements. The funds will be distributed as supplemental grants, 75 percent being set aside for small shipyards with 600 employees or fewer; up to $25 million for yards with 1,200 employees or fewer.
This is a massive increase compared with the $9.8 million distributed among 19 shipyards in 2008. The new grants will cover 75 percent of the cost of estimated improvements in capital and infrastructure for enhancing the cost-effectiveness and quality of domestic ship construction. States will receive $60 million for ferry and ferry terminal improvements. The Coast Guard will receive $450 million for acquisition, construction, and improvements, of which $195 million is reserved for shore facilities and aids to navigation; $255 million for priority procurements due to materials and labor cost increases and to repair, renovate, assess, or improve vessels.
The Army Corps of Engineers is slated for $4.6 billion in civil works programs, of which $2 billion is for construction, $1.9 billion for operations and maintenance, $500 million for the Mississippi River system, $25 million for the regulatory account, $25 million for investigations, $100 million for the Formerly Utilized (hazardous) Sites Remedial Action Program, and $50 million for flood control and coastal emergencies.
Alleged Jones Act Abuses
The Jones Act (Section 27 of the Merchant Marine Act of 1920) is a key pillar of U.S. maritime policy. Its cabotage provisions limit domestic shipping services to ships built, owned and operated by Americans. Jones Act operators came under extensive Department of Justice antitrust investigation into alleged execution or attempted cover-up of a wide-ranging conspiracy. This involved rigging bids, fixing prices, and allocating market share in the U.S.-Puerto Rico trade in early 2008, and it resulted in one conviction. A senior vice-president for yield management pleaded guilty and was sentenced to four years in prison, $20,000 in fines, and two years of supervised release. This is the longest sentence ever imposed in the United States for a single antitrust violation. Four other carrier executives, three from Horizon Lines and one from Sea Star, will be sentenced later.
The scope of the investigation has expanded to include the entire Jones Act realm, and customers have filed almost three dozen private civil antitrust lawsuits, consolidated in San Juan and Seattle. Government agents seized documents and computers from the offices of Horizon, Sea Star, and Crowley Maritime, and subpoenaed information from Trailer Bridge and Matson Lines.
The Hawaii and Guam lawsuits allege that Matson and Horizon fixed prices, limited capacity, and fixed domestic intermodal rates in the Guam trade. It may be sheer coincidence, but the current circumstances parallel the 1930s investigations into mail subsidy abuses of the Depression era that culminated in the Merchant Marine Act of 1936. The timing may be perfect for a new magna carta for American shipping.
Other Legal Developments
Nineteen years after the March 1989 Exxon Valdez oil spill, in June 2008 the Supreme Court reduced the $5 billion punitive penalty against Exxon Mobil to about $500 million. In a five-to-three decision, the court settled on a one-to-one ratio between compensatory damage and punitive damage and established a landmark precedent. Prior to this, the median punitive damage was about 65 percent, which prompted the court to settle on the new ratio as a fair upper limit in maritime cases. The court rendered a split decision on whether Exxon could be held accountable for Captain Hazelwood's recklessness. As a result, the lower court ruling that Exxon might be held responsible stood.
The Coast Guard interpretation of Jones Act ship construction rules was upheld by U.S. District Court of the Eastern District of Pennsylvania. This will allow continuing the new Jones Act constructions at Aker Philadelphia Shipyard and the General Dynamics NASSCO Shipyard. A federal court in Virginia, however, ruled against the Coast Guard in two cases for approving major repairs on board two Jones Act ships in foreign yards.
The Hawaii Superferry operations ceased on 16 March 2009, when the state supreme court ruled as unconstitutional the state law allowing the ferry to continue its services before completing the environmental impact study. The Florida attorney general and major cruise line operators came to a settlement regarding retroactively charged fuel surcharges on cruise passengers. Carnival Cruise Lines returned $40 million to irate passengers who had made their reservations before 7 November 2007, and Royal Caribbean and Celebrity Cruises returned $21 million.
Domestic Shipbuilding
The Aker Philadelphia Shipyard has delivered ten Jones Act ships in ten years; four additional ones are now under construction. On 1 January 2009, General Dynamics NASSCO delivered MT Golden State, its first product carrier to U.S. Shipping Partners. The San Diego yard will build nine Jones Act product tankers under the current contract. The governor of Mississippi announced that $20 million from Hurricane Katrina (2005) recovery funding will be used to establish a shipbuilding academy at the Mississippi Gulf Coast Community College.
Stevedoring Contract Negotiations
The International Longshore and Warehouse Union (ILWU) and Pacific Maritime Association signed their new six-year contract in late July 2008, maintaining the status quo. The union's bargaining tactic included a two-and-a-half-week work slowdown. The new contract is a disappointment for those who expected enhanced port productivity measures, and some may even find it a step backward.
To make matters worse, the stock market decline has hit the ILWU pension fund very hard, as has the decline in cargo volume and man hours worked. This may further escalate the cost of using West Coast ports and diminish their competitive status vis-à-vis ports on the East Coast.
Container Ports and Terminals
The economic slowdown affected U.S. ports in 2008, though not to the same level as it did ship owners and operators. Port congestion is no longer a concern. Ports are cutting back discretionary expenses, although long-term capital projects are still on schedule. Terminals in Los Angeles and Long Beach will eliminate Saturday gate hours in 2009 and scale back the PierPass program (which provided incentives to cargo owners for shifting movements to off-peak hours to reduce congestion). Savannah has decided to cancel Thursday night gate operations.
West Coast stevedoring hours dropped 5 percent in 2008, and they are expected to drop further. There is a major shift toward wheeled operations to eliminate the cost of duplicate container moves, with some terminals reporting 80 percent wheeled operations.
Maersk was unable to meet Charleston's minimum volume requirements in 2008 and paid a substantial penalty. The carrier will stop calling at this port after 2010. The Charleston business model is under severe criticism, and the port's leadership is in flux. The fundamental operational weaknesses of American ports remain unresolved.
Container moves per crane in U.S. ports barely reach two-thirds of the current global benchmark. Also the container throughput per acre in U.S. terminals is one-half of that in major Asian and European terminals.
Environmental Issues
As of December 2008, ships operating in designated areas on the East Coast are required to slow down to ten knots to protect the endangered North Atlantic right whales. The reduced speed zone extends out 20 nautical miles from major ports and applies to all vessels 65 feet or longer on a seasonal basis.
The Clean Trucks Program of Southern California ports received considerable attention in 2008. One key action item was to replace old harbor trucks with newer ones that burn ultra-low-sulfur diesel fuel and meet rigid pollution standards, at a cost of about $2 billion. The ports will subsidize 80 percent of the cost of buying a new unit, or pay the full cost of refitting a 1994 or later truck by imposing a $35-per-TEU fee on cargo owners. Pre-1989 trucks have been denied entry to the port since 1 October 2008, and by 1 January 2012, all harbor trucks must be 2007 or later models.
However, what began as an epoch-making environmental stewardship initiative transformed into a controversial tug-of-war that embroiled ports, labor unions, environmentalists, the trucking lobby, and, most recently, the Federal Maritime Commission (FMC).
The FMC determined that some provisions of the Port Fee Services Agreement submitted to it for anti-trust immunity would reduce competition—thereby increasing cost and affecting services. In particular, the Port of Los Angeles' plan to switch from owner-operators to employee drivers has been most controversial. The ports have remained steadfast and contend that the FMC has no jurisdiction over the case, but the regulatory agency is seeking unprecedented legal injunction against the ports of Los Angeles and Long Beach.
Today, independent truck owners operate most of the vehicles themselves. FMC's argument is that who drives the truck does not impact the environment. The ports' position—that trucks must be driven by employee drivers who are likely to be union members and not independent truck owners—seems irrational.
The ports began collecting the $35-per-container fee beginning 18 February 2009, after a two-month delay. Meanwhile, many truckers and shippers are making their own private financing arrangements, avoiding the port bureaucracy and eliminating the fee. If this course of action gains popularity, the desired air-quality improvements will occur without borrowing money from the ports. Every port in the nation is looking at introducing its own version of Clean Truck Program—and avoiding the legal mess created in Southern California.
Maritime Security
As per Department of Homeland Security statistics, almost a million transportation workers are now enrolled in the Transportation Worker Identification Credential program (TWIC). Its primary objective is to proactively approve those who may need unescorted access to secure areas within a port, including ships. The final date of nationwide full implementation is 15 April 2009. This has a direct impact on U.S. merchant mariners, as a TWIC becomes essential for any dealings with the Coast Guard.
The 100 percent scanning of all U.S.-bound containers in foreign ports by July 2012, mandated by the Safety and Accountability for Every Port Act, remains controversial. It is unlikely that this measure will be accomplished because of ongoing political, technical, and procedural problems, concerns that Janet Napolitano, Secretary of the Department of Homeland Security, has reaffirmed.
A World Customs Organization study to assess the economic impact of the 100 percent scan law identified major direct and indirect costs while recognizing some benefits. As of mid-October 2008, all import containers are required to have tamper-resistant seals that meet ISO standards. This may soon apply to export containers as well as those that cross the border through surface modes.
International Issues
New IMO Air Emissions Standards
The Marine Environmental Protection Committee of the International Maritime Organization (IMO) adopted amendments to the International Marine Pollution Prevention Regulation Annex VI in 2008. The new provisions will lower the global cap on sulfur content in marine fuel, progressively decreasing it to 0.5 percent by 2020 and aggressively limiting sulfur oxide emissions. Starting in 2016, certain newly constructed ships must have engines with very strict controls on nitrogen oxide emissions; greenhouse gas emissions from ships will also be reduced.
These changes meet the stated U.S. objectives and are expected to dissuade individual states from establishing their own environmental regulations. On 21 July, President George W. Bush signed into law the Maritime Pollution Prevention Act of 2008 (H.R. 802) and delivered the diplomatic instrument of ratification to the IMO, making the United States the 53rd state to ratify Annex VI. As a signatory, the nation can designate one or more Sulfur Emission Control Areas (SECA) off its coast where the emission level will drop to 0.1 percent by 2015. The United States and Canada are reportedly planning to establish the world's largest SECA, which will extend 200 miles off the joint coastline.
Shipbuilding Crossroads
The shipbuilding order book is currently valued at around $500 billion, of which about 75-80 percent is bank-financed. One immediate effect of the current credit crunch is that ship financing has become difficult for owners; furthermore, shipbuilders themselves are experiencing monetary problems. Despite this, 14 new Chinese yards and 5 new Korean yards came on line in 2008, building ships 30,000 deadweight tons or more.
Chinese yards have announced plans to increase deliveries in 2009 by 75 percent, and Koreans by 32 percent. The Scandinavian shipbroker R. S. Platou predicts that there will be structural overcapacity in the market unless there are significant cancellations of new-building orders and delays in anticipated ship deliveries this year. Order cancellations and sales of new ships at discounted prices have already started depressing values. Some Chinese shipyards have announced the cancellation of one-fifth of their orders.
End of Liner Immunity in EU
The European Union competition rules became fully applicable to the maritime sector with the lifting of liner conference block exemption on 18 October 2008. Liner conferences, collaborative agreements that allow member carriers to coordinate their services and freight rates on a particular trade route, receive immunity from anti-trust regulations in most countries. However, based on tightened competition rules that came into existence when the EU was created, last October liner conferences lost their freedom to collaborate among their members. It is now illegal to engage in such activities in EU trades, but liners are allowed to continue their membership in consortia operations that provide joint services and not price-fixing.
There is a general feeling that this option will also be curtailed further by 2010. Even the operation of tramp shipping pools (ships with no fixed schedule, unlike the liners that maintain a regular schedule of port calls) and pooling arrangements is coming under EU scrutiny. A pool involves a number of ships of the same type owned by different owners, operated under the same commercial management. The EU is expected to look at each pool on a case-by-case basis to ascertain whether its main purpose is joint production or joint marketing. While the former may continue in future, the latter may become a past privilege.
Liner Strategies
If liner operators anticipated their worst outcome in 2008 to be the elimination of antitrust immunity in EU trades, they were sadly mistaken. Dire predictions about the gloomy fate of the industry last year were not expected to reach calamitous proportions. But the bottom fell out from the market during the fourth quarter, and the situation continues to worsen in 2009. Freight rates have dropped in the trans-Pacific trade, with most ships sailing a third empty. With no viable conference system, the Asia-Europe trade, which in 2007 had been an industry savior, took a terrible beating in late 2008. Some carriers dropped freight rates competitively to an extreme level of marginal cost pricing; they charged only the applicable surcharges.
According to Port Tracker statistics from National Retail Federation and IHS Global Insight, U.S. retail container traffic dropped 7.9 percent in 2008 and will sink another 12 percent in the first half of 2009. As late as the end of August 2008, U.S. exports were growing at 20 percent, and many exporters complained of a container shortage. But even the lower-priced U.S. exports declined subsequently due to low demand, and the shipment of commodities such as waste paper has hit the trash.
There are so many dire forecasts in the market today based on various assumptions; as one example, depending on the source and its underlying assumptions, the trans-Pacific trade alone is expected to drop 4.1 to 15 percent in 2009.
Four container operators failed in late 2008. The maverick Senator Lines, under Hanjin ownership, filed for bankruptcy in early 2009, citing falling volumes, increasing competition, and rampant overcapacity. Meanwhile, containership order book still exceeds 50 percent of the current fleet, and global container carrying capacity is projected to rise another 12.7 percent in 2009. The confounded carriers are resorting to various strategies, conventional and unorthodox, to deal with their predicament. All carriers are pursuing traditional cost-cutting and administrative optimization measures. A classic example is American President Lines, with its plans to downsize staff and move from Oakland, California, to Phoenix, Arizona.
The reduction in bunker cost during the latter part of 2008 has made it pointless to pursue a slow-steaming strategy any further. A preferred option is to control the supply by idling ships at anchor or alongside, or laying them up. Operators are releasing chartered tonnage as they come off their contract; beneficial owners then lay up those ships. In the case of owned ships, operators prefer laying up older tonnage (ships). Laying up a ship means the ship is "parked" because there is no demand for services of that type of ship; when the ship is laid up, the owner can cut costs by measures such as reducing the number of staff onboard. One major operator has announced chances of laying up a fourth of its total tonnage.
One liner strategy is to save the high cost of major canal transits. With that of the Panama Canal now $250,000 for a fully laden Panamax ship, and the Suez $600,000 for a new-genre megaship, operators' intentions seem rational. Maersk Line is routing its Asia Europe service around the Cape of Good Hope, thereby not only saving the transit fee but also avoiding the pirate-infested waters off the Gulf of Aden—at a 4,000-mile increase in distance. Carriers have approached the Panama Canal Authority to suspend planned increase in tolls, and some are contemplating voyages around Cape Horn. Overcapacity in the market and the low cost of bunkers support this circuitous voyage strategy.
The members of the Transpacific Stabilization Agreement (TSA) approached the FMC in late 2008, seeking expanded authority to discuss capacity issues, driven by the 8 percent drop in eastbound container volume. This authority would have allowed them to control supply and match demand, but it would also violate our competition laws. The request would have gone into effect on 1 February 2009, had not the FMC asked for additional information. This prolonged the review period by another 45 days. Sensing futility and likely denial, in mid-February TSA and the carriers withdrew their request.
After much ambiguity and posturing, Hapag-Lloyd was purchased for $5.8 billion, by Hamburg's Albert Ballin investor group. Rumors continue of a merger between Hapag-Lloyd and Hamburg Sud, the other Hamburg-based operator. With market conditions deteriorating, further consolidations are anticipated in the sector, which is still highly fragmented. Figure 1 shows top liner operators with 2 percent or higher of the market share. Some of these may become candidates for a merger or acquisition.
Piracy
Maritime piracy made international headlines, with the whole world condemning this despicable act against humanity. Targets in 2008 included a U.S. naval supply ship on which an attack was attempted in September. The prize catch of the year was the Saudi Arabian VLCC Sirius Star, fully loaded with 2 million barrels of crude oil valued at $256 million and staffed by 25 crew members, while sailing on a $47,000-per-day time charter. The incident took place 400 nautical miles off the Kenyan coast.
In summary, International Maritime Bureau statistics list 293 acts of piracy against ships in 2008, compared with 263 in 2007. These resulted in 49 hijackings and 889 crew hostages, surpassing prior records. In addition, 46 additional ships were fired upon. Pirates used guns in 139 incidents, almost twice as many as in 2007, injuring 32 crew members and killing 11, with 21 missing and presumed dead. There were 111 incidents off the Gulf of Aden, 50 of them during the months of September, October, and November. Nigerian waters were the next most pirate-infested, with 40 reported incidents that resulted in 27 boardings, 5 hijackings, and 39 crew member kidnappings.
The economic coast of maritime piracy is becoming substantial. Somali pirates operating along 1,880 miles of free-for-all coastline reportedly earned $50-100 million in 2008. An approximate estimate of the total cost of maritime piracy today is well over $500 million per year. The cost of insurance alone has gone up from $500 per trip to $20,000 or more.
Naval ships and assets from 20 nations are active in Somali waters, although it is a formidable challenge to monitor a million square miles. The normal time span between sighting a pirate boat and their attempt to board the target is only about 15 minutes. Most attacks occur during daylight hours. Ships at speeds of 14 knots or less, with freeboard less than 25 feet, are ideal targets. Reportedly, given the potential bounty involved, many local fishermen have switched over to piracy, along with most former members of Somali security forces who have been unpaid for several years now.
UN Resolution 1851, adopted on 16 December 2008, permits member states to conduct air attack or go on land to fight piracy for the next calendar year. The EU Naval Force has initiated Operation Atalanta to support the resolution. The Combined Maritime Forces have announced the establishment of Combined Task Force 151 (CTF-151) to focus solely on anti-piracy issues, in addition to the earlier CTF-150 that concentrates on deterrence of destabilizing activities in general. The United States, United Kingdom, and European Union will sign bilateral agreements with neighboring countries to transfer alleged pirates and conduct fair trials locally, but not in Somalia given the legal lacuna there.
Seafarer Issues
Global macroeconomic problems have temporarily supplanted crew shortage problems in the industry. This does not, however, erase the inherent problem—which, according to the most recent Drewry/Precious Associates annual report, may culminate in a shortage of about 42,700 officers by 2013. The main supply nations for Western Europe in 2008 were Greece, the United Kingdom, and Italy. China, the Philippines, and India provide 75 percent of the Far Eastern supply. Ukraine, Russia, and Croatia dominate the supply from Eastern Europe. Figure 2 shows the year's leading supply nations. A seafarer wage increase of up to 12 percent is expected in 2009, especially in the tanker sector.
Recent reports indicate that recruiting seafarers is becoming difficult in many fast-growing Asian countries. This could become a huge problem, as Asian seamen now account for 44 percent of the world body of sailors, and in flags such as the oceangoing Japanese fleet, it is 94 percent. The IMO launched a Go to Sea campaign in November 2008 to attract new entrants to the shipping industry. The U.S. initiative to provide a maritime-based charter school curriculum in prominent coastal cities is a commendable development.
It would also help if the working conditions at sea were to improve. The recent trend toward criminalization through a seemingly reverse burden of proof standard imposed on innocent merchant mariners does not bode well. In the 2007 Hebei Spirit case, the VLCC was at anchor when hit by an errant heavy-lift Korean barge. The ship's officers took every prudent action possible to avoid the collision, yet they were indicted for criminal negligence. The two senior officers were found not guilty by a South Korean lower court in June 2008—only to be reversed by an appeal court in December. They were given tough jail sentences, although their actions were endorsed as extraordinarily prudent and seamanlike by virtually every professional association of merchant mariners. After notable global protest, the Hebei two received bail in early January. They are still prohibited from leaving Korea, although no one knows why.
Lloyd's Register has developed a Seafarer's Bill of Rights to facilitate the 2012 implementation of the ILO Maritime Labor Convention on new and existing ships. The new convention sets minimum standards on all aspects of working at sea and positively impacts crew recruitment, retention, and maritime safety in general.
In some U.S. ports, implementation of the mandatory TWIC card has resulted in charging foreign seafarers as much as $300-400 for simply escorting them each time they step on port premises. Some terminals have banned shore leave altogether. It is time to come up with a rational policy for the treatment of legitimate foreign seafarers who would like to step ashore in the United States.
Outlook
By all accounts, market conditions today point toward a brewing perfect storm. Every shipping market has been affected negatively, including the sub-markets, with the sole exception of the ship demolition sector. Trade volumes will continue sagging in all major markets. This, along with scheduled new deliveries, will worsen the tonnage oversupply even after substantial order cancellations and delays in delivery time. Capacity utilization will decline further, and ship owners will lay up more tonnage, especially in the liner sector. Key stakeholders, preoccupied with major fiscal problems, will inadvertently let the seafarer-shortage problem slip off the radar. The global growth model perfected after China's entry into the World Trade Organization will undergo radical restructuring after the global economy recovers. The ongoing psychological catharsis of the American consumer may extend well beyond two years. Recovery may come from 2010 to 2012. But in the short run, it does not bode well for shipping in general, and for the liner sector in particular.