The year 2013 will go down in maritime annals as one of extraordinary contradictions, with optimism finally dislodging the melancholic recent past. This is not to imply that the maritime sector is on tranquil waters or that we are on another upswing toward record profitability similar to a decade ago. On the contrary, the recovery is still very tenuous; in fact, the highly visible container shipping market worsened last year. However, the aura of a change in the overall market trend and confidence became very noticeable toward the last quarter of 2013. And, after a gap of several decades, there are even harbingers of a domestic maritime renaissance, driven by unprecedented developments in the energy sector.
As noted in this column for more than a decade, world shipping market undulations are now driven more by what is happening in fast-growing emerging economies, in particular that of China. Interestingly, its 2013 growth in gross domestic product (GDP) was the slowest in recent memory. Similarly, the other major developing countries—Brazil, India, Indonesia, Russia, and South Africa—also grew at a more sluggish pace than forecasted. The International Monetary Fund (IMF) attributes this to financial volatility in those emerging areas and its impact on domestic consumption and growth. Regardless, the IMF early estimate is that the global GDP grew 3 percent in 2013, mainly because of the recovery in the United States, European Union, and Japan after several years of fiscal hibernation. A good example of the U.S. recovery is the American Chemical Council’s report that the shale-gas boom alone led to the investment of more than $100 billion in the chemical sector, mostly foreign direct investment. Many leading chemical companies now look at the United States as the most attractive location for manufacturing activities.
China’s slow growth did not stop it from becoming the world’s largest trading nation in 2013, with preliminary estimates showing whole-year goods trade of $4.14 trillion. Raw material imports to facilitate China’s domestic infrastructure developments picked up pace during the second half of the year, partly assisted by falling iron ore prices. This gave a boost to the demand for shipping capacity.
Other major drivers of the shifting world maritime psyche include energy-related trades from the United States and a bumper grain crop. Even though worldwide economic growth is still sluggish and instability lingers in shipping markets, the recent annual Moore Stephens Shipping Confidence Survey shows that trust in the market is now at its highest level in three years, and survey respondents anticipate that freight rates and vessel values will rise. Similarly, the Norton Rose Fulbright annual survey of the transport sector (including 260 shipping companies) also found more than two-thirds of respondents with a positive outlook, although many still see excess capacity as a nagging problem. There have been many private equity investments in the tanker and bulk-carrier sectors in particular, although the longevity of their interest remains questionable. However, all indications are that the maritime psyche may have indeed turned the corner. Now we turn to the analysis of market conditions and other domestic and international maritime developments of significance.
Last year’s review stated that shipping markets had reached a nadir and there was nowhere to go but up. What no one could predict was when the uptick would start, or if the agony would simply linger. Now we know that it was exactly halfway through the year that the momentum shifted, first in the dry-bulk sector, then in the liquid-bulk (tanker) segment. The 2014 Platou Report records a modest 6 percent growth in the supply of shipping tonnage, leading to a slight increase in the average fleet utilization. The tightening market, though in its early stages, made an impact in all sectors (except the liner market); correspondingly, freight rates and the value of shipping assets went up, followed by an increase in the cost of building new ships and the price of good-quality used ships.
All these are harbingers of the long-awaited market recovery. But, invariably, they are accompanied by greater expenses. The Ship Operating Costs Annual Review published by Drewry Shipping Consultants predicts a 2–3 percent annual increase in operating expenses for the next two years. This includes crewing costs and other operating components such as stores, spares, lubricating oils, and repairs and maintenance. The introduction of the Maritime Labor Convention (MLC 2006) last year, along with rising fuel-oil quality standards and the forthcoming ballast water management regulations will escalate the cost of operating ships. As demonstrated by the two leading Korean shipping companies, ship owners are adjusting their business models to suit market realities. The Hyundai Merchant Marine is selling off its liquefied natural gas (LNG) transport business for $1 billion to concentrate on bulk carriers and containerships. Hanjin Shipping, the other major Korean operator, is disposing its bulk-carrier fleet to raise half of the $1.5 billion it needs to offset current losses.
Dry Bulk Market
The Baltic Dry Bulk Index, a barometer of dry-bulk carrier earnings, came off its lowest average of 920 points in 2012, to rise to 2,337 by mid-December 2013. Although the freight rates are still well below 2010 levels (see Figure 1), recovery from the doldrums reached in 2012 has been brilliant. This was brought about by many factors, one being the shrinking tonnage surplus (compared with 2012). Others include the higher-than-expected Chinese demand for bulk commodities such as iron ore, coal, nickel, and manganese, and the rising volume of grain exports from the United States and the Black Sea region. The deliberate slowing down of ships and its effect on fleet productivity has also aided the recovery. The 2014 Platou Report estimates an annual fleet-size growth of 8 percent versus demand growth of 9 percent, and thus a 1 percent increase in fleet utilization. This contrasts drastically with conditions in 2012, when the supply of ships exceeded demand growth by 5 percent.
Last year we discussed the dry-bulk shipping strategy of Brazilian mining giant Vale, involving the use of 35 very large ore carriers (VLOCs, or Valemax ships) of about 400,000 deadweight tons to better control the supply chain and lower the total logistics cost. Although these ships are built in China and have made safe port calls there, the Chinese Ministry of Transport has introduced a new safety regulation banning the berthing of such ships at Chinese ports as of 1 July 2014. This is antithetical to the ministry’s usual stance that the ports must always keep up with increases in ship size. The ban on Valemax ships is a testament to the political clout of the China Shipowners’ Association, of which members include major dry-bulk shipping companies who perceive Valemax vessels as a competitive threat. Vale is attempting to surmount this predicament by setting up a floating transshipment hub in the Philippines and an iron-ore storage and distribution center in Malaysia. The added cost will place Brazilian iron ore at a competitive disadvantage vis-à-vis its Australian counterpart, transported over a much shorter distance.
Whereas the first half of 2012 saw the crude-oil tanker segment doing well and the second half favoring product tankers, 2013 was exactly the reverse. The market for crude-oil transportation, the biggest seaborne commodity, remained moribund during the first half of 2013 but made a strong recovery thereafter, especially during the fourth quarter. Very large crude carriers (VLCCs) in particular fared very poorly until the turnaround. Yet their average single voyage earnings for the year are much lower than in 2012. Not surprisingly, AP Moller-Maersk, an established player in the tanker market that posted major losses in 2011 and 2012, exited the VLCC market and sold its 15 ships for $980 million to Euronav. This Antwerp, Belgium-based company is on an ambitious track to own 100 VLCCs and Suezmax tankers in two years. Euronav has teamed with the Blackstone Group and other private investors and has secured a $500 million six-year credit line from banks.
Although world oil production increased by 0.5 mbd (million barrels per day) in 2013, its seaborne trade shrank during the year. There was a major change in the dynamics of the crude-oil trade, with the United States replacing West African and Latin American oil with increased domestic production (of 1 mbd) and Canadian imports. The United States now needs one-third less crude imports than it did barely two years ago, and this is expected to drop even further. The European nations also imported less unrefined petroleum and opted for more refined oil. Even the Chinese, Korean, and Japanese import demand for crude oil was lower than originally forecasted, India being the only exception. The contraction in trade volume did not, however, impact the ton-mile demand, the key metric for tanker owners and operators. This is a direct outcome of the Chinese strategy of procuring unrefined petroleum from multiple source regions.
The delivery of new oil tankers slowed considerably in 2013 because of the financial problems of several Chinese yards. This helped slow down the average crude tanker fleet growth in 2013 to 4 percent versus the 7 percent experienced in 2012 (2014 Platou Report). Furthermore, intentional slowing of the ships to offset the high cost of bunker fuel also impacted fleet productivity and tonnage supply. Had it not been for these measures, fleet utilization in 2013 would have been far worse than the slight decrease registered in 2012.
The world tanker fleet is getting younger, with two-thirds of the operating ships less than ten years old and VLCCs less than eight years on average. In contrast, the average age of crude tankers being recycled now is 21 years. The shipping finance bank DVB estimates that for the next three years, there will be a modest annual demand growth of slightly more than 1 percent for tankers. These trends are already visible in the market today, and if the owners maintain discipline and do not indulge in speculative newbuildings, they could be on a good road to recovery.
The market for product tankers remains robust. There are some high-equity investments entering this submarket. The New York–listed Scorpio Tankers has 56 of this type of tanker on order now and recently sold off very profitably its 7 new VLCC hulls under construction. Diamond S is another fast-growing New York–listed company, operating 33 product tankers. It recently withdrew its initial public offering that would have raised part of the funds for ordering 10 more new tankers.
This is a market that worsened in 2013, and, had it not been for the slight increase in demand toward the end of the year, the outcome would have been even more troubling. The carriers’ attempts to raise freight rates were not successful, and the yearly average rate per 20-foot equivalent unit (TEU) dropped 5 percent from 2012. Drewry Shipping Consultants reports that only a small number of container operators made money in 2013, and, according to the Journal of Commerce, the industry averaged a profit margin of 1.7 percent during the last 15 years. Global container volumes increased by 2 percent in 2013 (CTS Container Trade Statistics). Furthermore, 1.4 million TEUs of new carrying capacity entered the trade, while 435,000 TEUs exited and 780,000 were laid up at year’s end. An additional 1.8 million TEUs of mostly bigger and more eco-friendly ships are expected to enter the trade in 2014. This will only depress the market even further, especially for the medium-size containerships, most of which are quite new. To make matters worse, the containership ordering frenzy continues unabated, and current new ship orders exceed one-fifth of the capacity in service.
Maersk Line, the market leader, reported profits of $1.5 billion from container-shipping operations in 2013. Despite a 7.2 percent fall in average freight rates, Maersk earned a 7.4 percent return on investment (versus 2.3 percent in 2012). It credits this to a new business strategy and a 10.6 percent reduction in unit cost resulting from the use of larger and more eco-friendly ships at slower speeds, along with a streamlining of services. The annual savings from bunker cost alone was $600 million, and an additional $800 million came from new network economies. In contrast, Neptune Orient Lines, the parent company of American President Lines, reported a loss of $76 million in 2013, five times less than the 2012 loss. Its average revenue per FEU (40-foot equivalent unit) dropped 8 percent. Combined with the decline in volume, this caused a 9 percent drop in revenue.
The 2014 Platou Report highlights a total investment of $65 billion in new ships in 2013. This is more than twice the annual increase a year ago. Shipyards are now mostly engaged until 2016. Although shipbuilding prices are going up, they are still well below the peaks from the last buildup cycle, mainly because of the precipitous drop in steel price. So conditions are still ideal for investors; hence the recent flurry of private-equity investments discussed earlier.
Greek owners alone invested $13 billion in 275 newbuildings, many in Chinese yards and financed by Chinese banks. Overall, China’s shipyards received 42 percent of all new orders in 2013, followed by South Korea with 35 percent, and Japan with 14 percent. Half of the Chinese new constructions are for domestic owners, whereas in Japan this is one-third, and in South Korea just one-tenth. The Chinese yards received contracts to build two of every three new dry-bulk carriers, while the Korean yards have orders for building twice as many tankers and containerships as the Chinese.
The depreciation of the Japanese yen has helped shipyards in that country and brought more orders than in the recent past. Hyundai Heavy Industries Co., the world’s largest shipbuilder, based in South Korea, suffered an 83 percent decrease in profit in 2013. Many smaller Chinese yards are in difficulty and are likely to be consolidated soon. According to the ship-classification society DNV-GL, ship owners are increasingly opting for LNG as the marine fuel. Forty-eight vessels currently use it, and 50 more are on order, including several in U.S. yards.
Despite the tarnished image of the cruise sector from a recent spate of illnesses and emergencies on board, the market grew spectacularly in 2013. The annual Cruise Lines International Alliance statistics document 21.3 million passengers for the year, more than half of them U.S.-based. The five-year global passenger growth rate is 15.1 percent. Seventeen ships were added in 2013. Twenty-four new ones, costing $8 billion, will begin service in 2014 and 2015. Of these, 17 will be of the megaship category (2,000+ berths). The newer ships are catering increasingly to the needs of the millennial generation, with state-of-the-art on-board communication options. The U.S. Coast Guard has announced plans to conduct unannounced ship inspections in 2014, with a view toward improving safety standards. The U.S. Environmental Protection Agency has provided temporary relief to cruise-vessel operators from the low-sulfur fuel-quality requirement of the North American Emission Control Area. Several operators are aggressively developing scrubber technology to receive the EPA waiver rather than switch over to the more expensive fuel. Carnival Cruise Line plans to invest $180 million in the research and installation of scrubbers on 32 ships.
The ill-fated Costa Concordia appears destined for continued attention until the very end; questions now relate to where the ship might be broken up and recycled. Turkey, the U.K., and China have made strong bids. These countries all have respectable experience with environmentally safe ship recycling. However, a 2008 European Union directive promotes the disposal of waste in close proximity to its location. So the Italian ports of Naples, Civitavecchia, Genoa, Palermo, and Piombino are all lobbying for recycling locally within Italy itself. The Tuscan port of Piombino, closest to the salvaged ship, is the leading contender, even though it has no current demolition facilities.
Passengers on board the Carnival Triumph, the cruise ship that suffered an engine-room fire last year, have filed several lawsuits against Carnival Cruise Lines. One among those, and sought by 33 passengers, is a lifetime monthly payment of $5,000 for medical bills and mental anguish, even though no passengers or crew suffered any direct injury from the fire. Despite the opportunistic nature of this lawsuit, it is generally believed that the clauses printed on passenger tickets are highly biased in favor of cruise-ship owners and operators. This and other lawsuits are likely to result in more balanced contractual obligations in future years.
The U.S. Merchant Marine
The American merchant marine is on an unprecedented upswing, with shipyards increasingly busy. We have not witnessed the sort of optimism that pervades the industry today since the enactment of the Merchant Marine Act of 1970 under President Richard Nixon, albeit for different reasons. The nation’s rapid emergence as a leader in the global energy market is driving this sudden burst of enthusiasm on the domestic maritime front. Interestingly, even the political uncertainty in Ukraine will add to potential opportunities for the U.S. export machine and the merchant marine.
The U.S. Department of the Interior plans to auction off 40 million acres more for oil and gas exploration and development in the Gulf of Mexico under the 2012–17 Outer Continental Shelf Oil and Gas Leasing Program. With such initiatives, it appears well within reach that the United States could overtake Saudi Arabia as the world’s top oil producer in 2015 (World Energy Outlook, International Energy Agency), peaking by 2020 and remaining the biggest producer until 2035. Such a dramatic turnaround for a nation that until recently depended on the Organization of the Petroleum Exporting Countries for oil has not yet entered the psyche of the average American, even though the International Energy Agency estimates a savings of $130 billion on energy bills alone for U.S. manufacturers in 2012. These developments are also creating a plethora of opportunities and jobs in the maritime and related sectors.
The Crude-Oil Card
There is worldwide interest in how the United States will play its new oil might. The export of diesel and gasoil, refined products, has already tripled from two years ago. Now the question is what will happen to the surplus shale oil and gas. The U.S. ban on the export of crude to countries other than Canada was imposed after the Arab oil embargo. A total elimination of export controls may be a political improbability. A lobby group called CRUDE (Consumers and Refiners United for Domestic Energy), representing refiners and users of refined products, is already in place to oppose reversal of the export ban. Their interest is in buying cheap crude, refining it, and then selling the products for which there are no restrictions. The American Petroleum Institute and other key established lobbyists are in favor of relaxing the restrictions.
The fact remains that the rising U.S. shale-oil production leaves us with excess crude. Also, U.S. refineries are more geared toward heavier crude oil than the sweeter version coming off the shale formations. A phased relaxation of the current ban is likely to be the most probable outcome, and a trial is already under way. As a test case, the Department of Energy published a notice of sale for 5 million barrels of crude from the strategic petroleum reserve, hoping that 50 percent of this oil will move by pipelines and the rest by Jones Act vessels. The DOE does not plan to seek any waivers in case U.S.-flag tankers are unavailable. Medium-size crude tankers will be the biggest beneficiaries of a lift in the ban. Because buyers will be based primarily in Asian countries, the distances involved guarantee good revenue for ship owners and operators. However, significant infrastructural upgrades are required to facilitate this radical turnaround in national petroleum logistics.
The availability of abundant LNG supply resulting from advances in drilling techniques is another contributor to the paradigm shift in the nation’s energy status. Whereas until recently public policy debates were focused on building LNG import terminals, today the thrust is on building export facilities and/or retooling import facilities. The DOE has approved 16 applications for LNG exports to Free Trade Agreement countries and 4 conditional licenses to export to non-FTA nations. Similarly to the opposition to crude exports, a coalition of U.S. manufacturers opposes exporting LNG and wants to keep it here for the domestic petrochemical industry.
Ever since the LNG trade began 50 years ago, infrastructural requirements have been one among the main challenges. Several years are needed to build the necessary facilities, whether on land or at sea. As an example, the first floating LNG facility planned by Excelerate Energy, off the coast of Texas, is now under Federal Energy Regulatory Commission review. Once approved, the construction will take four years. An effort to mandate the export of LNG on U.S.-built ships was rejected by the House Transportation and Infrastructure Committee. There are no U.S.-flag LNG ships today. It is projected that there will be a huge global infusion of these tankers within the next five years, as many as 100 of which will be focused on U.S. exports. Unless immediate actions are taken, there will be a worldwide shortage of ships and shore personnel qualified to handle these operations. Major LNG players are anxiously watching the U.S. market and the widening of the Panama Canal.
LNG As a Marine Fuel
There is significant interest in building ships that use LNG as the sole propellant or as an alternative fuel, because it meets new standards that will become mandatory in the North American and U.S. Caribbean Emission Control Areas as of 2015. It is also energy-efficient and cheaper than the low-sulfur gasoil, thus giving it tremendous potential as a marine fuel. The ship-classification society DNV GL estimates that the total number of LNG-powered ships will rise to 1,800 by 2020, and almost half of all ships by 2030. A 25–30 percent up-front cost is associated with building LNG-powered ships compared with traditional vessels. However, the projected savings in fuel are very high, and the payback may be as short as two years for some. Even converting an existing ship makes economic sense for a vessel with more than ten years of operating life.
The shift creates its own submarkets, because with the sole exception of the Scandinavian region, very little supporting bunker infrastructure is in place. The Jones Act U.S. Emission Control Regions and the Great Lakes Region are ideal for establishing a supply infrastructure. In addition, a copious supply of LNG is projected in the United States, which is promoting significant maritime research and creativity and having a direct impact on the domestic maritime sector. One example is the initiative to design LNG bunker barges by Jensen Maritime, a Crowley affiliate, for LNG America. These barges will provide vital bunkering capability along the U.S. Gulf Coast. The planned LNG America investment is reportedly in the $150 million range.
Another example is the September 2013 formation of the Society for Gas as a Marine Fuel to promulgate the best practices, policies, and procedures for the safe use of LNG as a fuel. This will be a sister agency of the Society of International Gas Tanker and Terminal Operators and will publish the international IGF Code (International Code for Ships using Gas or other Low Flash-Point Fuels) by 2017. The American Bureau of Shipping has formed a Global Gas Solutions team to leverage expertise in LNG and liquefied petroleum gas (LPG) operations. The Maritime Administration (MARAD) has selected two partners through a competitive process that will receive $1.4 million to study the increased use of LNG as a marine fuel and publish the data generated.
American Shipbuilding Rejuvenation
The construction of LNG-fueled ships has become a boon for U.S. shipbuilders. Toward the end of 2013, General Dynamics-NASSCO alone had orders for building ten LNG-ready or dual-fuel ships. Aker Philadelphia, VT Halter Marine, and Gulf Coast Shipyard are other yards with major LNG-fueled new-ship orders. The total value of these contracts was close to $3 billion at year’s end, and more orders are on the way. In addition, a number of other ships are being constructed for U.S. owners, including deep-water vessels, offshore supply vessels, and articulated tug-barges. There is even an export order for five platform supply vessels from a Brazilian owner. All these new constructions, with the exception of the container and container roll-on roll-off ships, are related to the energy boom. This is indeed a paradigm shift in U.S. shipbuilding, in which until recently, three-quarters of all new constructions were government-driven.
These developments are also creating well-paying new job opportunities, including mariners operating offshore supply vessels, shipyard workers building new ships or repairing or converting existing ones, and those involved in constructing and maintaining the energy infrastructure required for exporting crude oil and gas. According to the 2013 MARAD Report on the Economic Importance of the U.S. Shipbuilding and Repairing Industry, in 2011 this industry provided 107,240 jobs and $7.9 billion in labor income, contributing $9.8 billion to the nation’s GDP. Adding direct, indirect, and induced impacts, a total of 402,010 jobs, $23.9 billion of labor income, and $36 billion were traced to ship builders and repairers. With the ongoing boom in ship construction and repairs of the last two years, an update to the 2013 report will be an excellent boost to the morale of U.S. shipbuilding.
A Government Accountability Office (GAO) review of the Container Security Initiative program was completed in September 2013. Prescreening of U.S.-bound containers for weapons of mass destruction and other terrorist contrabands is now carried out in 61 foreign ports. The GAO recommends expanding this to more sites and making changes as needed. The Customs and Border Protection Agency is to report to Congress by August 2014 any changes to the country’s risk analysis and other program improvements. One school of thought is that any expansion should be driven by contraband type and not geography. If expansion is to be based on geography, the top ten countries with no established Container Security Initiative partnerships include India, Vietnam, Indonesia, Bangladesh, Chile, Guatemala, the Philippines, Turkey, Costa Rica, and Ecuador (in descending order, based on the number of bills of lading of U.S.-bound containers).
On the promotional side, the 2014 federal budget restored full funding for the Maritime Security Program at $186 million, removing the uncertainty of sequestration-driven budget cuts. The MARAD Title XI loan guarantee program received $38.5 million in funding, and there is an enhancement in the budget for the Army Corps of Engineers. MARAD has proposed including environmental features of new ships, such as their eco-friendliness, to the economic-soundness portion of the Title XI loan-guarantee application-review process. This will also promote continued research and commercial use of alternative-fuel system designs, hybrid propulsion systems, emission-reduction technologies, and ballast-water treatment systems.
In July 2013, three big maritime unions disaffiliated with the AFL-CIO’s Maritime Trades Department. They include the Marine Engineers’ Beneficial Association, the International Longshoremen’s Association, and the International Organization of Masters, Mates, and Pilots. The three maritime unions have founded a new organization called the Maritime Labor Alliance, along with the International Longshore and Warehouse Union (ILWU), the Inlandboatmen’s Union of the Pacific, and the American Radio Association. The current ILWU contract that covers dockworkers on the West Coast will expire on 30 June. The Pacific Maritime Association, which represents the interests of the 72 employers, is optimistic about reaching an agreement and avoiding industrial action. However, the negotiations will involve several controversial issues such as wages, pension and health benefits, automation, and union jurisdiction, as well as the threat of a widened Panama Canal, which will impact the market share of West Coast ports. Many shippers are concerned and have started making contingency plans. Any work stoppage will further bleed the eroding market share of West Coast ports; it is now down to 45 percent, unlike the dominance they exercised until few years ago.
In late December 2013, the U.S. Coast Guard published the final rule toward implementation of the “Amendments to the International Convention on Standards of Training, Certification and Watchkeeping for Seafarers, 1978, and Changes to National Endorsements” in the Federal Register. This has extensive impact on mariner education in the country, and the nation’s maritime institutions are in the process of implementing those changes. The Coast Guard issued a policy letter with guidelines for complying with the Ballast Water Management (BWM) discharge standards. According to the rule that went into effect on 21 June 2012, new vessels constructed on or after 1 December 2013 must have an approved BWM system in place upon delivery, and those built earlier must comply upon first scheduled dry-docking after 1 January 2016. Any extension request must be submitted 12 months before the scheduled implementation date. The Bureau of Ocean Energy Management has proposed increasing the limitation of liability for oil-spill removal costs and related damages from $75 million to $134 million. This is the first increase since the enactment of the Oil Pollution Act of 1990, and it will apply to offshore facilities in federal and state waters.
CSAV, a Chilean shipping company, pleaded guilty to criminal charges and will pay a fine of $8.9 million for its involvement in a conspiracy to fix prices, allocate customers, and rig bids of ocean-shipping services for roll-on roll-off cargo to and from the United States. Sea Star Line and Horizon Line have settled the price-fixing case against them and agreed to pay fines of $1.9 million and $1.5 million respectively. The former president of Sea Star Line was sentenced to serve five years in prison and pay a fine of $25,000.
On 16 March, U.S. Navy SEALs boarded the stateless tanker Morning Glory off the island of Cyprus at the request of the Libyan and Cypriot governments. The ship had loaded illicit Libyan crude oil despite a government ban at the port of As-Sidra, on the rebel-controlled eastern side of the country. A team of sailors from the USS Stout (DDG-55) took the vessel back to Tripoli and returned it to Libyan officials. The rebel leader accused the United States of behaving like pirates. The United Nations Security Council condemned the illicit export of Libyan crude and authorized formally on 19 March the future boarding of any ship suspected of carrying such oil.
Maersk Line has decided to spin off its north-south service between the Americas and name it the SeaLand as of 1 July. This will cater primarily to the logistical needs of small shippers that transport less than 500 TEUs per year and will not include the protected U.S.–Puerto Rico trade. The current fleet of eight ships will provide the core service, with additional chartered vessels to offer liner and third-party feeder services. The widening of the Panama Canal and the expected increase in feeder-ship activities in the region must have played a role in their calculus. More interestingly, the reintroduction of the revered SeaLand brand is noteworthy. Its aura and pioneering efforts remain legendary, although U.S.-flag container-shipping service today is a poor shadow of its once-dominating past. Regardless, return of the SeaLand brand by the market leader coinciding with the nascent U.S. maritime rejuvenation is perhaps a good omen of a new dawn for U.S. merchant marine interests.
By 2015, the maximum sulfur content in bunker fuel permitted in areas designated as Emission Control Areas in Europe and North America will drop to 0.1 percent (the same as gasoline or clean distillate) from the current 1 percent level. Ship owners and operators have three options to meet the new standard: switching to low-sulfur marine fuel oil, installing scrubbers, or changing to LNG-powered engines. However, many owners are still wary of the scrubber and LNG options because of high up-front costs and the absence of suitable port infrastructure. This will increase the demand for marine gasoil substantially, especially as both northern Europe and North America will make the switch at the same time and cause a price spike.
Another legitimate concern is that given the difficulty in enforcing these standards, some owners may simply ignore the requirement. Essberger, the largest chemical tanker operator in Europe, estimates a cost of €650,000 per ship per year to comply with all the new environmental regulations; a 10 percent increase in freight rates is required to offset it.
Ship Safety Issues
According to the 2014 Safety and Shipping Review from Allianz, shipping losses are on a downward trend. In the 2013 accident year, 94 ships were lost worldwide, 80 percent of the figure from 2012. Foundering (sinking or submerging) was the most common cause of losses, accounting for 73 percent. The regions of the South China Sea, Indochina, Indonesia and the Philippines, and Japan, Korea, and North China accounted for 37 percent of the losses. There were 2,596 casualties during the year. January is the worst month for accidents in the Northern Hemisphere, and July in the Southern Hemisphere.
On 17 June 2013, the MOL Comfort, a five-year-old, 8,100 TEU containership, cracked in two 200 miles off the coast of Yemen in the Indian Ocean. Investigation is under way, but wrongly declared container weights and improper stowage may have aggravated any existing structural problems and faulty construction. This is an eerie reminder of what happened to the MSC Napoli, a 4,400-TEU containership that also broke in two, in the English Channel on 18 January 2007. Among the 660 containers that did not suffer water ingress or damage, 137 were found to be 312 tons heavier than their declared weight. The U.K. Marine Accident Investigation Agency concluded that underdeclared container weights had caused the hull failure.
Another example is the Maersk containership Deneb that keeled over at its berth in Algeciras, Spain, in June 2011. A subsequent investigation found that one in ten of its containers were overweight by a factor of 1.9 to 6.7 times what was declared. In the United States, all containers loaded on a ship must have a weight certificate. The International Maritime Organization (IMO) is proposing a similar international requirement to enhance safety at sea. This has predictably run into opposition from certain cargo interest groups, but one hopes common sense will forge ahead and safety will prevail.
Another ongoing tragedy involves ships in distress and seeking a safe haven. Despite the historic, revered tradition of providing a safe port and assistance to ships and mariners in distress, there is a disturbing trend toward the “not in my backyard” philosophy. The ships Erika, Prestige, Castor, MSC Flaminia, and Stolt Valor all met such a tragic fate in recent years and will always remain a nightmare for mariners both young and old. Regretfully, the Maritime Maisie is the newest addition to this hapless list. The 44,000-deadweight-ton chemical tanker collided with the Gravity Highway, a car and truck carrier, nine miles off the South Korean port of Busan on 29 December 2013. The Hong Kong–registered Maritime Maisie, carrying 29,337 tons of acrylonitrile, caught fire. Her 27 crew members were rescued, and lines were secured to tow her to safety on 16 January. However, by then the ship had drifted into Japanese territorial waters, with the remaining cargo of 20,000 tons of chemicals and 640 tons of heavy fuel oil. Neither Japan nor South Korea has been willing to offer a safe haven for discharging the cargo, despite passionate pleas from several sources, including the secretary general of the IMO, and despite potential environmental damage to their own countries.
The coastal states are simply refusing to help. The IMO resolution on providing a safe haven to ships in distress, enacted after the Prestige and Erika disasters, is non-binding and toothless. Nongovernmental organizations such as the International Chamber of Shipping, the International Union of Marine Insurance, and the International Salvage Union are joined in a rallying cry for a more responsible approach toward assisting ships in distress. This is now a human-made tragedy and no longer just a collision at sea. It is a sad irony that two nations that dominate maritime activities are at the center of it.
Captain Apostolos Mangouras and Chief Engineer Nikolaos Argyropoulos of the ill-fated Prestige, denied a safe haven while in distress and discussed extensively in the 2013 Proceedings Annual Review, were acquitted from charges of criminal damage to the environment but convicted for disobedience after an 11-year judicial investigation that ended in November 2013. The Spanish High Court found the 78-year-old captain guilty of disobedience and gave him a nine-month suspended sentence for not taking the ship as far away from the Spanish coast as possible. Prior to the inquiry, the captain, who earned worldwide accolades for his professional judgment and actions, was held in jail for two years, including 85 days in a high-security prison.
A tally of major worldwide piracy incidents, successful or not, is illustrated in Figure 2, along with a linear forecast trend for the Gulf of Guinea. The rapid decline in Somali activities is very obvious. Correspondingly, an uptick is noted in engagements off the Gulf of Guinea and off Indonesian waters, where there is a particularly long history of maritime piracy.
The Somali pirates’ modus operandi is to attack underway ships, whereas in the Gulf of Guinea and Indonesia, targeted vessels are usually at anchorage. Tankers carrying petroleum products or chemicals are the usual victims of Gulf of Guinea pirates. They have succeeded in stealing petroleum products worth well over $100 million since 2010. The pinpoint accuracy with which the more egregious attacks are carried out clearly indicates that these actions are well coordinated. It is widely believed that Nigerian crime syndicates are behind this, and that they profit by selling off the stolen cargo.
Incidents have occurred off the coasts of Ivory Coast, Togo, Benin, Nigeria, Gabon, and recently even as far south as Angola, which gained significant attention. The Liberian-flagged MT Kerala was hijacked off the coast of Luanda, Angola, on 18 January while on charter to the Angolan oil company Sonangol. The charterer even accused the crew of disabling the ship’s communication system and faking the attack despite vehement denials by the ship’s Greek owner. The pirates stole more than 13,000 tons of gasoil during their week-long custody of the ship. They terrorized the crew and stabbed one of the engineers on board. Several governments are now stepping up to establish the West and Central Africa Maritime Security Trust Fund to counteract crime gangs and pirates.
Last year we discussed the case of two armed guards on board the Italian tanker Enrica Lexie who erroneously shot and killed two Indian fishermen off the coast of Kollam, India, on 15 February 2012 and caused a major diplomatic row between India and Italy. The Indian Supreme Court recently dropped anti-piracy charges against the two Italian marines. They are, however, still liable for prosecution under the Indian legal system and are now out on bail but prohibited from leaving India.
Adequate preparation and compliance with best practices are increasingly recognized as being essential to thwart pirate attacks. Although this includes a defined role for private security firms, there is a concern that some are no better than unscrupulous mercenaries. There have been incidents involving security firms with U.S. connections, such as the recent drug-overdose death of two guards (who were former Navy SEALs) on board the Maersk Alabama. The AdvanFort misadventure in India led to the arrest of its entire crew by Indian authorities. A recent Maritime Executive op-ed piece by Klaus Luhta proposed a blueprint for reforming maritime security contractors and making them accountable. This is long overdue for action and should become a priority.
Despite the enactment of the Maritime Labor Convention (MLC 2006) last year, instances of mariners being abandoned in foreign ports and/or not being paid their hard-earned wages by dishonest ship owners are far too many. A case in point is the abuse suffered by Russian and Ukrainian seafarers on board the Dyckburg, a ship registered in Antigua and Barbuda. In spite of the wide support from unions and several nongovernmental organizations, it took more than two years to get their lawful $75,000 in back wages and repatriation expenses. In April the International Labor Organization reviewed a proposed amendment to the MLC 2006 that, if approved, will put an end to this gross injustice.
Previous Proceedings annual reviews have discussed the case of unfair targeting of mariners by prosecutors. Seafarers’ Rights International, a research center dedicated to advancing the interests of seafarers, conducted an extensive survey in 2011 and 2012 related to this issue and released its findings in 2013. Surveys were distributed through seafarers’ centers in 18 countries, and 3,480 responses were received. Appropriate statistical techniques were applied to make sure the survey sample was random and the results valid. The findings confirm that while criminalization is not rampant in shipping, widespread fear about it exists among mariners; hence they are reluctant about pursuing a maritime career. Among those who do pursue the career, disinterest in seeking higher responsibilities was found. Following are some of the major findings:
• 8 percent of participants had faced criminal charges, 4 percent had been witnesses in criminal prosecutions, 33 percent knew of colleagues who had faced criminal charges.
• The odds of facing a criminal charge was 19 times higher if the mariner was a master compared with being an oiler.
• Being the master of a ship was one of the most important determinants of the probability of facing criminal charges and being convicted.
• 62 percent of all mariners who had faced criminal charges had not had their legal rights explained to them.
• 61 percent of all mariners who had faced criminal charges felt they had not been treated fairly.
• 58 percent of all seafarers who had faced criminal charges felt they had been intimidated or threatened.
These findings confirm the extreme and unreasonable difficulties involved with being a mariner in today’s world. While I am not advocating that the guilty should be spared, the apparent double standard in the treatment meted out to mariners and their ships when something goes wrong is a grave injustice. Much as society wants zero defects and accidents, invariably they do occur for reasons other than human error. We have had far too many Captain Mangourases of late. Are we setting up our future ships’ officers for a condemned career? I hope not.
The Danish Maritime Authority released the final report, its Survey on Administrative Burdens among International Seafarers, in July 2013. There were 1,934 responses from 34 nationalities. Although the results cannot be generalized because one particular nationality dominated the responses (55 percent of the total were Ukrainian), the findings are very illuminative of what happens on board today’s merchant ships. They are categorized as perceived levels of administrative burdens and the relevance of those burdens. The report divides administrative burdens into seven main areas of work as follows:
• Preparation of and participation in PSC (port state control), FSC (flag state control) or class inspections
• Preparation of and participation in vetting inspections
• Handling of ISPS (International Vessel and Port Facility Security) requirements, including filling out ISPS papers and mandatory watch duties on deck
•Planning and execution of exercises and drills according to International Safety Management (ISM) and ISPS codes
• Using and maintaining Internal Management Systems (e.g., Quality Management System, ISM, etc.)
• Completion of various journals and record books (e.g., oil, garbage, deviation, etc.)
• Completion of port and pre-arrival documents such as crew lists, passenger lists, declarations, etc.
Far too much paperwork is associated with ship arrivals and departures, and the old adage “cargo travels on paper” still remains relevant despite advances in digital technology. The survey results indicate sincere concern about the value of some of the repetitive documentation mandated by the long list of authorities awaiting ships coming to a port. The IMO should streamline the redundant paperwork burden on mariners so that they may focus more on safety and security issues.
Liner Shipping Woes
The very basic liner shipping market structure and business model confounds most analysts and observers. This is a sector that changed radically from the shipping-cartel days of its formative years to a regulated quasi–common carrier status by 1916; hence, it is widely scrutinized for any abuse of market power under the provisions of the current Shipping Act. Few would deny the role of containerization in facilitating global markets and bringing down the cost of transporting consumer goods. Container operators have attempted numerous strategies over the years, yet their inherent economic problems persist. Their services have become more of a commodity with little premium for quality. Furthermore, their quality worsened throughout 2013 according to the latest Drewry Shipping Consultants’ report on carrier performance. In the meantime, the market that was fairly contestable until the 1990s seems to have erected effective barriers to entry, and all but the top-tier operators are being squeezed out. The top-ten container operators that now control 63.3 percent of the worldwide capacity share are, from largest to smallest: APM Maersk, Mediterranean SC, CMA CGM Group, Evergreen Line, COSCO, Hapag-Lloyd, APL, Hanjin Shipping, China Shipping, and MOL. Statistics from Alphaliner, the Journal of Commerce, and Clarkson all validate the increasing dominance of these top-ten operators.
It appears that the current market strategy is to build bigger and more efficient ships whether or not this makes economic sense, enter into a convenient alliance of carriers of similar strength, and pray for profits or exit the market, usually at a high exit cost. A cost-based business strategy has finite limits, and there is only so much that can be accomplished through cost reductions. Besides, such a strategy has an inherent bias toward lowering price, which only makes sense if the cost-reduction rate is higher than the revenue-loss rate. This is more likely with a nascent industry and not with the relatively mature liner shipping services.
Ever since the ratification of the U.S. Shipping Act of 1984, liner operators have benefited from their ability to form alliances of convenience in U.S. trades and bring down their operating costs. The latest using this strategy is the planned gigantic P3 alliance, which still requires approval by China and will bring together the shipping assets of Maersk Line, MSC, and CMA CGM, the top-three operators. The planned alliance will have 252 ships, with an average capacity of 13,000 TEUs and 28 scheduled strings of operations linking the three arterial trade routes of Europe-Asia and the transpacific and transatlantic routes to the United States. This is expected to lower the unit cost of the containers they carry, bringing together elements of the same strategy that gave Maersk Line a profit of $1.5 billion in 2013 at an even grander scale.
The remaining top carriers are strengthening their own two alliances and seeking new partners as a competitive response. However, their ability to match the P3 might is questionable. Is the P3 attempting operational efficiency and cost reduction, or is this an endgame to bankrupt competing carriers? Only time will tell how the game theory plays out. However, if these agreements receive approval from Chinese regulators, the bigger ships may start arriving on the U.S. East Coast by mid-2014. This is well ahead of the targeted completion of the Panama Canal widening, which was when the East Coast ports were hoping to be ready to handle the logistics of the “ultra-large container vessel” visits.
In the meantime, the Panama Canal widening project is running into engineering problems and contract disputes. It is now unlikely that the widened canal will be operational before 2016. The new locks, when ready, will allow ships with a beam of 160 feet to transit the canal, which will include containerships with up to 13,500-TEU capacity compared with the current 5,100-TEU maximum capacity. Several other global trades are also expected to benefit, such as U.S. grain exports, Brazilian soybean trade, coal exports from Newport News to China, and Asia-bound LNG shipments from the Gulf of Mexico.
The dispute between the Panama Canal Authority and the contracting partners is over a $1.6 billion cost overrun to the original widening pricetag of $5.25 billion, raising the total to nearly $7 billion. To put this in the right perspective, the total cost of widening a vital passageway between the Americas to facilitate global commerce for several decades into the future, and the almost 20 years of rigorous research and engineering preparation that has gone into that colossal effort involving thousands of people, is worth about one-third of the price paid by Facebook when it purchased WhatsApp for what was apparently a bargain price. Welcome to the real world! The future is certainly not what it used to be, in the words of renowned French poet, philosopher, and essayist Paul Valéry, who remains as visionary as ever. Au revoir!