The tantalizingly upbeat ambience that prevailed toward the end of 2013 led most pundits to predict an improving world economy in 2014 and a period of rising expectations in the shipping industry. Although the year was not recessionary by any means, the sluggish 3.3 percent global economic growth simply failed to unshackle key maritime markets from their prolonged morass. According to Michael Grey of Lloyd’s List, the maritime sector was hit by numerous black swans. In the United States, despite positive developments in the maritime sector after decades of inertia, the aggressive Saudi Arabian stance to maintain the Organization of the Petroleum Exporting Countries’ (OPEC) market share has temporarily throttled the shale oil-driven optimism. Even the unanticipated steep decline in fuel-oil prices was insufficient to generate a rising tide that would lift the global maritime community, and shipping confidence is now at its lowest level since 2012.
The IMF World Economic Outlook reports that market fundamentals—marginal revenue exceeding marginal production cost—have positively impacted the supply of various commodities, with iron ore and oil as prime examples. This has not been matched by a corresponding growth in demand, which has led to a sharp reduction in commodity prices in recent months and declining shipping fortunes in general. The operators of oil tankers (and also liquefied petroleum gas [LPG] carriers) are exceptions and have benefited from the ongoing oil market “contango” (indicating a current oil price lower than that expected in future months). In general, excess shipping capacity continues for crude oil tankers and LPG carriers. The conditions are not expected to change in the short run, according to a recent Danish Ship Finance Report forecasting that world trade will grow 3.5 to 4 percent annually until 2017, and that the world fleet will grow 6 percent.
Considering last year’s shipping markets through Dickensian eyes, it was the worst of times in recent years for the dry-bulk carriers and, unexpectedly, good times for the oil tankers, with all others in between. One can only imagine how bad the year would have turned out had it not been for the precipitous oil-price drop that began in September 2014 and the accompanying lower fuel expenses. This has helped to more than offset the increase in other operating-cost components, including crew wages, repair and maintenance costs, and insurance expenses.
Figure 1 summarizes the current global shipping and offshore fleet, whether in service or under construction in various yards, now valued at a total of $1.6 trillion. An additional $1.4 trillion in new assets is expected over the next decade. This includes several specialized ships such as liquified natural gas (LNG) carriers, which alone have attracted close to $30 billion in the past few years. Many private-equity firms invested in shipping markets in the post-2008 financial-crisis environment anticipating a windfall. They are now restructuring their commitments and exiting the shipping sector.
The Baltic Dry Index reached its lowest ever level on 18 February 2015, when it settled at 509. The lackluster growth in demand for dry-bulk commodities, along with surplus shipping capacity in the market, is driving the current outcome. Shipowners appear to be realizing their folly, at least temporarily, as evidenced by the declining number of new building orders in 2015, presently at one-sixth of the volume from a year ago. In addition, it has become difficult to find financiers even in traditional shipowning nations to support fleet expansion. Other signs of worsening conditions include an increasing number of bankruptcies, the declining asset value of dry-bulk ships, and passionate pleas from leading owners to hold back on adding new capacity. During the month of February 2015 alone, three dry-bulk owners—one each from Denmark, China, and the Republic of Korea—filed for bankruptcy protection.
Although 2014 ended registering a strong growth in iron-ore exports from Brazil to China, it only helped the Capesize ships, and was not helpful in offsetting the overall decline. The Baltic and International Maritime Council estimates that the supply of new dry-bulk ships this year will decrease to 5.1 percent, from 5.5 percent in 2014, while the Danish Ship Finance Report projects a 7 percent fleet growth. Regardless, with estimates for dry-bulk demand growth only between 3 to 5 percent, it is highly unlikely that the market will recover from its current woes in the immediate future. Under these conditions, owners taking delivery of new bulk carriers are unlikely to meet their variable cost, let alone make a contribution toward fixed cost. Scorpio, an aggressive recent entrant to the dry-bulk market with significant private-equity support (discussed in previous annual reviews) has announced plans to convert nine of its Capesize new building contracts to product tankers and reduce exposure to the dry-bulk market.
Enlightened diplomacy between Brazilian and Chinese leaders seems to have resolved the Valemax controversy, which was also discussed in previous annual reviews. Vale, the Brazilian mining giant, invested in a fleet of ultra-large bulk carrier ships of 400,000 tons deadweight to compete with Australia in selling iron ore to China. However, its commodity competition strategy was upset by a 2012 Chinese government edict to ban ships of that size based on safety concerns, allegedly at the behest of competing Chinese domestic carriers. After President Xi Jinping’s state visit to Brazil in 2014, China announced plans to relax the Valemax restrictions and allow visits to ports that could safely accommodate the big ships. In addition, Vale also secured a $7.5 billion loan from the Chinese EximBank and the Bank of China. Many Chinese ports are anxious for Brazilian business. The big ships will, however, worsen excess-capacity woes by displacing the currently employed fleet of Capesize and Panamax bulk carriers plying this route. Five leading dry-bulk operators of Capesize ships have already announced the formation of a joint entity called Capesize Chartering to consolidate their commercial activities. This is the first such development in the dry-bulk sector.
The tanker sector did unexpectedly well in 2014, as volatile oil prices created numerous trading opportunities. Crude-oil tankers in particular started the year maintaining the upward trend of the second half of 2013 and made significant rate gains during the second half of 2014, including a $9,000 hike in one day in late October.
The upward buoyancy in this market is primarily driven by the contango market condition and the surplus availability of oil. The Saudi Arabian decision on 27 November 2014 to maintain OPEC production of 30 million barrels per day (mbpd) despite increasing non-OPEC production gave further boost to the tanker-market recovery, and VLCCs were earning more than $80,000 per day in mid-January 2015.
The International Energy Agency expects crude-oil demand to increase one mbpd in 2015 and 2016. Some oil traders are storing huge inventories on board large tankers to take advantage of the contango situation and have created a temporary additional revenue boost for tanker owners. A typical VLCC can store 2 million barrels of crude oil, and ultra-large tankers can handle 3 million barrels. Ship-owners are designating their older, relatively non-competitive, less fuel-efficient large tankers for storage at very attractive daily hire rates, thereby creating even more opportunities for the rest of the fleet.
It is important to note the role of supply-side conditions in leading toward the current outcome. Excess capacity in the tanker market has been declining, and all single-hull tankers are now restricted from international movements. The Baltic and International Maritime Council estimates that the 2014 increase in crude tanker supply will be 1.3 percent, increasing to 1.7 percent in 2015. For some smaller ship sizes such as Aframax tankers, the capacity has shrunk. The overall result of these conditions is an increase in asset value and price of most categories of oil tankers. Should there be an OPEC decision to cut daily production, or a split among OPEC cartel members on oil-production quota, this will not augur well for tanker owners, and the conditions may deteriorate as rapidly as recent improvements. Another imponderable is non-OPEC producers’ resilience to withstand the Saudi Arabian duopoly challenge.
The liner market again continued its inherent unpredictability, with a clear consolidation among key operators such as Hapag-Lloyd and CSAV (Compañía Sudamericana de Vapores); Hamburg Süd and CCNI (Compañía Chilena de Navigacion Interoceánica); CMA CGM (Compagnie Maritime d’Affrètement Compagnie Générale Maritime) and OPDR (Oldenburg-Portugiesische Dampfschiffs-Rhederei GmbH & Co.); and Horizon Lines and Matson. However, the widely expected P3 alliance involving Maersk Line, Mediterranean Shipping Company (MSC) and CMA CGM (discussed in the 2013 annual review) did not materialize. Although the U.S. Federal Maritime Commission and the European Competition Directorate saw this as a larger alliance, Chinese regulators found it to be more of a merger. The fallout from this initiative led to a number of new alliances of convenience and strategic repositioning.
On a positive note, excess capacity in the market is at its lowest level in recent years, and the idle container shipping capacity is far less than a year ago. Containerisation International statistics show that about 631 million 20-foot-equivalent units (TEU) were handled in 2014, of which 366 million (58 percent) were in the top 30 ports. The demolition and recycling of older tonnage continued at a high rate in 2014, although not as high as 2013. The anticipated gains from cost-cutting and alliance formation are readily visible, but this is not a rising tide by any means. Operationally, the two major canal-enhancement projects are progressing well, and ports on the U.S. East Coast are on the eve of welcoming 14,000 TEU ships.
Regretfully, the many ominous sides to the perennial Shakespearean tragedy of liner markets, which date back to the late 19th-century era of the British Royal Commission on Shipping Rings and fighting ships, are also flourishing. The ordering and delivery of new ships remain very high, with Lloyd’s List Intelligence estimating a net increase of 8.8 percent in liner capacity in 2015 and the addition of one-fifth of the existing capacity in three years. Additionally, the operation of containerships at slow speed, which began in 2009, may soon cease because of the drop in fuel-oil price. An estimated 2 million TEU container-carrying capacity owes its business to the slow-steaming strategy. Furthermore, as most of the new ships being ordered are ultra-large, the average size is increasing at a very high rate (from 6,600 TEU in 2013 to 8,000 TEU capacity in 2015). All ports, from behemoth gateways to smaller regional facilities, are increasingly handling larger ships even though many are not ready for the challenge. This is ratcheting upward supply-chain bottlenecks at all port levels. Lastly, although trade volumes have grown marginally, freight rates still remain volatile. New ships entering the market will only worsen this situation.
Based on Maersk Line’s stellar performance, the parent company has allocated $3 billion per year between 2015 and 2019 for investing in new ships and equipment. The focus will be on the current strategy of cutting cost and slowing speed. Maersk plans to build more Triple E ecoships with slightly higher container-carrying capacity. The carrier has ceased the Daily Maersk, a higher-priced premium service with guaranteed delivery times, introduced four years ago. The apparent preference of global supply chains for lower cost as opposed to predictability remains unproven, but this would confirm the commoditized nature of east-west liner shipping services.
Other top carriers are also investing in ultra-large containerships. China Shipping’s CSCL Globe’s reign as the largest containership, with a 19,100 TEU capacity, lasted only 53 days, beaten by the MSC Oscar with her 19,224 TEU capacity. MOL (Mitsui O.S.K. Lines Ltd.), another top-tier carrier, has ordered four ships of 20,150 TEU, and blueprints are readily available for ships of up to 24,000 TEU capacity. The new MOL ships will be LNG-ready dual-fuel type, costing $154.9 million per vessel.
For yards engaged in new-ship construction, 2014 was not a cheerful year. The 2015 Platou Report cites a 15 percent reduction in 2014 newbuilding orders, measured in compensated gross tonnage (CGT). Most of this occurred during the second half of the year, although several incentives were offered to shipowners and investors. Even worse, the major shipyards’ strategy to substitute declining traditional new-ship construction with contracts for building offshore shipbuilding units also took a serious setback. The 2014 oil-market conditions directly impacted the demand for offshore production units and supply vessels, disappointing the yards’ expectation for a new knight in shining armor to come to their rescue. The six most ordered ship types in 2014 and their estimated contract values, ranked in descending order, are as follows:
South Korea regained its status as the global leader in delivering new ships, measured in CGT. It accounted for 12.1 million CGT, according to Clarksons Shipping Intelligence Network, beating back Chinese yards that had taken the lead in 2010. However, the Chinese yards received 39 percent of all new orders in 2014, while the Koreans dropped down to 30 percent. Korean yards continue to dominate in building specialized vessels such as the new class of LNG ships and very large containerships. In addition, the Korea EximBank has launched a 1 trillion won ($898 million) ecoship fund to assist South Korean carriers and yards and boost the national fleet. The construction of dry-bulk carriers, the traditional forte of Chinese yards, was impacted by depressed market conditions. Japanese yards benefited from that nation’s monetary policy and the favorable yen exchange rate, holding on to a steady 19 percent of the CGT built in 2014.
The U.S. Merchant Marine
The emergence of a new dawn for the U.S. merchant marine, discussed in last year’s annual review, seemed even likelier in 2014. From dialogues focused on maritime-policy formulation to the nation’s new role as the pivotal swing factor in global petroleum hegemony, numerous upticks strengthened the sense of optimism in domestic shipping. The energy sector was again a rising tide until November 2014, when the OPEC cartel led by Saudi Arabia began a classic oligopolistic response and flooded the market with cheap oil to drive out unwelcome competition.
Energy Sector Impact
U.S. crude-oil production reached 9.2 mbpd in January 2015, per the federal Energy Information Administration. It forecast the total crude production to reach 9.52 mbpd. The key driver of the current domestic oil-production boom is shale oil. Although the aftereffects of this exploration remain controversial, a 2014 American Petroleum Institute study found that registered voters overwhelmingly favored increased oil and gas production. These developments directly impact the domestic maritime sector because of its multiple roles in facilitating increased production of oil and gas, and its subsequent downstream distribution.
Forty-four Jones Act coastal tankers now carry crude oil between Corpus Christi, Texas, and refineries along the Gulf and East Coasts or along the West Coast, compared with one ship that was engaged in the trade in 2013. In May 2014, American Phoenix, a Jones Act tanker, gained worldwide attention in the tanker market when she was chartered at $120,000 per day, many multiples of the going global rate at that time. The demand for tanker capacity has led to even speculative new building taking place in U.S. yards, unprecedented but justified by the ongoing market conditions. The movement of Bakken crude (from North Dakota) by rail to the Mississippi and Hudson Rivers, and from there by traditional barges to refineries on the Gulf and East Coasts, declined in 2014. The choice of transportation mode for this trade seems to be shifting toward unit trains and the new articulated tug barges.
The current low oil price and overall short-run reduction in supply from relatively expensive production sources like shale oil and offshore oil wells are causes for concern. However, as observed by the International Energy Agency, shale oil has changed the market, and any minor setback will be temporary. In 2014 the export sale of processed light (condensate crude) oil was approved by the U.S. Department of Commerce (Bureau of Industry and Security). The first export took place in July 2014 on board the BW Zambesi, a foreign-flagged tanker, and similar exports are expected to rise in 2015. While untreated crude oil is still prohibited from exporting, the U.S. export of gasoline, diesel oil, and other refined products have doubled. Similarly, the export of LPG set a new record during summer 2014.
Even higher expectations are associated with LNG exports from the U.S. Gulf. Estimates include 150 LNG ships awaiting the opening of this trade, presumably upon completion of the Panama Canal widening.
Aside from the developing LNG export trade with its logistical challenges, there are tremendous advancements in the use of LNG as a marine propellant in the Jones Act U.S. emission-control areas (ECAs) and the Great Lakes region. The use of low-sulfur fuel (0.1 percent or less) became mandatory in U.S. coastal waters as of 1 January 2015. Shipowners are benefiting from the short-run low oil prices that have almost halved their fuel-oil cost. However, for the long run, the more environmentally friendly and cheaper-priced LNG is a better option. On 6 February 2015, a dual-fuel offshore supply vessel (OSV), the Harvey Energy, received the first truck-to-vessel transfer of LNG fuel in the United States. This will allow the OSV, currently on charter to Shell for its Gulf of Mexico operation, to operate for about seven days between refuelings. Many such OSVs and LNG transfers are anticipated as the use of LNG becomes more widespread.
U.S. shipyards have quietly built a broad portfolio of new commercial orders besides their traditional Department of Defense orders. Their current order book consists of 17 tankers and 8 coastal barges capable of carrying about 150,000 barrels or more, with General Dynamics National Steel and Shipbuilding Company alone being under contract for the design and construction of eight tankers, five for American Petroleum Tankers (now Kinder Morgan) and three for Seabulk Tankers, Inc. The keel for the first of five 50,000 deadweight-ton eco-tankers was laid in March 2015. The San Diego yard is also on schedule to deliver the world’s first LNG-powered containership for TOTE to be used in its Puerto Rican trade. VT Halter Marine is also building two LNG-powered 2,400-TEU containerships for Crowley Maritime, also for the Puerto Rican trade. Aker Philadelphia Shipyard delivered two Aframax tankers for SeaRiver Maritime, one in 2014 and the other in March 2015. Their joint venture with Crowley to build four Jones Act product tankers received a $325 million loan, further validating the current lure of the domestic tanker market. Other Aker contracts include building two 50,000-tons (deadweight) product tankers for Philly Tankers and two 3,600 TEU containerships for Matson, all for 2018 delivery.
Jones Act and Other Promotional Developments
There was an abortive attempt to repeal the Jones Act domestic shipbuilding requirement through an amendment attached to the Keystone XL pipeline bill. This followed a Heritage Foundation background paper titled “Sink the Jones Act.” A bipartisan group of 32 legislators appealed against the amendment by writing to the Senate majority and minority leaders. The EU is expected to broach the Jones Act subject yet again at the Transatlantic Trade and Investment Partnership negotiations. Meanwhile, the Jones Act fleet continues to decline and is now down to 93 ships, according to U.S. Maritime Administration statistics. The list of Jones Act common carriers is now down to four survivors. The financially troubled Horizon Lines has shut down its service to Puerto Rico. Matson is taking over its Alaskan service for $456.1 million, and the Pasha Group is acquiring the Hawaiian service for $141.5 million.
The Department of Transportation’s 2014 recipients of the Transportation Investment Generating Economic Recovery grant include seven port-related projects. They will receive a total of $74 million, based on their innovation and ability to create jobs and enhance local quality of life. Successful projects include the Port of Seattle; Virginia Port Authority; Port Newark, New Jersey; Wando Welch Terminal in Charleston, South Carolina; Lake Charles, Texas; Alaska Railroad’s Seaward Marine Terminal expansion planning project; and the Oil Spill Response Access Dock Phase II project from the Makah Indian Tribe in Washington. Also from a promotional perspective, the President’s proposed Fiscal Year 2016 budget includes $5 million for the design of the National Security Multi-Mission Vessels. If built, these vessels will replace the aging training ships operated by state maritime academies, first in line being the 52-year-old Empire State, operated by the State University of New York Maritime College. The new ships will be used for disaster relief and humanitarian assistance, besides the education and training of the next generation of mariners.
Legislation passed in December 2014 increases the inland-waterway diesel-user fee as of 1 April 2015. The resulting $40 million yearly infusion into the Inland Waterways Trust Fund will help modernize the system and is fully supported by the Waterways Council. In addition, the Army Corps of Engineers’ Civil Works program received $5.45 billion in its FY 15 federal appropriations, $921.5 million more than what the President requested.
West Coast Port Labor Strife
No maritime topic received as much attention in 2014 as the port labor strife on the West Coast. The contract between the International Longshore and Warehouse Union (ILWU), which represents 20,000 dockworkers on the West Coast, and the Pacific Maritime Association, which represents the interests of the 72 employers and 29 ports, expired on 30 June. The nine-month-long acrimonious negotiations that ensued finally concluded on 23 February 2015, after direct intervention by the U.S. Secretary of Labor and the Secretary of Commerce. The new five-year agreement has yet to be ratified by the rank-and-file. In the meantime, irreparable damage has been caused to port users’ psyches.
The East and Gulf Coast container ports have made significant inroads into the huge discretionary volumes typically handled by West Coast ports. The Canadian ports of Vancouver and Prince Rupert have also benefited from the recent delays. The 2002 10-day lockout cost the U.S. economy a billion dollars a day; the American Association of Port Authorities estimates that the economic damage caused through recent congestion was twice as much. More than 100 containerships awaited berths before the tentative agreement was reached. Typically these ships run on a tight schedule, rigorously planned months in advance with no time to waste. A recent Journal of Commerce survey found that two of every three shippers plan to ship less cargo through the West Coast ports in 2015 and 2016. Of those surveyed, 62 percent blamed the ILWU for the delays and disruptions, 2.2 percent blamed employers, and 34.5 percent blamed both parties. The ILWU has denied allegations of work slowdowns and contests that the congestion was caused because of factors beyond their control such as the introduction of larger ships, carriers’ withdrawal from chassis ownership, expanded carrier alliances resulting in multiple container repositioning moves within yards, the improving U.S. economy, and other related factors.
This crisis highlights the fundamental challenge facing all North American ports and container terminals. Our productivity, even without a strike, is far below the world average, and our investment in technology and people is inadequate for handling the new generation of ultra-large containerships.
The ECAs off North America and Northern Europe cut down the sulfur content in ship fuel from 1 to 0.1 percent, effective 1 January 2015. The restrictions in North America will also include nitrogen oxide and particulate matter. In non-ECA European waters, passenger vessels must use fuel oil with sulfur content not exceeding 1.5 percent until 2020. The global standard in non-ECA areas will drop to 0.5 percent by 2020. This may be extended by five years in non-ECA areas outside Europe, pending an ongoing International Maritime Organization (IMO) study of the worldwide availability of low-sulfur fuel.
Shipowners are complying with the new requirements by switching to the more expensive low-sulfur marine gas oil, installing scrubbers, or considering alternate fuels such as LNG, methane, biofuels, and fuel cells. In most parts of the world, low-sulfur marine gas oil costs typically about twice as much as the traditional heavy fuel oil used on board ships. According to Environmental Protection Agency (EPA) and EU estimates, the annual cost of compliance with the new requirement will exceed $6 billion. Shipowners are understandably passing on the added cost as a sulfur surcharge to cargo owners, raising the freight rate in ECAs by 30 to 50 percent. This may lead to some cargo owners opting for other modes of transportation, especially for coastal cargo. The conversion to LNG propellant has a high upfront cost although, as discussed earlier, it is an attractive strategy for new ships under construction. The installation of scrubbers for removing sulfur contents from emissions is very popular with major cruise operators like Carnival, RCL, and Norwegian Cruise Lines, and far less expensive than the structural changes needed to burn LNG fuel.
There is concern about another option that some shipowners may choose: to ignore the rule. The price disparity between the two fuels may provide an incentive to cheat. This is not expected to be an issue in North America, but in Europe the multiple jurisdictions involved may cause problems. Robust enforcement through a strict regimen of flag-state and port-state control inspections is essential to ensure that those who comply are not at a competitive disadvantage.
Another area of concern is the ballast-water management system (BWMS) requirement. The 2004 IMO Convention, applicable to all seagoing ships greater than 400 gross tons that use ballast water, is expected to be ratified in 2015 and implemented 12 months later. All new ships must then be fitted with a type-approved BWMS; all existing ships within five years or their next dry-docking. In addition, the ships must meet national and local ballast-water regulations. For vessels visiting U.S. ports, this means meeting Coast Guard and EPA regulations as well as applicable state regulations. The apprehension is about the IMO BWMS-type approval guidelines not being strong enough to meet U.S. standards. Because a type-approved system for U.S. waters is currently unavailable, organizations like the World Shipping Council are calling for a delay to the ratification and implementation of the IMO convention. The cost of compliance with the BWMS is very high, for small systems up to $1 million and for larger ones upwards of $5 million, according to Lloyd’s List data. So there is true hesitation and justifiable confusion among shipowners who are faced with the very high price tag of BWMS compliance.
The third greenhouse-gas study on shipping, commissioned by the International Maritime Organization, found very positive news for the maritime fraternity. Compared with the 2007 second-study data, CO2 emissions from shipping declined from 3.3 percent to 2.7 percent. For international shipping, the decline was from 2.7 percent to 2.2 percent. One explanation for this is the slow-steaming business model discussed previously. However, the temptation to speed up vessels when fuel prices are low is very real and may adversely impact the short-term gains made.
The European Monitoring, Reporting and Verification system will require ships to submit annual CO2 emission data on voyages to and from European ports, effective 1 January 2018. Additional energy-efficiency reporting requirements will be imposed on larger European shipping companies as of 2015. Rather than awaiting a multilateral IMO system, the EU is aggressively implementing regional monitoring, reporting, and verification, which could well become shipowners’ next compliance dilemma.
International Maritime Bureau statistics indicate that worldwide, 245 piracy incidents occurred in 2014, with 183 ships boarded. All 11 attacks off Somalia were unsuccessful. There were 18 incidents off Nigeria and a total of 41 in West African waters. The Southeast Asian waters have once again become the epicenter of pirate activities, with 183 attacks during the year, constituting 75 percent of all incidents worldwide.
In its 2014 annual report, the Regional Cooperation Agreement on Combating Piracy and Armed Robbery against Ships in Asia, a multinational group based in Singapore, classified only 1 in 5 of the 183 regional incidents as very or moderately significant. This has not pleased shipowner organizations, which are demanding a greater effort to eliminate the rapidly growing new menace.
In June 2014, Somali pirates released 11 seamen who had been held hostage for more than three years. They were captured in November 2010, when the Malaysian ship MV Albedo was hijacked 900 miles off Somalia while sailing from the United Arab Emirates to Kenya. The Maritime Piracy Humanitarian Response Program (MPHRP), funded by the International Transport Workers’ Federation, along with shipping-industry donations played a key role. Of the Albedo’s original 23-man crew, 1 was killed during the hijacking, 7 were released in 2012, and 4 drowned when the ship sank in 2014. The tragedy that befell those seeking an honest livelihood on board a merchant ship could not be more moving.
The MPHRP also secured the release of seven Indian seamen from the MV Asphalt Venture, captured in September 2010. Their four-year captivity ended on 30 October 2014. Four seamen from the Thai fishing vessel Prantalay who spent almost five years in captivity were released on 27 February 2015. Twenty-six other seamen are being held hostage by Somali pirates, captured five years ago from another Thai fishing vessel.
Ship Safety Issues
The American Geophysical Union published an interesting study that mapped 1992–2012 shipping traffic, using altimetry data from seven different satellites to estimate the escalation. The increase is as much as 300 percent in 20 years in the Indian Ocean, with growth rate as high as 10 percent in 2011. There are several implications of such high growth; the authors focused on environmental aspects. The safety of maritime operations in light of the increased movements should be of concern to all.
Further corroborating this, a 2015 IHS Maritime and Trade Fleet Capacity model shows the total number of ships increasing annually at a rate of 3 percent. As ship numbers increase, so will congestion in restricted waters, ports, channels, and harbors, all leading to more close-quarter situations and the likelihood of more accidents. Two recent ship collisions in Houston in the first two weeks of March 2015 provide grim testimony. Marine insurer Allianz Global reports in its 2015 Shipping and Safety Review Report that the probability of billion-dollar shipping incidents is becoming increasingly likely because of the rapid introduction of ultra-large containerships. In particular, Allianz Global notes the inadequate training of new mariners and their overdependence on electronic navigation aids.
The education and training of the next generation of mariners has never been so important. The U.K.-flagged containership CMA CGM Florida and the bulk carrier Chou Shan collided in open waters 140 miles east of Shanghai early on 19 March 2013. Both vessels sustained major damage, though there were no casualties. A 2014 report on the accident, released by the U.K. Marine Accident Investigation Branch, pointed to language problems between the officers on watch, who were in communication via VHF radio. The South Korean ferry Sewol sinking on 16 April 2014 resulted in 304 confirmed dead or missing, 250 of whom were teenagers from the same high school. The ensuing investigation found abundant evidence of avarice and gross incompetence, including serious safety lapses, illegal structural changes to the ferry to carry more cargo and passengers, collusion between ferry operators and regulators, insufficient water ballast, improper securing of cargo, unstable departure conditions, tardiness of first responders, and above all homicide through flagrant negligence. This tragedy will stain the global maritime community for decades to come.
Arctic Navigation and the Polar Code
The thinning of Arctic ice has lengthened the shipping season at high latitudes. The Northern Sea Route over Russia and the Northwest Passage (NWP) through the Canadian Arctic have the potential to serve as vital conduits between the Pacific and Atlantic Oceans from June to November. The Northern Sea Route in particular had seen a steady increase in commercial traffic until 2013 but a decline in 2014 because of rising political risk and the drop in oil prices. The extraction of hydrocarbons beneath the ice when oil prices are low does not make commercial sense. In addition, costs associated with Arctic shipping operations are very high because of ice-strengthening requirements, icebreaker pilotage costs, and associated expenses. Other problems are the short sailing season, bureaucratic obstacles for non-Russian operators, and the harsh weather conditions. So most such projects are on hold, and the Transpolar Sea Route is being used primarily for Russian domestic traffic and exports.
The MV Nunavik, an ice-strengthened bulk carrier owned by the Canadian company Fednav, made the first unescorted commercial voyage through the NWP, transporting 23,000 tons of nickel concentrate from Deception Bay, northern Quebec, to Bayuquan, China. The recent opening of the world’s northernmost iron-ore mine, the Mary River in Canada’s Baffin Island, is projected to create 50 NWP loadings during a likely 70- to 90-day window in summer 2015. The initial anticipated export tonnage is 3.5 million tons annually to Europe and may reach up to 20 million tons per year in the long run.
Finally, the luxury-cruise business to the Arctic (and the Antarctic) is booming despite high prices. For $21,355, a traveler can book a month-long trip on the Crystal Serenity from Anchorage, Alaska, to New York City through the NWP. This is being marketed as the ultimate expedition for the true explorer. The cruise is set for 16 August to 17 September 2016.
The International Code for Ships Operating in Polar Waters (Polar Code) was adopted during the 94th session of the IMO’s Maritime Safety Committee, held in December 2014. The code will be effective as of 1 January 2017 and has several mandatory requirements that enhance the operational safety of ships and protect the pristine marine environment. By defining a polar service temperature on which ships will operate, it guides the testing and specification of materials and equipment. A Polar Ship certificate will be issued based on assessing the operational limitations of the ship. Details are being worked out by subject-matter experts in consultation with the International Association of Classification Societies.
The IMO Subcommittee on Human Element, Training, and Watchkeeping met in February 2015 to review requirements for mariners operating under the Polar Code. The Standards of Training, Certification, and Watchkeeping (STCW) Convention will be amended to make appropriate certification mandatory for deck officers and masters at basic or advanced levels of proficiency. All deck officers must complete the basic course and demonstrate competency. The basic certificate is a prerequisite to earn the advanced one, followed by two months of sea time in polar waters at the management level or watchkeeping at an operational level. Officers will then complete the advanced training and demonstrate competency. There are provisions for interim certification, and both certificates must be revalidated every five years, similarly to other STCW credentials. This is long overdue, given the rapidly growing number of incidents in polar waters—55 Arctic Circle shipping incidents in 2014 compared with 3 in 2005.
The results of the 13th Shore Leave Survey, administered annually by the Seamen’s Church Institute’s Center for Seafarers’ Rights, validate lingering concerns about the treatment of mariners in U.S. ports. During the survey week (18–24 May 2014), ministries in 27 ports visited 416 ships and met with 9,184 crew members representing 60 nationalities. The survey found that a total of 1,030 seafarers serving in 97 ships were denied shore leave. The main reason for denial (86 percent of all cases) was not having a valid visa. Other reasons included terminal restrictions, vessel operation–related restrictions, and U.S. Customs and Border Protection restrictions. Overall, the trend is increasingly to deny shore leave. These data do not include seafarers detained in ships berthed in terminals to which chaplains were denied access.
This is the first such survey since the Maritime Labor Convention (MLC 2006) was enacted, and it shows that 79 percent of those denied shore leave for lack of a visa served in ships where the MLC 2006 was in force. This is a clear violation of the mandate (Standard A 1.4 Section 5[b]) and raises questions about the integrity of the entire MLC certification process. Interestingly, three seafarers were denied shore leave because they did not understand Customs and Border Protection officials’ questions. If the Chinese had a similar policy, how many of our seafarers would be able to respond to visa interview questions asked in Mandarin?
It is refreshing to note new Coast Guard efforts to improve seafarers’ access to maritime facilities without compromising the security of U.S. ports and facilities. The Coast Guard Authorization Act of 2010 requires Maritime Transportation Security Act–regulated facilities to provide shoreside access to seamen in a timely manner. The Coast Guard would like each facility owner or operator to come up with a suitable plan, which would then be reviewed for reasonableness by the Captain of the Port. If this moves forward, within 10 months of publication each facility will submit a revised facility-security plan that meets seafarers’ access requirements. The plan will then be implemented within a year. As noted by the Coast Guard, this will help preserve freedom and maintain the dignity of seafarers while keeping the nation safe.
The International Transport Workers’ Federation (ITF) and the Joint Negotiations Group, representing the employers—jointly referred to as the International Bargaining Forum—agreed on international seaman salary increases (of 1 percent in 2015, 2 percent in 2016, and 3.5 percent in 2017) after nine-month-long discussions that began in October 2013. This will replace the last agreement signed in 2011. Both parties have agreed to downgrade the Somalian waters from war-zone to extended risk-zone status and give Joint Negotiations Group members a 10 percent rebate on ITF welfare-fund payments.
The various Port State Control regimes organized a joint Concentrated Inspection Campaign (CIC) in 2014 to verify a list of 10 selected items against the STCW requirements. The Paris Memorandum of Understanding on Port State Control’s (European waters) CIC on the STCW Hours of Rest requirement carried out 4,041 inspections over a three-month period and arrested 16 ships. Violations included 449 cases of incorrect recording of hours of rest, 203 cases of insufficient rest, and 101 cases of not maintaining an effective bridge lookout. The inspections also showed 1,268 ships operating with a two-watch navigational watchkeeping system, and 13 of them were among the arrested ships.
Maritime Education and Training
The IMO Secretary General announced recently that the 2015 World Maritime Day theme will be the adequacy and quality of maritime education and training (MET) programs worldwide. Our seven maritime academies may be flush with new applicants, but the longevity of their careers as mariners and even the sustainability of the excellent education they receive are not beyond skepticism. Their commitment to the profession when there are other, unprecedented competing opportunities remains untested; no documented studies exist, and any evidence is purely anecdotal. Complicating the supply side, the cost associated with MET is rising, whereas state appropriations are declining nationwide for all higher education. Furthermore, the availability of a suitable vessel to provide the necessary shipboard training in accordance with STCW provisions is approaching a crisis stage in the United States. Correspondingly, on the demand side, privately owned U.S.-flag tonnage continues to decline, while the brown-water fleet and offshore operations in particular, buoyed by the energy sector, are on the ascent. Several new, related lucrative career opportunities are emerging where there is a significant shortage of skilled personnel, which may further deplete the supply of licensed officers.
The Cost Factor. A high-quality mariner-education program is expensive and unlikely to succeed without some level of state support, the magnitude of which is on the decline worldwide. Internationally, the emphasis is on public-private partnership to ameliorate the state burden, as demonstrated by the integration between the National Maritime College of Ireland and the Irish Maritime and Energy Resource Cluster. However, greenfield institutions are still emerging, the most recent entrant being the Kazakhstan Maritime Academy in Almaty, Kazakhstan, which began operating in 2013 and hopes to be on the IMO white list of approved institutions by 2015. The KMA is expected to educate 300 cadets during its first five years at a total cost of $25 million, which averages out to approximately $83,000 per student.
The fully allocated total cost per cadet at maritime institutions (including on-board training to earn the required sea time) in Europe and North America is not available in the public domain. However, it is rational to assume that the KMA cost per cadet is not an outlier. In the U.K., the current level of government subsidy alone is $28,000 per cadet per year for the 800 sponsored by the national Support for Maritime Training scheme. It is no accident that even in the case of large state-run maritime universities such as the Dalian Maritime University, China, those enrolled in the traditional mariner-license program represent close to 5 percent of the total student body.
Institutions of Questionable Quality.There are more than 600 MET institutions worldwide. Although the STCW provisions have been in place for several years now, and anecdotal evidence supports overall improvements in safety at sea and pollution prevention, as yet there is no evidence of the specific contributions those provisions have made to global shipping. A glaring example is the ongoing scrutiny of maritime education in the Philippines by the European Maritime Safety Agency, seeking clear evidence of compliance with provisions of the STCW Convention.
The mandatory implementation of STCW provisions by a national authority increases barriers to entry for substandard maritime-education providers lacking the necessary resources. Many institutions, regardless of their location, are unable to attract appropriately qualified instructors. The typical pool of applicants for license-track faculty openings is relatively small. The turnover among faculty, especially those with experience on board specialized vessels such as tankers and LNG ships, is exceptionally high. Furthermore, while many mariners who pursue the teaching option may have the professional skills, they rarely possess formal preparation in pedagogy and instruction, and, hence, may have a lengthy learning curve toward becoming effective educators. This has a major impact on the effectiveness of the instruction provided, which for deck students is about one-half of the total four-year academic credits required for graduation, and close to 60 percent for engineers.
Training Platforms. Although all world-class maritime institutions routinely invest in expensive simulator technology for effective education and training, there is no real alternative to the experiential learning that takes place on board a ship, and that is a requirement for any approved MET program. However, very few countries today have sufficient on-board training (OBT) facilities of their own, and this is presently emerging as a serious global concern. Even among those with a training platform, according to an estimate from the Global On-Board Training Center (GOBTC), only 40 percent of the current training-vessel capacity is suitable for safe operation and training.
The GOBTC estimates that 90 percent of the total worldwide OBT slots come from commercial fleets, which puts nations without such ships at a significant disadvantage. In that category are newly emerging “energy economies” in Africa and other developing countries, which have discovered “a career at sea” as an effective social-policy instrument to help reduce unemployment and assist with the national balance-of-payment dilemma. It is a tough task for those who seek public funds in any country to justify the high cost of experiential learning. As a result, an estimated one-half of the 51,000 cadets worldwide (who complete MET courses annually) are unable to find the necessary OBT opportunity, resulting in an estimated 50 percent forced wastage.
Some initiatives address the issue. For example, the government of India recently decided to convert two cargo vessels (one tanker and one Panamax) into hybrid trading-cum-training ships at a total cost of $67 million. The converted cargo vessels will accommodate 100 cadets on board each ship. With the national exchequer meeting the capital cost, the expectation is that the freight on board will meet all associated operating costs. However, even this is not enough for the very high number of maritime institutions located in India, many of which must sign their own agreements for cadet berths with foreign shipowners.
The OBT dilemma is becoming increasingly visible in the United States, as noted above. All six state academies will soon approach a tipping point with regard to their OBT capability, and the national fleet is insufficient to provide the necessary sea time for all merchant-marine cadets currently enrolled. The real challenge for leaders of maritime academies is not merely justifying the need for mariner education, but designing their academic offerings to articulate a compelling vision for the right level of federal and state support and resource commitment. The challenge is further complicated because of the absence of readily usable data on U.S. mariners, highlighted in a recent Government Accounting Office report. The declining U.S.-flag shipping fleet also complicates realistic demand analyses.
As most multinationals and even citizens of neighboring countries fled the Ebola-stricken West African nations of Liberia, Sierra Leone, and Guinea, shipping companies that provide a regular, reliable supply of food items and other consumer goods continued their operations unabated. The dire medical conditions affected their cargo volumes, but that did not stop the carriers from reorganizing their essential services to maintain a steady supply of critical items. Maersk split its West Africa services and introduced a separate loop from southern Europe to the Ebola-stricken countries. Similar actions were taken by CMA CGM, Grimaldi, Evergreen, PIL (Pacific International Lines), MOL, and other carriers to maintain services when they were most needed, rather than shun this human tragedy. They enacted strict access controls and hygiene rules to protect the crew, and they made sensible changes to ship-boarding practices and official ship visits. There was neither shore leave nor crew change in affected ports, and all physical contact with dockworkers was avoided. APM Terminals, a carrier affiliate, even contributed toward the cost of setting up a field hospital in Monrovia. This is the modern merchant marine and the new generation of mariners behaving in a quintessentially seamanlike manner.
In 2014, merchant ships saved the lives of thousands of migrants who otherwise would have drowned in the Mediterranean. About 800 ships were diverted from their normal courses to rescue 40,000 illegal migrants trying to cross the Mediterranean in unsafe watercraft. Some ships took on as many as 500 survivors at a time. It is believed that in 2014, about 218,000 migrants from North Africa and the Middle East crossed the Mediterranean, and 3,500 among them perished at sea. Human traffickers use unsafe “rust-bucket” merchant ships for their illicit operations, with no trained mariners on board. This has made commercial shipping the de facto search-and-rescue agency, a noble task for which seafarers are neither trained nor well equipped. The U.N. High Commissioner for Refugees expects the number of clandestine crossings to double in 2015.
On 4 March 2015, various U.N. agencies met with the IMO and concerned maritime nongovernmental organizations to deal with this tragedy. Ironically, on the same day Italian and Tunisian authorities reported the drowning of ten North African migrants when their rubber dinghy capsized 50 miles off the Libyan shoreline. Also on that day, merchant ships rescued more than 900 other refugees from Syria, Palestine, Libya, and Tunisia, from seven refugee vessels, while the Italian Coast Guard rescued 121 other passengers. In February 2015 alone, more than 300 refugees drowned during their attempt to reach Italian shores. This is a serious, ongoing crisis that has garnered little, if any, media attention in the United States. The press is, understandably, more focused on other atrocities and problems, of which there is no scarcity. It is a shame that the yeoman services rendered by merchant mariners, saving hundreds of lives at sea while quietly doing their jobs as professionally as they can and withstanding all commercial pressures imposed on them, go mostly unnoticed. Their service, even while knowing that they themselves are not welcome to step ashore in many parts of the world after saving a few hundred lives during the course of their last voyage, is truly selfless. I cannot think of a better candidate for the 2015 Nobel Peace Prize: the global merchant marine community, of which I am proud to be a member.