The year 2015 was a forgettable one for the vast majority of the global maritime community. Interestingly, this sentiment became pronounced by the middle of the year and did not recover.1 There was no anticipation of a rising tide lifting all shipping markets as had been expected in 2014, only to be let down by the end of that year. The sole exception to the gloomy 2015 trend was the tanker market, which continued its exceptional recovery that began in 2014 and had its second best year since the 2008 global economic crisis.
Many shipping companies, especially those with dry-bulk investments, are in various stages of financial difficulty today. The 55 shipping stocks monitored by Clarksons declined 18 percent on average during the year, and the Shipping Heat Index they track (a ratio of vessel earnings and investment activity) dropped to 62 for the year, three points below the 2014 average. This is despite impressive gains in controlling ship-operating costs in all three major shipping markets reported by Moore Stephens.
The weakening Chinese industrial output, sharply dropping worldwide stock market indices, and plummeting oil and other primary commodity prices maintained a steady drain on market optimism and set the stage for prolonged misery in 2016. Even before 2015 ended, Fitch Ratings forecast 2016 to be another negative year for shipping, which Moody’s Analytics affirmed in March 2016. Baltic Dry Index, the routinely monitored composite dry-bulk market indicator, has been descending for several months now. The index reached a low of 290 on 10 February 2016, a 98 percent drop from 11,793—the level attained prior to the May 2008 global financial crisis. To top it all, the most recent Shipping Confidence Survey released in March 2016 found shipping at its lowest rating in the survey’s eight-year history.
The Global Gross Domestic Product growth has been anemic and, correspondingly, has been the growth in seaborne trade. The International Monetary Fund’s current estimate puts 2015 world GDP growth at 3.1 percent. Growth in the emerging market and developing economies, the prime driver of economic growth in recent decades, declined for the fifth consecutive year in 2015. Even the mid-year devaluation of the Yuan currency did not boost Chinese exports. Broader macroeconomic forces, driven by the shift in Chinese economic priorities, along with the declining price of energy and other primary commodities, have collectively placed a firm grip on global economic growth.
Market Developments
Maritime economists have monitored the multiplier relationship between global GDP growth and seaborne trade and containerized trade. The magnitude of these multipliers has been declining steadily over the last decade owing to fundamental structural changes in manufacturing and business strategy. As per Clarksons’ current data, the seaborne trade multiplier dropped below 1 percent in 2011 and reached 0.7 percent in 2015. In addition, the container trade multiplier—the ratio of increase in container trade growth to the global GDP growth—dropped precipitously to 0.8 percent in 2015, placing both multipliers below 1 percent for the first time. Thus, the overall seaborne trade grew barely 2 percent in 2015, while global shipping capacity rose more than 3 percent. This has created a severe imbalance in the market and worsened the fate of commercial shipping companies in general.
Table 1 summarizes the year-on-year changes or lack thereof in world seaborne trade volumes for 2014 and 2015. The market trends that began in 2014 remained steady in 2015. Tankers that were on the threshold of good business results a year ago went on to have the second-best year they have had in recent memory, 2008 being their best. By contrast, the malaise in the dry-bulk sector, also evident in 2014, became more ominous and worsened in 2015. Market conditions in the liner sector also deteriorated progressively during the second half of the year.
Dry-bulk Market: Hoping to avoid a repetition of 2014, dry-bulk operators exercised rare strong market discipline and held their capacity addition to 2.7 percent in 2015. In fact, the increase in dry-bulk shipping capacity in 2015 was the slowest since 2007, and recycling of older tonnage increased 87 percent year-on-year as per Clarksons’ data. Data from Lloyd’s List shows that 359 dry-bulk vessels (more than 20,000 deadweight tons [dwt]) were recycled during the year for a total of 27.7m dwt, 54 of them in the month of May alone. Baltic and International Maritime Council (BIMCO) statistics place dry-bulk demolitions at 30 million dwt in 2015, more than twice the 14 million dwt demolished in 2014. Regardless, these were not enough to offset the leftward shift of the demand curve caused by the decline in Chinese imports, slower growth in iron ore and steel trades, the fall in Chinese and Indian demand for thermal coal imports, and their increasing reliance on clean-energy sources.
Conditions worsened during the course of the year in all sub markets, leaving shipowners with barely sufficient returns to meet daily operating costs, let alone contribute to capital cost. The trend worsened in early 2016. On 11 January, the Capesize market index dropped 15 percent. At that level, a shipowner would make about half that ship’s daily operating cost, estimated to be approximately $7,000, which implies a high level of ongoing cross-subsidization in the market. Allied Shipbroking estimates that to bring a semblance of market balance, one in every seven ships must exit the market—the equivalent of reducing the fleet by 1,400 ships. Goldman Sachs analysts estimate time charter rate rising to $10,000 a day by 2018, but only if ship recycling remains at record level and new construction grinds to a halt.
These outcomes have led to several market exits worldwide. Others are selling off assets to raise liquidity or lower their daily operating losses. Bankruptcy proceedings and forced sales are on the rise. In January 2016, Star Bulk Carriers, a major dry-bulk shipping company, sold four Capesize bulk carriers currently under construction in South Korea for $150 million. These are in addition to the nine they sold in November and December 2015. Scorpio Bulkers, the aggressive, equity-financed market new entrant, sold all their Capesize ships in 2015 and are now down to only the smaller bulk carriers.
Eagle Bulk Shipping has lost access to a $10 million revolving credit facility for breaching a loan covenant. Norden, another owner, announced the likely loss of $440 million related to dry-bulk operations. The Norwegian operator Western Bulk sought protection from creditors in early February, made a futile attempt to reorganize under a new name, Bulk Invest, and then filed for bankruptcy on 3 March. The three well-established Japanese shipping companies—K Line, NYK, and MOL—also have reported a drain on corporate returns and profitability caused by their dry-bulk shipping fleet. The long list of others who either declared bankruptcy or lost their assets through court actions or forced auctions in 2015 include Daiichi Chuo, Global Maritime Investments Cyprus, Copenship, Zheng Shipping, Fu Lai Deng Shipping, and Guangdong Lanhai Shipping. Ironically, healthy operators find this to be an opportune time to buy good, high-quality, dry-bulk ships in the second-hand market. A good example is the recent decision by BW Group, a tanker and gas carrier specialist that owns 160 ships, to enter the dry-bulk market and buy several ships in the 50,000 to 90,000 dwt range.2
Tanker Market: Low oil prices have increased the global demand for oil and the demand for oil tankers. The ongoing future price/spot price contango situation also gives a strong incentive for using tankers for floating storage. In addition, with most on-shore storage facilities filled to the brim, some tankers have involuntarily become floating storage facilities, which also has increased their demand.3 In such a climate, it is not surprising that tankers and related sectors had an outstanding 2015. Clarksons statistics show a 73 percent increase in average earnings from last year, the biggest beneficiary being very large crude carriers (VLCCs), with a 120 percent increase. From a broader perspective, the very large gas carrier (VLGC) trade was the top-performing trade of the year, with daily earnings exceeding $85,000.
Given the good trading conditions, the tanker new-building orderbook is at an eight-year high. New crude and product tankers ordered in 2015 numbered 358, according to EA Gibson, a major tanker broker. This is more than twice the number contracted in 2014. VLCCs and Suezmaxes have seen the most increase in new building orders. EA Gibson estimates that the tanker fleet grew 6.5 percent in 2015, far exceeding the 2.7 percent growth experienced in 2014. This does not bode well for the coming years. Indeed, VLCC chartering rates in early 2016 show a high level of volatility, dropping to as low as $60,000 per day in late March. Accordingly, there is considerable skepticism and apathy among investors, and new orders for VLCCs have come almost to a halt.
Liner Market: Although 2015 began with hopes of rate restoration and revenue enhancements, the subsequent collapse in earnings by mid-year gave a clear indication of where the market was headed. Drewry Maritime Research estimates that liner operators will have a loss of $5 billion in 2015 stemming from the year’s 9 percent fall in freight rates. Most of this can be explained by the gross imbalance between supply and demand, with global container trade growing at 2.5 percent as opposed to the 8.5 percent increase in supply. Per Alphaliner’s containership statistics, 214 new ships were delivered in 2015, constituting 9 percent of the current 19 million total container-carrying capacity in 20-foot-equivalent units (TEU). Also, 200,000-TEU capacity was eliminated through scrapping or otherwise. Further complicating the economic fundamentals, freight rates dropped at a faster rate than volume-growth rate, contributing to an inherent negative bias in liner pricing. It reinforces the basic logic that there is a finite limit to gains through cost reductions from a newer ship or technology; when freight rates are dropping at a faster rate than any gains through cost reductions, common sense dictates caution. What confounds rationality more is that the industry placed orders for 255 more vessels in 2015, despite the gross surplus capacity in the market.
The carriers are resorting to several cost-cutting measures to stem their losses. Maersk, the market leader, has announced serious retrenchment and deferral of major investment in new vessels. The consolidation among top-tier operators also continued in 2015, two notable proposals being the CMA CGM acquisition of NOL and the merger between COSCO and China Shipping, two Chinese operators, to create COSCOSC.
Another rumored merger in the making involves the two big Korean carriers, Hanjin Lines and Hyundai Merchant Marine. CMA CGM, APL, COSCO, and China Shipping are part of three distinct operational partnerships, referred to as carrier alliances, that dominate the market today. Hence, the proposed mergers will affect all existing major carrier alliances. In addition, there is talk of the new CMA CGM APL creating a new alliance for its 2017 operations, causing even more market disruption. The only liner agreement that will remain unchanged will be the $2 million alliance between Maersk Line and Mediterranean Shipping Company, two top market leaders, which are now in the second of their ten-year agreement.
Even the container-terminal operators, usually immune from the fluctuating fortunes of carriers and regularly blessed with double-digit annual growth and increasing profits, are being hurt by the current market.4 They are forced to invest huge sums of money in terminals, equipment, and supply-chain configurations to accommodate the ULCVs and facilitate the uninterrupted flow of containers. While this is exacerbating their capital and operating costs, there are no offsetting increases in trade volume. In addition, the switch to bigger ships lowers the number of port calls, which also affects the terminals’ revenue. Above all, balance of power and negotiating leverage seem to be consolidating with carrier alliances, their major customers whose clout comes from the huge container volumes they control and their ability to move operations to a competing gateway port or terminal if necessary.
Shipbuilding Market: Last year was not the year for shipbuilders, either. Clarksons estimates a 40 percent decline in the value of newbuilding orders received, from $113 billion in 2014 to $69 billion in 2015. Japanese shipowners accounted for 15 percent of all orders—$10.2 billion in value—and most of those went to their domestic yards.5 Their ship investment decisions were primarily strategic, taking advantage of the depreciated Yen and the low construction cost to recapitalize their older tonnage. Worldwide, as mentioned, the oil tanker is the only ship type that experienced an increased growth rate in newbuilding orders.
The three top Korean yards reported a combined annual loss of $6.66 billion, quadrupling their loss in 2014. Daewoo Shipbuilding and Marine Engineering Co. (DSME) posted a loss of $4.3 billion in 2015, attributed to order cancellations and delays in construction of offshore facilities. They have announced plans to continue their drastic cuts in the workforce to 30,000 employees in 2016 from 55,000 in 2014.
Chinese yards also suffered a substantial decline in new orders. This outcome was predictable, given that their niche is in building dry-bulk carriers. There was a 48 percent drop in new orders at their yards in 2015. Eight out of the top 10 yards in that country are government-owned, although that does not buffer them from the overall market conditions. A massive consolidation effort is under way among the Chinese yards.6
The U.S. Merchant Marine
The past two years have demonstrated a firm dichotomy in the fortunes of the U.S. Merchant Marine. The traditional U.S.-flag blue-water fleet continues to decline, whereas domestic sectors demonstrate hope and future growth. Although the ongoing global oil glut has tempered the shale oil-driven optimism in domestic trades, there were many positive developments that deserve recognition, and the shipyards in particular have stayed busy with pending commercial orders. There also were major shocks to the American maritime system in 2015, including the tragic loss of El Faro and her entire crew, the nation’s worst shipping disaster in recent memory.
The year’s positive developments include continued federal support for liquefied natural gas-powered ships through the Title XI loan guarantee program, designation of three new marine highways, TIGER (Transportation Investment Generating Economic Recovery) grants for port infrastructure development, dedicated freight funding through the FAST (Fixing America’s Surface Transportation), and grants for small shipyards. The FAST Act will build on the work of Build America Transportation Investment Center (BATIC), which has been helping American ports gain access to federal financing programs. The seven rounds of TIGER grants have led to $524 million for efficiency and capacity enhancements in 43 port and/or marine highway projects in 24 states.
The 2016 Omnibus Appropriations bill nearly met the Maritime Administration’s (MarAd) requested funding level of $407 million, including $210 million for the Maritime Security Program (MSP) at $3.5 million for each of 60 ships. The President’s 2017 proposed budget calls for increasing TIGER grant funding from $500 million to $1.25 billion.
The funding for navigation maintenance and improvements and port security grants is reduced. Similarly, the Army Corps of Engineers’ proposed budget in 2017 is $4.6 billion, 30 percent less than the $6 billion appropriation in FY2016. The proposed 2017 MarAd budget is $428.1 million. Although this is higher than 2016 appropriations, the MSP allocation would drop to $3.1 million per ship.
The Department of Justice reached a settlement in the 2010 BP Deepwater Horizon case. More than $20 billion will be made available to settle all civil claims arising from the oil spill. In November 2015, the House conducted a joint hearing to discuss the impact of International Food Aid programs on U.S.-flag shipping, defense and the economy.
There are only 78 U.S. flagships in the international fleet at present, compared with the 106 that existed in 2011. Maritime stakeholders believe there is strong correlation between this, the 75 percent to 50 percent cutback for food aid cargoes, and the reduction in U.S. military cargoes headed to Iraq and Afghanistan. Military leaders, including the Head of the Transportation Command and other general officers, have expressed concern for the depleting U.S.-flag commercial fleet and the ramifications for rapid deployment.7 With the current number of ships, the pool of appropriately credentialed merchant mariners available to support surge operations is barely adequate for initial activation and grossly inadequate for sustained operations. A 2015 research study alleges that the nation has adopted an “abandon ship” policy toward its crucial merchant marine industry.8 Although the U.S. Merchant Marine has been in a state of decline for the last several decades, this is a new low in terms of its ability to serve the nation in peace and war.
Matson, Inc. remains the poster child for a well-managed U.S. shipping company. 2015 was its best year with a net income of $103 million. The company has recovered smoothly after some initial bumps that came from its partial acquisition of Horizon Lines.
VesselValue.com estimates that U.S.-built commercial ships currently total 160, including those under construction. In terms of current value, $4.5 billion, it is the sixth most-valued fleet in the world. The ships, at an average age of 33 years, are 20 years older than the global average. Thirty-eight ships, ATBs, and ocean-going barges are under construction in U.S. yards. Philly Shipyard, formerly known as Aker Philadelphia Shipyard, has made excellent progress with its series building of eight 50,000 dwt LNG-ready product tankers for the coastwise market.
NASSCO, the most prolific domestic builder, delivered three lead ships in 2015, one for the Navy and the other two for commercial operators. These include Isla Bella and Perla del Caribe, the world’s pioneering LNG-fueled containerships delivered in September and December, respectively, for TOTE. The other new-category commercial ship is the Lone Star State, an ECO-class 50,000 dwt-ton LNG-ready product tanker delivered to Kinder Morgan APT. The ship is 33 percent more fuel-efficient than the five NASSCO ships built between 2007 and 2010. They will build four more of these ships for Kinder Morgan and two for Seabulk. NASSCO has now delivered 12 commercial ships since 2005, and the rest will be delivered between 2016 and 2017. VT Halter, based in Pascagoula, Mississippi, is another large commercial shipyard and has orders for two container RORO ships for Crowley Maritime, due for delivery in 2017.
As part of the U.S. Coast Guard’s evaluation of ballast-water management practices in the United States, a new reporting requirement went into effect on 22 February 2016. Vessels with ballast tanks, operating exclusively on voyages between ports or places within a single captain-of-the-port (COTP) zone will now be required to submit an annual report of their ballast-water management practices. Based on the data gathered, the Coast Guard will decide if these vessels should continue their current reporting requirement.
Congress lifted the ban on crude-oil exports on 18 December 2015 through language contained in the Omnibus Spending Bill. This had long been anticipated, since the domestic refineries are not configured for refining the light, low-sulfur crude produced in the United States. The lifting of the ban has received widespread industry support, including from Kinder Morgan, a prominent coastwise tanker operator.9 American Petroleum Institute estimates U.S. oil exports reaching 1.8 million barrels per day (mbpd) by 2017.
The first export of U.S. crude in 40 years, sold through a Swiss trading house to Italian buyers, was completed on board the tanker Theo T on 31 December 31 2015. These exports will be competing in a market currently saturated with oil because of the ongoing market-share tussle between OPEC and non-OPEC oil-producing nations.10 The lifting of the Iranian sanctions along with likely increased production from both Iraq and Saudi Arabia is projected to exacerbate the current oil supply surplus. The International Energy Agency (IEA) has projected a 26 percent decline in the oil demand growth rate in 2016 compared with 2015, which will also dampen the short-run demand for U.S. crude oil exports. However, in the market for oil products, U.S. exports grew to 4.3 mbpd in 2015, an increase of 467,000 bpd, which is roughly the cargo carried by additional one-and-a-half average-size product tankers each day.11
The effects of the global oil market conditions discussed above go far beyond the demand for export volumes. The cutbacks in offshore oil exploration and support services have impacted shipyards that focused on repairing and maintaining the offshore primary and support fleet. Baker Hughes’ worldwide offshore rig count shows fleet utilization at 60 percent and barely meeting their operating costs.
The long-term forecast for the energy sector is optimistic.12 The 2016 BP Energy Outlook forecasts global demand for energy increasing by 34 percent between 2014 and 2035. The United States is projected to achieve overall energy self-sufficiency by 2021 and oil self-sufficiency by 2030, and the share of shale gas in total gas production to increase from 10 percent in 2014 to 25 percent by 2035. Lower levels of carbon emissions are forecast, resulting from enhancements in energy efficiency despite fossil fuels remaining the dominant form of energy until 2035.
LNG exports from the United States and Australia are expected to elevate their global trading volume from the current 250 million tons per year to 370 million tons by 2020. A Rice University Study found that the increased export of American LNG will create up to 35,200 jobs annually, and grow the economy between $7.7 billion and $20.5 billion per year from 2026 to 2040 while also enhancing the nation’s energy security.
A bipartisan Energy Policy Modernization Act reviewing policies affecting the U.S. energy sector is currently before Congress. The LNG provision of the Act aims to streamline the federal review of export applications and eliminate bureaucratic delays. If the bill passes, the Secretary of Energy will have 45 days to make a decision on permit applications following a review conducted by either the Federal Energy Regulatory Commission or the Maritime Administration as part of the National Environmental Policy Act of 1969.
Cheniere, an approved U.S. LNG exporter, was originally scheduled to begin exports in December 2015. The first LNG carrier Asia Vision docked at the Sabine Pass export terminal on 21 February 2016 and departed for Brazil with a full load a few days later. Energy Atlantic, the second ship with U.S. LNG cargo, departed Sabine Pass on 28 March 2016. Although the current LNG market is in turmoil, with market price not covering the long-run marginal cost of new projects, it is expected to stabilize by the time U.S. exports are fully under way. Initial targets for U.S. exports are European and South American markets, with possible expansion to buyers in Asia. Lloyd’s List estimates that the U.S. will export 64 million tons per year during the next few years.
The 18,000 TEU ultra-large container vessel (ULCV) Benjamin Franklin, operated by CMA CGM, called at the ports of Los Angeles and Oakland in late 2015. A total of 11,229 containers were handled in Los Angeles using nine cranes during her 90-hour stay, generating an average berth productivity of 200 moves per hour. The ship visited Seattle in early March. Immediately after the trial runs, the operator announced the upgrading of trans-Pacific service by deploying six 18,000 TEU ships regularly between ports in Asia and the U.S. West Coast. The proposed weekly Pearl River Express Service is expected to begin in late May and will help the operator benefit from economies of scale in light of the projected 5.3 percent increase in U.S. imports in 2016.13
Seamless movement of the high number of containers handled during each port visit by these ships will elevate the cost and complexity of terminal operations to a level never seen before and pose a number of logistical challenges. These include raising the operating height of container-handling “Gantry” cranes, reconfiguring terminal operations and drayage activities, investing in automation, and acquiring additional terminal equipment and trained labor. The container ports and terminals marketing to capture ULCV clientele are being pushed further to accommodate the rapidly increasing size and scope of such operations, without commensurate returns. There is increasing skepticism about the economies of scale associated with these megaships and associated risks.14
Containers are rightly referred to as the “box that changed the world” by scholars and analysts.15 One aspect of containerization has remained troublesome, however. Unlike traditional breakbulk cargo, where the weight is visibly stenciled or printed, the weight of a loaded container has been somewhat of an enigma. They are loaded and sealed far from port in most cases. Ship operators depend on the declared contents and weight of the container to plan their stowage.
Mis-declaration of container contents or its weight can have drastic consequences, especially when it becomes a business practice. Stowing containers packed with cargoes that are non-compatible with each other in close proximity subjects the ship and all her contents to serious chemical hazards and even spontaneous combustion and explosion. Governments do not approve of shippers intentionally mis-declaring contents to avoid paying tariffs and import duties.
The consequences of under-declaring container weight is even more troubling and may seriously affect the ship’s stability, especially in weather conditions where there is no room for error. The erroneous calculation of the ship’s metacentric height resulting from wrongly declared container weight may lead to multiple container losses and in extreme cases, the loss of the ship.
There is consensus worldwide that shippers, carriers, and terminals must work together to load a ship safely; accurate weight of cargo is the most fundamental requirement. The International Maritime Organization (IMO) has been deliberating the issue of under-declared container weights since 2010 and amended the SOLAS (Safety of Life at Sea) Convention in 2014. The amendment will enter into force on 1 July 2016, from which date the shippers are required to provide accurate verified gross mass (VGM) of containers loaded for international ocean movements.
While many nations have approached this as a basic safety issue and taken reasonable actions, the official U.S. response has been troubling. The Coast Guard believes it has no authority over domestic shippers and that the VGM reporting requirement is purely a business issue between the shipper and the carrier, two contracting parties. Hence, the Coast Guard is advocating the status quo, unlike countries that are introducing penalties for noncompliance. This has roused the carriers. The World Shipping Council, representing all major container shipping companies, has voiced a serious objection to the laissez-faire official position. Ironically, the Coast Guard played a lead role in drafting the new container safety amendment. Meanwhile, many shipping associations have expressed full support for the position and do not agree with making changes to the current practice.16
An important development during the year was the transition of Amazon.com from e-commerce pioneer to global supply-chain facilitator. The company now has Non-Vessel-Operating Common-Carrier (NVOCC) status in the United States and has sought approval from the Shanghai Shipping Exchange to act as a freight-forwarder on 12 major trade routes from China. This will allow small shippers to book their cargo directly through Amazon. As an NVOCC, Amazon will consolidate huge container volumes, giving the company negotiating leverage for service contracts with liner operators. Until the 1990s, there was an expectation that containerization and accompanying regulatory changes would pave the way for seamless door-to-door intermodal services. That level of customer service did not materialize, and the carriers became more absorbed in their perpetual pursuit of market share. It is only poetic justice that an innovative online retailer is laying the groundwork for unleashing the true potential of door-to-door container services.
International Developments
The Paris Agreement was signed in December 2015 to lower pollution levels such that rise in global temperatures is limited to no more than 2°C (3.6°F) and if possible, down to 1.5°C.17 Of the total 195 signatories to the agreement, 181 committed to cutting or limiting the growth of their greenhouse gas (GHG) emissions through shared responsibility. The signatories vowed to make “intended nationally determined contributions” of $100 billion a year from developed countries to developing countries by 2020, most of which will be spent on adapting to climate change. They also agreed to assess the progress made every five years and make public disclosure of every country’s carbon reduction. As the pledges are voluntary and unenforceable, transparent reporting of carbon reduction attained by each signatory is a sine qua non for its success. However, there is a perception that the agreement has no teeth when it comes to holding the governments accountable.18 Both shipping and aviation were included in the early draft, but omitted from the final agreement.19
According to the third IMO GHG study on shipping emissions, international shipping generated 800 million tons of CO2 in 2012. Compared with similar data from the second GHG study in 2007, CO2 emission from shipping has dropped from 3.3 percent to 2.7 percent. The IMO claim that this resulted from its coordinated efficiency enhancements and improvements in ship design was refuted vociferously by the Marshall Islands, a nation under imminent threat from the consequences of global warming and also the third-largest shipping register in the world. Island leaders believe that any reduction in CO2 emissions from shipping is mainly because of the slow-steaming practices in the post-2008 financially strapped trading environment.
The European Commission estimates that although international shipping and aviation currently account for only 5 percent of global emissions, they will escalate to one-third of all emissions by 2050. Emissions from European domestic flights are covered under the EU Emissions Trading Scheme (ETS), and the International Civil Aviation Organization (ICAO) has been tasked to propose a global alternative by 2016. Shipping is the only industry not covered under EU ETS or other emission control measures. On 1 July 2015, the European Parliament enacted EU Regulation 2015/757 on monitoring, reporting, and verification (MRV) of CO2 emissions from shipping on voyages to, from, or between EU ports. It is to be implemented in three phases, and on completion of preparation time, the monitoring period will begin on 1 January 2018. Additional energy efficiency reporting requirements were imposed on the larger European shipping companies from 2015. Every ship will be mandated to have a document of compliance relating to the relevant reporting period from 30 June 2019.
A recent International Monetary Fund Report advocates internalizing the cost of CO2 externality through carbon taxes and supports the EU approach.20 The shipping industry recognizes that some sort of carbon pricing is unavoidable and highlights their investment in fuel-efficient ships. However, they would prefer industry self-regulation through IMO coordination to the EU-driven regional MRV approach.21
One of the IMO’s last actions in 2015 was to resolve to reduce administrative burdens in shipping. Discontent among mariners about increasing paperwork, especially related to the ISM Code and other recent mandates, was discussed in my previous Annual Reviews. This change is long overdue and will help the mariners focus more on their core duties and enhance safety at sea.
Cybersecurity received considerable attention in shipping circles in 2015. Maritime cybersecurity firms believe the industry is underprepared in this area, and the current systems of even the most sophisticated ship operators can easily be tampered with. International shipping associations—consisting of Baltic International Maritime Consultative Organization (BIMCO), International Chamber of Shipping (ICS), Intercargo, and INTERTANKO—are collectively developing standards and guidelines to address the cyber vulnerabilities, threats, and issues the industry faces. The group is working on standards and guidelines to minimize risk, protect shipboard systems, develop contingency plans, and manage incidents if they occur.
Domestically, the Coast Guard is taking the lead in addressing cybersecurity issues and protecting ports and their customers. The immediate goal is to help ports, carriers, and terminals create a cyber risk management strategy. This involves identifying a point person and conducting risk assessment, determining vulnerabilities of their systems, and mitigating those cyber vulnerabilities through a low-cost physical process when possible. The proposed strategy also includes incorporating cybersecurity into the training and education of mariners and shore-based personnel. A Brookings Institution paper on the topic proposes Congress giving the Coast Guard the authority to enforce cybersecurity standards.
The Suez Canal expansion was completed at a cost of $8.2 billion in August 2015. It involved the digging of 37 kilometers, created a second parallel lane, and widened and deepened 35 kilometers of the existing canal. The new 75-kilometer parallel channel will reduce transit time by up to seven hours. The canal is now used by 20,000 ships annually and is projected to increase to 34,000 transits by 2023 through an increase in daily transits from 49 to 97 per day. The increased transits are forecast to boost the country’s revenue from $5.3 billion in 2015 to $13.2 billion in 2023.22
While the canal expansion was carried out efficiently and well within the targeted completion time, the projected growth in transits is questionable. Fifty percent of the canal’s revenue comes from containership transits, with Maersk Line alone currently spending $750 million for their 1,400 canal passages. So, with the ships getting bigger in general, and a big ship replacing more than one smaller ship, it is unlikely that the number of transits will increase as projected. As discussed earlier, world trade is unlikely to experience the scale of growth fueled by China’s entry into the World Trade Organization. Finally, many containerships are now reportedly avoiding the Suez Canal and going around South Africa because of lower fuel costs. Such a transit at faster speed could save the carrier approximately $235,000 per voyage.
Piracy attempts appear to continue a declining trend worldwide. There were 246 pirate attacks in 2015 compared with 245 in 2014 and 439 in 2011. There is continuing concern that incidents off Nigeria are under-reported. Although vessel boardings and crew kidnappings increased in 2015, hostage-taking and use of firearms declined significantly.
There were no Somali-based attacks in 2015, and the designated high-risk area off its coast has been reduced in size. The Regional Cooperation Agreement on Combating Piracy and Armed Robbery Against Ships in Asia (ReCAAP), a cooperative agreement among nations of the world to combat piracy off the Horn of Africa, is in its tenth year and inspiring the affected nations in other piracy-prone areas to establish their own agreements.
An additional 42,500 mariner positions are required to crew new ships entering the market until the end of 2019, according to the 2015 World Seafarer statistics from Drewry Maritime Research. The worldwide supply of officers, currently at 615,000, will not grow commensurately. Drewry estimates a deficit of 15,000 officers within three years, which they believe will be offset by some officers working longer shifts and rotations.
Preliminary results of a survey conducted as part of the 2015 BIMCO/ICS Manpower Report found the majority of mariner respondents being content with life at sea, and their retention dependent on shipboard working conditions and happiness, timely wage payments, and career-enhancement opportunities. Two of three responding mariners are now able to find other jobs in three months. The most important recent changes in their lives include an increase in basic pay and internet access.
The Maritime Labor Convention (MLC) was implemented in 2013. The general perception is that this has been good for mariners and created a respectable work environment with mandatory employment standards and an effective regulatory enforcement system. Eighty percent of the world fleet is now under MLC oversight, and ships of non-ratifying states cannot escape its provisions. Mariners have access to a safe and secure workplace, fair terms of employment, decent living conditions, right to healthy conditions, medical care, welfare measures, and in many cases, a level of social protection unavailable in their own country. Overall, there is an improvement in shipboard quality of work life and accommodation standards, although more remains to be done.
Oil spilled at sea has been reduced. Table 2 shows oil spills greater than seven tons during the last 25 years, based on International Tanker Owners Pollution Federation (ITOPF) data. Not only has the volume of oil spilled been cut drastically, but the number of incidents dropped from 358 spills during the 1990s to 42 during 2010-15. Similarly, the number of losses in shipping has reduced by 45 percent in the last ten years.23 This shows the benefits of having a well-trained mariner workforce operating their ships safely and is also a testament to the implementation of many new safety regulations introduced in recent decades.
On 26 January 2016, Spain’s Supreme Court sentenced the captain of the Prestige oil tanker to two years in prison. This case was discussed in several previous Annual Reviews. The ship sank 250 miles off Spain’s northwest coast in 2002. The ship in distress was denied a port of refuge by Spanish, Portuguese, and French authorities and forced to drift at sea prior to splitting into two. She released 63,000 tons of fuel oil along the Galician coastline and heavily impacted the fishing grounds. The court overturned a previous sentence that had cleared the captain of criminal wrongdoing and also found the owner and the insurer liable. There is global outrage over the court’s decision in general, and the imprisonment of the 81-year-old captain, who had done all the right things in his professional capacity, especially in the absence of a coherent public policy. Aggressive criminalization of mariners, despite demonstrating professional competence under dire circumstances, continues to be a major detriment to their retention.
The car carrier Hoegh Osaka grounded off Southampton, the U.K., on 3 January 2015. Although no lives were lost, the incident shook the foundations of maritime safety culture. The excellent 76-page report issued by the U.K. Marine Accident Investigation Branch is a compendium of all that can go wrong on board a highly specialized roll-on, roll-off car-and-truck carrier and the gross incompetence of her officers. While one can understand the plight of ships caught in severe storms and freak incidents and disasters, no mariner would empathize with Hoegh Osaka’s incompetent officers and their leadership.
At the other extreme is the tragic loss of El Faro and her entire complement of 33 on board. This is a sad reminder of the unfettered fury of a hurricane and our vulnerability when confronted by its immense power. The 40-year-old ship, “jumboized” 20 years ago, sank off the coast of the Bahamas on 1 October 2015, while en route from Jacksonville, Florida, to Puerto Rico. She ran into the powerful storm that became Hurricane Joaquin. The captain attempted to outrun the storm but lost engine power and the ability to maneuver.
The fact remains that regardless of the advances made in technology and ship operations, a career at sea is not to be taken lightly. Yet, the mission continues as merchant mariners fearlessly transport 80 percent of global trade by volume and 70 percent by value.
1. “2015: The Ship Finance Year that Died Half-Way Through,” Lloyd’s List, 29 December 2015, www.lloydslist.com/ll/dailybriefing/12-29-2015.
2. “BW Group Makes Surprise Entry into Struggling Dry Bulk Sector,” Lloyd’s List, 16 March 2016, www.lloydslist.com/ll/dailybriefing/03-16-2016.
3. “Amid Oil Glut, Floating Storage to Form Price Floor for Tanker Rates,” Lloyd’s List, 29 December 2015, www.lloydslist.com/ll/dailybriefing/12-29-2015.
4. “Terminal Costs Rising and Profits Harder to Find, Drewry Says,” Journal of Commerce, 22 February 2016, www.joc.com/port-news.
5. “Japan Emerges as Top Newbuilding Investing Nation,” Lloyd’s List, 9 February 2016, www.lloydslist.com/ll/dailybriefing/2016-02-09.
6. “China Needs Market-Based Approach in Shipbuilding Consolidation,” Lloyd’s List, 22 January 2016, www.lloydslist.com/ll/dailybriefing/2016-01-22.
7. For comments from Darren W. McDew, see “Losing Our Sea Legs,” Norfolk Virginian-Pilot, 17 January 2016, http://pilotonline.com/opinion/columnist/guest. For comments from GEN Milley, see “Over Where? Army Struggles to Relearn Rapid Deployment,” Breaking Defense, 21 March 2016, http://breakingdefense.com/2016/03/over-where-army-struggles. For comments from GEN Selva, see “Four Star General Ardent Supporter of Jones Act,” The Maritime Executive, 15 April 2015, www.maritime-executive.com/author.
8. Carl Schuster and Patrick Bratton, “Sea Strangulation: How the United States Has Become Vulnerable to Chinese Maritime Coercion” https://www.linkedin.com/pulse.
9. “Exports to Have Limited Impact on Jones Act Trade: Kinder Morgan CEO,” Platts, 27 January 2016, www.platts.com/latest-news/shipping/2016-01-27.
10. “IEA: OPEC Deal Unlikely, Oil Glut to Continue,” Reuters, 9 February 2016, www.maritime-executive.com/article/iea-opec-deal-unlikely-oil-glut-to-continue.
11. “U.S. Boosts Product Tanker Demand by 1.5 Ships a Day” Lloyd’s List, 17 March 2016, www.lloydslist.com/ll/dailybriefing/03-17-2016.
12. “U.S. Oil Exports: Short-term Anemic, Long-Term Strategic,” Lloyd’s List, 4 January 2016, www.lloydslist.com/ll/dailybriefing/01-04-2016.
13. “CMA CGM to Deploy Six 18,000 TEU Ships from Asia to West Coast” Journal of Commerce, 3 March 2016.
14. “Mega-ships Are No Panacea, Hapag-Lloyd CEO Says,” Journal of Commerce, 29 February 2016.
15. “Yang Ming Chairman: Ultra-large Containerships? Just Say No,” Lloyd’s List, 11 November 2015, http://www.lloydslist.com/ll/dailybriefing/11-11-2015.
16. Arthur Donovan and Joseph Bonney, The Box that Changed the World: Fifty Years of Container Shipping—An Illustrated History (East Windsor, NJ: Commonwealth Business Media, 2006).
17. “AgTC Supports USCG on Box Weighing Rules,” Lloyd’s List, 15 March 2016, www.lloydslist.com/sector/containers/03-15-2016.
18. “The Paris Climate Pact Will Need Strong Follow-Up” The New York Times, 14 December 2015.
19. Ibid.
20. “After Paris: Fiscal, Macroeconomic, and Financial Implications of Climate Change,” International Monetary Fund, http://www.imf.org.
21. “Shipping Measures Cut More CO2 Emissions than Most Nations, Says ICS,” Lloyd’s List, 26 November 2015, www.lloydslist.com/ll/daily-briefing/2015-11-26.
22. A container ship traveling from Asia to USEC is charged typically about $465,000 for each transit.
23. “Safety and Shipping Review 2016,” Allianz Global Corporate & Specialty, www.agcs.allianz.com.
Can the United States Be Saved?
By Norman Polmar
Every few years there has been an effort to save the superliner SS United States—the world’s fastest ocean liner. The most recent came in February of this year, when cruise operator Crystal Cruises announced it will rehabilitate the United States and operate her as a luxury cruise ship. The firm estimates the cost to save the ship to be more than $700 million.
If this effort fails, the ship will undoubtedly be scrapped. She has been tied up since 1969 and has been rotting at a Philadelphia pier since 1996. During the last four-and-a-half decades the United States has been put up for auction, purchased by groups that wanted to save her, and towed across the Atlantic and through the Mediterranean Sea to Turkey and Ukraine, before ending up at Pier 82 in Philadelphia.
In 1978 United States Cruises proposed to refurbish the ship for service between California and the Hawaiian Islands, later changed to a cruise schedule along the U.S. West Coast and Alaska as well as to Hawaii. There were proposals by the firm to update the ship in both American and West German shipyards. In 1979 the Prince of Peace Foundation planned to rehabilitate her to become a “think tank that would ferry scholars across the seas to solve humanity’s problems.” Among a score of other proposals for the liner were rebuilding her as a luxury apartment block or floating hotel-restaurant (like the liner Queen Mary) or converting her to a 2,000-bed military hospital ship.
All of these plans failed to materialize. The deteriorating condition of the United States requires that action be taken in the very near future, or she will simply rot away—an inglorious ending for a great ship.
Built by Newport News Shipbuilding in Virginia, the United States was completed in 1952 at a cost of $79.5 million, of which the United States Lines paid $25 million for “ownership” of the ship. She had luxurious accommodations for 1,600 passengers. But she was built to Navy requirements, which required conversion in two days to a troopship to carry 14,000 men.
Propulsion was provided by four steam turbines that generated 240,000 horsepower—more than any warship except for super carriers. Reportedly, she never ran at more than 149,000 horsepower. Still, on her first trans-Atlantic run in July 1952 the United States made the 2,906-mile voyage at an average speed of 34.51 knots—the unbeaten record for an Atlantic liner crossing.
The Chief of Naval Operations at the time, Admiral William M. Fechteler, said the ship had reached 35.59 knots on that maiden voyage. (There are credible reports that on her May 1952 trials, the United States reached 38.52 knots.)
The ship made 455 commercial crossings of the Atlantic. But by 1957, air travel was offering too many advantages over ship crossings, and the United States was losing money. Caribbean cruises were introduced to increase revenue during the slack winter months. However, the end came in November 1969, when the ship was tied up at the Newport News shipyard.
Although this latest plan to save the United States has been estimated to cost more than $700 million, some observers believe that the cost could reach almost double that amount because of the need to replace her engines, remove contaminants such as PCBs, and meet today’s stringent safety regulations in addition to a total rehabilitation
The United States embodies an era when America ruled the seas as a naval power and possessed a major merchant fleet. Unfortunately, today there seems to be little interest in preserving the latter heritage.