As cheap as ships?
For third successive year, all categories of shipping expenditure in 2017 were down, most notably for insurance costs and stores
RUNNING ships is getting cheaper. Costs are going down. Now, before shipowners start throwing bricks through my window and shippers accuse container lines of manufacturing bunker adjustment factor surcharges, it should be made clear that we are talking about costs other than fuel.
That said it still seems surprising that international accountant and shipping consultant Moore Stephens is able to report that total annual operating costs in the shipping industry fell by 1.3 per cent in 2017. This compares with the 1.1 per cent average fall in costs recorded for 2016.
For the third successive year, all categories of expenditure in 2017 were down on those for the previous 12-month period, most notably for insurance costs and stores.
Moore Stephens' ship operating costs benchmarking tool OpCost 2018 shows that total operating costs for the tanker, bulker and container ship sectors were all down in 2017, the financial year covered by the study.
On a year-on-year basis, the tanker index was down by 3 points, or 1.7 per cent, while the bulker index also fell by 3 points, or 1.9 per cent, with the decline in both indices repeating that seen in the previous year at 3 points, or 1.7 per cent, for tankers and 3 points, or 1.9 per cent, for bulkers.
The container ship index, meanwhile, was down by 2 points, or 1.3 per cent, compared to the fall in the previous year of 1 point, or 0.6 per cent.
It would seem evident that this trend cannot keep going on. Richard Greiner, Moore Stephens partner, says: "The likelihood is that operating costs will increase when the markets improve significantly."
Intriguingly though, he adds: "Such increases must, however, be balanced against the technological advances which have already started to make shipping markedly more efficient and more cost-efficient.
"There will be more significant operating efficiencies - and more fluctuations in overall operating costs - to come. That is what makes shipping such a challenge."
So are we actually seeing an underlying long term real decline in the cost of shipping?
I doubt it. There are too many new demands being made on the industry. Adjusting to the 2020 sulphur cap and complying with the Ballast Water Treatment Convention will be expensive.
Insurance issues
Nevertheless costs continued on their downward track last year and insurance costs fell the most. Mr Greiner says this may be due in part to a significant reduction in the overall incidence of large, expensive casualties over the past couple of years. But, he adds, "the size and frequency of the cost reductions is still worthy of note".
He notes: "Expenditure on protection and indemnity (P&I) insurance was also down, which is again a reflection of the relative dearth of major casualties over the course of the year. The International Group, through its pooling agreement, reinsurers, and owners themselves will have felt the benefit of that in their pockets."
Those pockets can be under threat, however: Mutual liability insurer The American Club has spotted a clever wheeze by some charterers who are requiring the shipowner to provide a "continuing warranty of seaworthiness" for the entire duration of the voyage as part of contractual terms.
P&I cover for cargo risks is conditional upon the shipowner not contracting on terms less favourable than the Hague Visby Rules (HVR), which require the ship to be seaworthy before the voyage commences.
If cargo owners can show that their loss was caused by a failure of the carrier to exercise due diligence to make the vessel seaworthy before and at the commencement of the voyage, the resulting loss will fall under P&I cover.
If, however, the loss was shown to have been caused by some event which affected the vessel's seaworthiness only during the voyage, the carrier would not be liable to the cargo interests.
A continuing warranty of seaworthiness makes the carrier potentially liable for any and all events affecting the vessel's seaworthiness during the entire voyage. This would represent terms less favourable than the HVR and so place any resulting claims outside P&I cover. This looks like something that could keep the legal fraternity busy for a long time.
Talking of costs again, there's a fascinating competitive spat under way between some of the big open registers.
International Registries (IRI) which runs the Republic of the Marshall Islands (RMI) Registry has put out a statement saying it will not follow its competitors by levying surcharges and commissions on vessel documents and certificates issued on its behalf by the classification societies.
The RMI Registry says it "will continue to provide its clients with a transparent pricing structure for the issuance of key certificates needed by shipowners".
Apparently Liberia has now joined Panama, Belize and Honduras in the practice of adding a flag state surcharge to the class fees for such certificates.
IRI's president Bill Gallagher can spot a competitive edge when he sees one and has announced to the world he has no intention of following suit. Ship registration can be a rough game.
