A Bleak Scenario:

After 2 consecutive years of decline, the container shipping industry globally is expected to continue facing a tough time in 2010 – (Business Monitor International – BMI).

This forecast is based upon global port container throughput indicators for Q4 2009.

Indicative decline in Ports’ Container throughput in 2009 (yoy):-

Singapore          17.8 %.

Hong Kong      18.85 %.

Shanghai,        16.45 %.
Durban,           13.58 %.
Los Angeles    11.39 %.

Long Beach     23.21 %.
New York             2.2 %.

Container Shipping companies worldwide have been significantly negatively affected by the global economic downturn, losing more than $10 billion in 2009.

Rate decreases and the fall of cargo volumes have affected all companies from Europe to Asia including China and Japan.

In 2009 Global consumption and investments have reduced substantially, and this has directly impacted world trade. Even the robust growth in India & China has not been sufficient to offset the decline in trade volumes.

 The overall container market volumes fell by approximately 13%in 2009.

Average freight rates in 2009 were USD 2,370 per FFE (Forty foot equivalent unit), equivalent to a 28% decline yoy.

 ‘Ship makers and container ship companies used cheap financing, (the equivalent of the housing industry’s sub-prime mortgaging), to order and build too many vessels in advance of the global trade downturn that began in 2008’ – (Seaspan’s Mr. Gerry Wang), this has exacerbated an already weak market.

In Q1 2010, the cargo volumes on major trade lanes have been seen to be increasing, however, low freight rates, rising fuel prices & new-building deliveries coming on stream are affecting financial performance.

Drewery Shipping Consultants forecast a 2.4% increase in container market volumes in 2010; however this will be offset by an expected capacity expansion of 7.9% in 2010.

Hence this is likely to further widen the demand supply imbalance. Fundamentals are expected to remain weak at least for the next five years, till end 2014, mainly due to the additional tonnage coming on line.

As freight rates are determined by global supply and demand, container shipping companies are generally price takers.

Industry fundamentals in the case of container shipping are currently weak because of uncertain demand recovery and excess capacity in the market.

Major Concerns:

• Bunker Fuel prices are again nudging USD 500 per tonne in Apr 2010, compared to the average of USD 342 per tonne in 2009. This translates into a 46% increase over 2009 bunker prices.

• Governments, banks & group companies have bailed out many container operators, hence, in spite of the severe downturn, not many have gone out of business. This indicates that the current demand-supply scenario is not realistic, with too much over supply still in the sector.
• In 2010, 7-10% of additional tonnage, in terms of new-building deliveries is expected for the global container fleet. The container sector’s considerable new-building order-book is a major threat to recovery, as it is unlikely that trade volumes would demand such a fleet in the mid term.
• As trade volumes improve in 2010 shipping lines will be tempted to bring their vessels out of lay-up and try to lock in cargos before their competitors.
  Bringing back idled ships at the first sign of an upturn would be very regressive; the lay up strategy is not only about reducing opex costs, but it is also about exerting upward pressure on freight rates by reducing the overall supply of ships.
• Due to these reasons, the expected increases in freight rates in some of the key routes are not expected to lead to an acceptable return for container line operators in 2010.
• Maersk Line which holds 16% market share globally, posted substantial losses in 2009 (USD 2.1 billion) compared to a profit in 2008 (0.6 billion). However the container volume handled by Maersk, in terms of percentage change yoy, was only -1%. Indicating that Maersk slashed its rates in order to attract clients.
• In 2009 major shippers began to turn their business to container carriers perceived as financially sound and likely to be around for the long-haul. This has exerted even more pressure on smaller operators. 
• Fleet age – A younger fleet means lower operating-expenditure and this is associated with less capital expenditure in the future. If the fleet age is comparatively high; maintenance costs and future capital expenditure too would be relatively higher again having a negative impact on the bottom line.
• The top 25 carriers have boosted their combined operated capacity by 5 percent over the last 12 months. But strategies pursued by different carriers vary widely, as 10 of the 25 major lines have increased capacities, while the remaining 15 have kept capacities unchanged over the last year.
• GOA – (Gulf of Aden), Somali Pirates have hijacked 46 ships in 2009, (117 unsuccessful attacks), & 7 hijackings till date in 2010, (13 unsuccessful attacks), even though more than 20 warships from 14 nations are patrolling to try to stop the attacks. Piracy has raised insurance costs and prompted some ship owners to send their vessels on longer routes around the Cape of Good Hope, instead of via the Suez Canal.

New Initiatives:

The major container shipping operators have undertaken certain new initiatives during these troubled times to sustain growth. Some of these key initiatives involve restructuring the organization. The structural options include organic growth, acquisitions, joint ventures, alliances, and networks.

Alliances & route sharing – In recent times, formation of Alliances & route sharing, have given the major operators a good bargaining power with the port authorities & stevedore companies.

By means of route sharing, competitors have pulled together to pool their resources & reduce over-capacity on trunk routes, thus freeing up tonnage for other routes.

For example, The New World Alliance (APL, Hyundai MM and MOL) along with Maersk Line, co-operate on Tran-Atlantic routes, cutting the capacity on this trade route by a third. Taiwan’s Evergreen Line has teamed up with APL, Hamburg Süd, Hapag-Lloyd and Hyundai Merchant Marine on their Asia-Australia container trade routes, namely, the Asia-Australia North (AAN) service and the Asia-Australia South (AAS) service.                                            FIX – (Far East India Express) – Hanjin, STX Pan Ocean and Korea Maritime Transport Company (KMTC), are cooperating by pooling 5 vessels of 2,500TEU capacity on the route.

IFX2 – (Far East Express 2) -  Hanjin Shipping will join this service operated by Singapore’s Pacific International Line (PIL), Japan’s Kawasaki Kisen Kaisha (K-Line) and India’s Shipping Corporation of India (SCI) from September 22 2009.

The Budget Airline Model - Norway-based The Containership Company (TCC) has devised a new container line operating model similar to the model used by budget airlines. Their savings devolving from lower charter rates in the downturn will be passed onto the shippers. Just like budget airlines, TCC will operate out of Taichung, rather than Shanghai.

Slow steaming – Slow steaming is being utilized to ease the situation of excess capacity. Operating the Engines at about 40% load effectively reduces the fuel consumption to less than 50% of normal rated consumption. A corresponding reduction in the consumption of cylinder oil is directly proportional to the reduction in engine load. This reduction is further helped by retrofitting the economical Alpha™ or RPLS™ lubricating equipment. On large (6,000 TEU & above) containerships, the engines are operated for 12 hours at a load of 10% of MCR (speed 12 knots), known as super-slow steaming & at a load of 50 % for the remaining 12 hours in a 24 hour period.

Isolating one out of the three Main-engine turbochargers has also contributed substantially to the above stated fuel savings. This procedure is suitable for continous operations on slow-steaming mode for the main diesel-engines.

Another positive spin-off of the above cost saving option is that the resultant increased voyage duration necessitates additional vessels’ utilization.

To get an idea of savings in operating costs, please see below figures based on experience for a 6,000TEU container ship operating under slow-steaming conditions..

Normal load operation (Average engine load – 85%):-

Speed 25 knots, Fuel cost – USD 90,000/day, Lube oil cost – USD 3,200/day.

Slow-steaming operation:- (Average engine load – 40%):-

Speed 16 knots, Fuel cost – USD 45,000/day, Lube oil cost – USD 800/day.

The above savings easily offset the incremental cost of more frequent Main engines’ maintenance & supply of spare-parts; Additional costs – USD 275/day.

Lay-up – excess tonnage has been taken out of service and laid-up, awaiting a turn-around in the present scenario. Depending upon the fleet usage and forecast, vessels can be either ‘Hot’ or ‘Cold’ (complete shut-down with NIL crew and only security guard attendance), laid-up, thereby reducing the manning & operational cost. This is a short-term strategy that allows companies to reduce capacity and cut operating expenses. A concerted effort has been undertaken by container line operators through scrapping, laying up and deferring the delivery of new-build vessels to try to decrease overcapacity in the market.

Economies of scale – Container shipping benefits from economies of scale in – maritime shipping, transshipment and inland transportation. Introduction of uniform transhipment procedures worldwide, have reduced the turn-around time & cost.

Technical innovations such as using rail instead of trucking to move containers from or to terminals, has improved inland transportation, thus avoiding congestion, caused by more trucks converging towards terminal gates.

In India, the IndiaLinx™ container freight rail service performed strongly based on its ability to reduce cargo transportation times between India’s key inland locations and major ports by 4-5 days compared to trucking.

Such contractual relationships with Rail companies & trucking companies (Intermodal tie-ups), have reduced the net transportation cost and delivery time.

Innovations – Other modern innovations such as web-based e-Invoice solution, INTTRA™, are being used. These allow customers to submit, receive, review and process invoices more efficiently and accurately, thus cutting down on the time and costs. 

Opportunities:

• The Baltic Dry Index (BDI) has shown a steady improvement since Q3 2009 through Q1 2010, sustaining above 3000. Many consider this an excellent sign for the world economy. The BDI which measures the price of shipping dry bulk cargo, such as coal, iron ore, and grain. A strong BDI signals an overall growth in the Global economy. Thus positive returns in demand for finished goods (containers) can be expected after around six months following the firming up of the BDI.

• Container traffic and GDP growth move in tandem. The US came out of recession in Q3 2009 and in 2010 the country’s consumer confidence is expected to return. This will have a knock-on effect on manufactured goods inventories. In 2010 the US’ total trade will grow by three per cent and exports by four per cent. These increases will affect throughput at the nation’s ports. Container throughput will increase at the US’ main West Coast ports of Los Angeles and Long Beach by 2.23 per cent and 5.84 per cent respectively. – (BMI).
• Exposure to a well balanced mix of routes is likely to be healthier for container shipping operators in the long term. Globally the cargo volumes are expected to rise by 3-5% in 2010 relative to 2009 & the freight rates are also expected to rise.
• Container freight rates for the Asia-Europe trade lanes have returned to 2007 peak levels. Mediterranean Shipping Company (MSC) will implement a new general rate increase (GRI) on the westbound trades from India to Europe from May 17. The planned increase will be $250 per 20-foot equivalent unit.

CMA CGM and Zim Integrated Shipping Services announced similar GRIs on the same trade lane, starting in early May. Hapag-Lloyd will also be increasing rates on cargo shipped from the Indian subcontinent and the Middle East to Latin America. – (Journal of Commerce).

As of 5th April 2010, APL handled 204,400 FEUs (40-foot equivalent units), in the preceding four week period, compared with189,100 FEUs in the previous four-week period that ended on 5^th March and 155,400 in the year-earlier period. The increase in the most recent period was mainly due to higher volumes carried from the trans-Pacific and Intra-Asia trade lanes.

• Taiwan’s leading container shipping firms, including Evergreen Marine Transport Corp. and Yangming Marine Transport Corp., have recently announced raising the freight rates on the Asia-Europe routes beginning 1st March. Evergreen and Yangming raised the freight rates on the Asia-Europe routes by between US$275 and US$300 per TEU (twenty-foot-equivalent unit) to reach the breakeven point of US$2,000 per TEU, enabling them to meet the operating breakeven point in the first quarter of this year. – (CENS)
• Currently the Trans Pacific routes are under-priced and a price increase is expected in 2010. Therefore, companies that have exposure to this route are likely to benefit.
• BMI also forecasts that China’s exports will improve by a massive 10.96 per cent in 2010.
• To sustain its advantage in exports, China needs move manufacturing to interior areas where labor costs are as yet low. This diversification of product sourcing away from coastal areas in North China to inland China (and similarly in other South East Asia countries, such as Vietnam and Indonesia, to alternative interior locations), necessitates good transport to the coast.  
• India’s GDP is expected to grow by 7% in 2010 & it is projected that container traffic at Indian ports will closely track a similar growth pattern.
• South Korea has signed a Comprehensive Economic Partnership Agreement with India in August 2009. Lower import tariffs are expected on cars and manufactured goods, including electronic items.

• New players in the container segment will be able to pick up second hand vessels cheaply in expected fire sales as smaller companies struggle in the container shipping sector.
• New-building ships are available from Korean yards at a 40% discount from the peaks recorded in 2007.

Conclusions:

Large players are expected to benefit since they would be in a position to consolidate their positions by means of acquisitions and alliances. Strong alliances & consistent practices will ensure that the partners work together and optimize their fleets.

The ongoing initiatives have definitely helped bring up the spot rates in Q1 2010. However, for the business to become profitable, dedicated efforts to further strengthen the market are needed.

Smaller players would benefit by focusing on regional trade in Asia. Future growth in China, India, Vietnam etc would be require handy sized vessels with shallow draft.

Such local players in Asia would not have exposure to the War-risk & piracy premiums applicable to vessels trading through Gulf of Aden.

New Players who may desire to enter the container business and who have escaped the brunt of the crisis, could find excellent bargains for new-building as well as second-had tonnage.

Overall however, due to the continued lack of clear direction shown by the global economic recovery, the 2010 outlook for Container shipping is still subject to considerable uncertainty.

Specifically, it is difficult to project the rate of recovery in container freight rates, bunker prices, operated capacity and the strength of the USD.

In these uncertain times, it is necessary for all the players to continue to focus on further improving effectiveness, competitiveness, efficiency, and flexibility.

Good MIS (management information system) is essential for container operators to analyze the market trends and adapt dynamically to the emerging scenario.

“He is a great CE, he can tell you which unit is misfiring by listening to the change in engine vibrations.”

All of us strive for technical excellence. But having said this, we should not exclude the “Commercial” aspect of ship operations, which sometimes gets neglected in our day-to-day goals & targets.

Whenever we engineers see the legal jargon & convoluted sentences of a typical CP document we tend to ‘switch off’.

But if I were to say –“Knowing the relevant technical part of the Charter Party could save an amount MORE than the annual spares budget of a ship!” – we would get ‘switched-on’ immediately.

Consider the text in the box below – this is a recent charterer’s claim for ‘Underperformance’ of a modest 6,000dwt ship. It’s for a period of 1 year, and yes, the amount claimed is USD 120K!

None of the claimed USD120K refers to any engine break-down or off-hire.

And yes, for a similar case, the claim would be in hundreds of thousands for a bigger vessel such as Aframax or VLCC.

In terms of breach of tc/p Clause 24 (a), Owners are hereby held responsible for the time lost and the over-consumption of bunkers to Charterers.

Total Off Hire Cost due to Underperformance Ballast + Laden= USD 120,257.50

By the time such a message is received by the owners, it is too late to do much damage control. At best we can analyse the daily noon reports & log book entries and make our own calculation for steaming hours & MT of HFO etc.

Typically the Speed & consumption figures would be stated in a CP in format such as below:-

With reference to M/T XYZship / OilCorp cp 01/8/2007, Clause 24, Owners guaranteed subject vessel’s speed and bunkers’ consumption as mentioned below.

Ballast Condition:

C/P Speed: 12.00 knots

Warranteed IFO (incl LSFO): 12.0 mts per day

Warranteed MGO: 0.60 mts per day

In Good weather conditions (meaning – Wind Force up to and including 4 BF)

Laden Condition:

C/P Speed: 12.00 knots

Warranteed IFO (incl LSFO): 12.50 mts per day

Warranteed MGO: 0.60 mts per day

In Good weather conditions (meaning – Wind Force up to and including 4 BF)

The above bunker consumptions are for all purposes ‘except’ for cargo heating and tank-cleaning.

How does the owner decides which speed and consumption to be inserted in the C/P?

Ideally the owner would keep a continuous record of the vessel performance and use this data when making the fixture. However not many owners do so.

Most often, the owner commits to the CP speed and consumption based upon sea-trial data & warranties given by the shipbuilding yard at the time of new building.

The commercial operator sends the CP to the vessel, but the inputs from Technical Supdt or CE are not often requested before committing to the technical parameters (namely speed & consumption).

How does the charterer decide how the ship has actually performed?

Charterers have a right to obtain the performance parameters of a chartered vessel and claim for damages if any.

An arbitration panel will decide the speed and fuel performance by analyzing the data from during the warranted weather conditions during the voyage.

The onus of proving a breach of the Charter’s speed warranty and underperformance lies on the Charterers.

The performance for the entire voyage is determined solely upon the average speed during moderate weather days.

The data from ships noon reports, logged entries and routing service are used for the calculations.

In case of any arbitration the Log book records are given precedence over the “Routing Service” reports, unless they can be proven to be incorrect by the party claiming the underperformance.

If the Charterers do not trust the reliability of the logs, it is up to them to prove it.

Any deduction from charter-hire for a voyage is adjusted to take into account the mileage steamed under Adverse Weather Periods.

Also the external factors that affect the speed are taken into account – called ‘environment disclaimers’ such as – No swell / No adverse current – etc.

For this purpose it is most important that the deck officer records the Weather data in the deck log book correctly and that it show the actual wind speed and direction.

The speed used for calculations is ‘speed through the water’ rather that the speed over the ground.

The owners can claim for under-consumption (of bunkers), if the Charterers makes a claim for loss of time, in which case the cost of the fuel saved is set off against hire lost.

How can we help to protect the Ship-owners interests?

As CE:-

1. Get a print copy of current Charter Party from Master.

2. Monitor the ME RPM & observed speed & compare it to the CP, before sending in the daily noon report.

3. Ensure that FAOP & EOSP are logged (Bridge/Engine), only after the ME RPM is normal (typically 85% MCR) & the Vessel Speed has attained the specified CP speed.

4. Check that the weather condition Beaufort 4 or above is recorded by bridge watch-keepers. Especially if part of the day was worse weather.

5. To ensure that the speed is maintained above the Laden / Ballast speed as specified in CP – (Whenever the weather was better than Beaufort 4).

6. Ensure that any deviation miles from noon-to-noon distance are recorded by bridge watch-keepers. – (Such as for avoiding storm / piracy area / fishing vessels / traffic separation etc).

7. Plan for any scheduled maintenance etc on good weather days, when the observed distance noon-to-noon is achieved better than CP – (stoppage for change of ME exhaust valve / filter cleaning etc).

8. A simple way to ensure awareness & better compliance would be to including the target ‘CP figures’ in an adjacent column of the CE noon-report – (e.g. When we get a blood test result – the “Normal range” is also shown alongside the column – (130-250 mg%)).

As Supdt:-

1. Office Briefing –allow some time to cover the commercial aspects & CP requirements during Senior officers pre-joining briefing.

2. Review vessels’ noon-reports for correctness of data & compare to CP requirements, especially when a new Master or CE has joined the vessel.

3. Revert to Master & CE in case of any discrepancies.

4. Request for any Missing data:-

- CP speed

- CP wind force

- CP consumption

- Dep ROBs

- Bad weather figures.

- Dep SBE consumption figures

- Dep Manov consumption figures

- Av Slip

- Estimated BHP

- Reason for 2 Gens

If I now tell you, that next year, by monitoring the above we achieved ‘NIL’ CP claim, I don’t think many would be surprised.

Even as she continued operations with the same voyages, without any major repairs, dry-docking, or hull cleaning etc!

A well-informed Marine Engineer can easily plan Engine operations & pre-empt such a CP claim.

After all, the charterers will use our vessel reported data to make their case. If we understand our data well, there will be no loop-holes whereby we expose ourselves to such a claim. “Its not rocket science…”.

Now if only the owner would give us that well deserved USD 120K to buy that complete set of AE cyl heads & pistons which I have been eyeing for some time……………. Dream on..!