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PAPERS-
Transport
Transport,Water,and UrbanDevelopment
Department
The WorldBank
Aprii 1993
WPS 1128
The InternationalOcean
TransportIndustry in Crisis
Assessingthe Reasonsand Outlook
HansJurgenPeters
The world's ocean transportindustry faces an unprecedented
crisis. Fundamental changes in the seatrade markets and
considerable discrepanciesbetween tonnage supply and the
demandfor transportarethe keyreasons.The internationalfleet
has becomecriticallyoveragedand suffersfrom a deteriorating
safetyrecord. Seriousretrenchingand sharplong-termplanning
are neededbut - hamperedby reducedfreightearnings,rising
insurancecosts, and a shortageof investmentcapital.
PolicyReseuabWoikingPapessdiseminatewtefindingof wok inproress andenourage theechange of ides amongBasnksaffand
al othaesinacsed indevelopmentissues.Thesepaperscry de nanmes
of theauthn. rlect onlytiir views, and shouldbeused and
cbedaccordiny. The findings.inteprctations.and conclusionsaretheauthors'own.Theyshouldnotbe attributedtothe WorldBank.
its Boardof Directors,its managemnent,
or any of its manbercounties.
Policy Research
Transport
WPS 1128
This paper -a product of the Transport Division, Transportation,Water, and Urban Development
Department -was
prepared in the course of the department's efforts to monitor developmentsin
intemationalfreightmarketsand thetransportindustriesthat servethem, as a basisfor advisingthe Bank
groups' operationalunits aboutpolicyimplications.Copiesof the paperare availablefreefrom the World
Bank, 1818H StreetNW, Washington,DC20433. PleasecontactJoanne Lucas-Walker,room S10-022,
extension31078(April 1993,49 pages).
Until 1980,the worldmerchantfleet expanded
rapidlyin responseto thriving seatrademarkets.
Sincethen, it has not grownmuch.The industry
did not adjusteffectivelyto periodicglobal
recession,and the fleet's earningsdeterioratedas
the gap widenedbetweenthe supplyof tonnage
and the demand for transport
The unpredictabilityof seatrademarketsand
the changingsnicture of demandfor ocean
transportcomplicatedshipowners'effortsto
retrenceand draw up defensivestrategies.
Advancesin ship design and oceantransport
technologiesallowedshipownersto adjustto the
greater need for specializedvessels,but choseto
retain their assets and their adoptionwas
expensive.
Most shipownersadded only a few new
vesselsafter 1980,often supportedby
governmentsubsidies.Governmentregulations
created seriousdistortionsin oceantransportand
impededfree market adjustments.
The most seriousissuesthe industryfaces
are a criticallyoveragedfleet and shortageof
capital.Becauseof reducedfreightearnings,
maintenancehas been neglected,leadingto
frequentstructuralfailure. Ship casualtiesoften with seriousenvironmentaldamage-
have reachedalarminglevels.The deteriorating
safetyrecordhas causedinsurancecosts to
escalateand has provokedcalls for stricter
liability rules, stringenttechnicalstandards,and
rigorousinspection.Enforcementwouldmake
ocean transportmoreexpensive.
To meet expecteddemandfor ocean
transportsafely and efficiently,a great deal of
overagedtonnagemust be replaced,maintenance
must be improved,and new tonnagehas to be
added.The estimatedcost: almostUS$400
billionin constant 1992prices.
But traditionalfinancing,throughmortgage
lendingand govemmentsubsidy,is becoming
scarce.Leasingor cashflow-basedlendingare
promisingaltematives,but they require
predictablerevenuestreamsbased on long-term
freightcontractspredicatedon cargo-owners'
cooperation,which remainsdoubtful.
No effectivearrangementshave beenmade
to meet the industry's capital requirements,and
doubts are morenumerousthan assurancesin the
industry.
The crisis that has developedis
unprecedented.
ThePolicyResearchWorkingPaperSeriesdisseminates
thefndingsof workunderwayin theBank.Anobjectiveoftheseries
is to get these findingsout quickly, even if presentationsare less than fully polished.The fmdings,interpretations,and
conclusionsin these papersdo notnecessarilyrepresentofficialBank policy.
Producedby the PolicyResearchDisseminationCenter
Policy Research
WORKING PAPERS
Trade and Transport
Transportation,Water, and
Urban DevelopmentDepartment
The World Bank
THE INTERNATIONALOCEAN TRANSPORTINDUSTRY
IN CRISIS
Assessing the Reasons and Outlook
Hans Jurgen Peters
THE INTERNATIONALOCEANTRANSPORTINDUSTRYIN CRISIS
Assessing the Reasons and Oudtook
TABLEOF CONTENTS
Page
Index of Illustrations .......................................
2
Acknowledgements.........................................
3
List of Abbreviations.......................................
4
Glossary of MaritimeTerms ...................................
I.
Introduction ............................................
9
H. The Internation-aOceanTransport Industryat Present ..................
10
HI. Developmentsin the InternationalSeatrade Markets ...................
13
IV.
17
How the InternationalOceanTransportIndustry Copes with VolatileSeatrade ...
V. The Principal Issues in InternationalOcean Transport ..................
VI. Correcting World MerchantFleet Deficiencies .......................
VI.
Vm.
Annex:
The FinancingDilemma ............
.........................
ConcludingObservations ....................................
ExpectedDemand for Shipbuilding,TonnageDemolition,
Vessel Repair and Conversionduring the Period 1993-20
2.
25
31
39
44
.............. 45
-2-
THE INTERNATIONALOCEANTRANSPORTINDUSTRYIN CRISIS
Assessing the Reasons and Outlook
INDEX OF ILLUSTRATIONS
Page
A. TABLES
1. The World MerchantFleet and Newbuildingson Order ....
.........
2. The World MerchantFleet - Ownershipand RegistrationPattern ....
...
3. The Rise and Fall of Seatrade ............................
10
4.
Ocean TransportRate Indicators ...........................
22
5.
InternationalContainer Traffic - Vessel CapacityUtilization ....
6.
TonnagePrice Fluctuations ..............................
......
9.
15
23
24
7. The InternationalCommerciallyOperatedFleet ..................
8. The World MerchantFleet - NewbuildingRequirements ....
12
33
........
The World's LeadingShipbuildingNations ....................
34
35
10. Analysisof VesselsBrokenup in 1992 ....................... 38
B. FIGURES
1. World Seatrade- By Main Categories ........................
13
2.
Developmentof the World MerchantFleet .....................
18
3.
Owners' Attitudesin Times of Uncertainty.....................
19
4.
The World MerchantFleet - Newcomersand Departures ....
5.
VolatileFreight Earnings ...............................
21
6.
The World MerchantFleet - Age Distribution ..................
28
........
20
- 3 -
ACKNOWLEDGEMENTS
The analysis benefitted from market intelligence and statistical informationprovided by
followingorganizations
ContainerizationInternationai
Drewry ShippingConsultantsLtd., London
Fairplay InternationalShippingWeekly
Fearmleysand Fearnresearch, Oslo
Hansa Zentralorganfur Schiffahrt,Schiffbau,und Hafen
Indian Shipping(Journal of the Indian NationalShipownersAssociation),Bombay
Institute of Shipping Economicsand Logistics,Bremen
InternationaiChamber of Shipping
InternationalMaritimeOrganizaLion
Organizationfor EconomicCooperationand Development
Lloyd's Shipping Economist
Lloyd's Register of Shipping
NaftiliakiInternational,Pireaus
SeatradeOrganizationLtd., Colchesterand Hong Kong
SS&Y Research Services Ltd., London
The author is grateful to a number of colleaguesin and outside the Bank whoseopinion and
advice helped to interpretthe observeddevelopmentsand to sharpenthe presentation. Special
thanks are due to Esra Bennathanand Gregory Ingram o. dheWorld Bank, William Bolitho
of Australian National Lines (Melbourne), Karl-HeinzBreitzmannof Rostock University,
John Harper of the InternationalFinance Corporation, Nigel Hill of Hill Samuel Bank Ltd.
(London), Georgy Levikovof Soyuzmorniiproekt(Moscow), Karl-HeinzSager of Senator
Line GmbH (Bremen), Deborah Seymanof Lloyd's ShippingEconomist(London), Jayant
Shakdher of Paramount IntermodalTransport Pvt. Ltd. (New Delhi), and Keith Trace of
Monash University(Melbourne). SusanneHolste providedvaluableassistancein compiling
backgroundinformationand data processing.
- 4 -
THE INTERNATIONALOCEANTRANSPORTINDUSTRYIN CRISIS
Assessing the Reasons and Oatook
LIST OF ABBREVIATIONS
BFI
-
BalticFreight Index
cgt
-
compensatedgross tons
dwt
-
deadweighttons
EC
-
EuropeanCommunity
FOC
-
Flag of Convenience
FSU
-
Former Soviet Union
GECC
-
General Electric CapitalCoiporation
grt
-
gross registeredtons
gt
-
gross tonnage
Idt
-
light displacementtons
LNG
-
LiquefiedNaturalGas
LPG
OBO
-
LiquefiedPetroleumGas
-
Ore/Bulk/Oil
OECD
-
Organizationfor EconomicCooperationand Development
OPA
-
Oil PollutionAct (U.S.A.)
OPEC
-
Organizationof PetroleumExportingCountries
RoRo
-
Roll On/Roll Off
SMY
-
StandardMan-Years
TEU
-
Twenty-footEquivalentUnit
ULCC
-
Ultra Large Crude Carrier
U.S.A.
-
UnitedStates of America
US$
-
UnitedStates dollar
VLCC
-
Very Large Crude Carrier
-5-
THE INTERNATIONALOCEANTRANSPORTINDUSTRYIN CRISIS
Assessing tk Reasons and Outlook
GLOSSARYOF MARITIMETERMS
Baltic FreightIndex (BFI) - The BFI showsthe weightedaveragefreight rate level and weightedaverage
trip time charter hire level on a 3pecificday of the dry bulk cargo shipping market. It is centered on
thirteen frequently fixed and settled worldwidevoyages on selected routes. The BFI is traded on the
Baltic InternationalF, ight Futures Market (BIFFEX)for specified future settlementmonths--upto two
years ahead--byopen negotiation. The price beingquotedfor each contractmonthwillconstantlychange
in line with supply and demand in the market. Hence the (price) indicators will reflect the views of
investors in the market as to what the settlementprice for the futures contract will be and, thereby, what
the level of the physical shippingmarket will be at the time.
Bareboat Charter - A contract under which a shipownerprovides a vessel to a charter party. Under
this form of charteringthe shipownervirtuallyrelinquishesall responsibilitiesand rights in respectof his
vessel for a specifiedperiod of time, in returnfor a pre-arranged,regular paymentof hire. The charterer
becomes a disponentowner, operating, crewing,and charteringthe ship as though he were the owner.
Bulk Carriers/Bulker/DryBulk Ships/DryBulkers - All thesereferencesdenotevesselsthat range in size
from small coastal craft to shipsof over 150,000deadweightcapacitywhich are designedfor the carriage
of oulk commodities,like grain, ores, or fertilizers.
Bunker - Ships propulsior fuel
ClassificationSocieties - Independent,non-profitmakingbodies which are directedby committeesof
persons representing shipowners,shipbuilders,engine manufacturers,and underwriters. They exist for
the purpose of ensuring that ships are properly constructed and maintained in a seaworthy and safe
condition. To fulfill this function, the mc:, established societies make rules governing vessel
construction, arrange and carry out surveys during the construction of a vessel and throughout its
subsequenttrading life. They also conductresearch coveringconstruction,efficiencyand safety of seagoing vessels.
CombinationCarriers - Ships designedto carry either oil or other cargo, normally not concurrently.
They includeOre/Oilers(0/0), Ore/Bulk/Oilers(OBO),Oil Products/Bulk/CrudeOil carriers (PROBO),
and tankers wLch can also load a limitednumber of containers.
Conferences - Organizationswherebya numberof shipowners,often of different nationality,offer their
services on given sea routes on conditionsagreed by the members.
ContainerShips - Vesselsdesignedto carry full loads of containersin fixedcell guides. Containersare
frequentlycarried on deck where they require to be lashedand secured. The carrying capacity of these
ships is specified in TEU, and may range from 300 to 500 TEU for feedershipsto 4,500 TEU for the
most modern deep-sealinehaulunits.
- 6 -
Cross Trade - A shippingservice operatedbetweentwo seaboardcountries by an ocean carrier whose
fleet does not fly either of the nationalflags and therefore is a foreign or third party operator.
Deadweight Tonnage (dwt) - The weight of cargo, watcr, bunkers, and constant-weights(a fixed
allowancefor stores, spare parts, and the crew's effects)that may be carried when a vessel is down to
its load-linemark. Since the load-linevaries, depending whetherthe ship is in a winter, summer, or
tropical zone, it is important to specify to which condition t ie figure applies, although it is normal
practice to utilize summer deadweightwhen describingdeadweighttonnage.
General Cargo Ships - Most vesselsunder this category in today's market are tweendeckers,i.e. ships
with two or mole decks becauseof the numberof ports served and the range of products carried. With
the main engine locatedin the aftand thus avoidingthe necessityof a shaft tunnel, the cargo spaces tend
to be box-shapedto assist the stowing ot containers. 5oxed and palletizedcargo, whilst on deck most
designs allow for storage of containers. This vessel category is the most versati;e in the merchant fleet
as individualunits can also carry bulk cargo.
GrossRegistered Tons/Tonnage(grt/gt) - The total of all the enclosedspaces within a ship, expressed
in tons, each basis unit of whichequals 100cubic feet (2.831 cu.m). The term grt is progressivelybeing
replaced by 'gross tonnage (gt)', as definedby the 1969Conventionon Tonnage Measurementof Ships
which came into force in 1982.
Hull - A ship's body which is enclosedby the main or weather deck of frames, beams, and plates,
below which may be one or more decks dependingon the type of the vessel and the purpose for which
it has been built.
Light DisplacementTonnage (Idt) - The actual weightof an empty ship. It is this particular tonnage
figure that is used by sale and purchasebrokers when negotiatingthe disposalof a vessel for demolition.
CBO Carriers - Vesselsof the combinationcarrier group, which have commoncargo compartmentsthat
may be used for oil or for low-densitydry bulk commodities,such as coal and ore.
Panamax - Referencedto vessels with certaindimensionallimitationsto be able to transit the Panama
Canal.
Protection& IndemnityClubs - Mutual insuranceassociationsrepresentingmainlyshipowners,insuring
them against expenses and legal liabilitiesin respect of ships and their crews.
Rating - Seaman
Reefer Vessels - Shipsspecificallydesignedfor cargoeswhichdeteriorate in ordinaryhold temperatures
and conditions,such as meat, fish, vegetables,fruit, and dairy products. They are fitted with numerous
insulatedtweendecksand can, if necessaryalso be used for the carriage of non-refrigeratedgoods, like
cars, and bagged, baled, or palletizedcargo. But they are not equippedto carry bulk cargoes.
- 7 -
RoRo Vessels - Unit-loadvessels where thUcargo is movedon and off using trailers normallycarrying
containers. A common characteristicof these vessels is their intermodalcapability, which means that
their cargo can go directly into the highwaysystem.
Special Survey - Every four years vessels must undergo a special survey of hull and another of
machinery,althoughboth may be postponedfor up to a further twelvemonthsif the classificationsociety
agrees, followinga general examinationwhich proves the vessel to be in a satisfactorycondition. All
sea-goingvesselshave to be maint inedin accordancewith the rules and regulationsof the class to which
they were assigned.
Suezmax - Referenced to vessels with certain dimensionallimitationsto be able to transit the Suez
Canal.
Tankers (Oil and Product) - These vesselsare principallyinvolvedin the carriage of crude oil and its
derivatives. The oil tanker categoryessentiallycomprisesthree types: (1) the Ultra Large Crude Carriers
(ULCCs) which are used in long hauls; (2) the Very Large Crude Carriers which are used on the same
routes as the ULCCsbut with greater flexibilitiesin dischargingport options, owing to their size; (3) the
medium size Crude Carriers of 70,000 to 130,000tons deadweightare mainly used on short hauls from
Mediterranean,West African, Indonesian,and North Sea loadingterminalsto major nearby consuming
areas. Product tankers with 26,000 to 40,000 tons deadweightare used primarilyfor the distributionof
oil products from refinery to consumer.
Tankers (Chemical,)- Class of vessel specificallydesignedto cater for the liquid chemicalsmarket,
capable of transporting various grades of chemicals, solvents, and acids in a variety of cargo
compartmentsranging from mild steel-lined, through tanks provided with different coatings, such as
rubber-linedtanks for phosphoricacid.
Tankers (Gas) - There are two categories: (1) Liquid Natural Gas (LNG) Tankers, and (2) Liquid
Petroleum Gas (LPG) Tankers. The first category includes vessels designed to carry LNG, mostly
methane, which is held in a liquid state by pressure and refrigeration. The cargo spacesconsist of special
tanks whose upper sectionsoften protrudeabove deck height in domedor cylindricalform. The second
category are vesselsdesignedto carry LPG, such as butane or propane. These are also carried in special
tanks under pressure and at very low temperatures. The tanks are often rectangularin sectionand may
be flankedby wing tanks used to carry ballast water. The carrying capacityof both tanker categoriesis
specified in cubic meters; typicaltanker sizes range between25,000 and 75,000 cubic meters.
Time Charter - Under such contracta third party hires a ship for a fixedperiod of time. The shipowner
is required to operate his ship but insteadof freightpaymentshe receives previouslyagreed sums of hire
money, in advance and at regular intervals.
Trip Charter - This type of charteringsignifiesa situation where a ship is hired for a single voyageor
a roundtripunder which the owner maintainsthe responsibilityfor operatingthe vessel. But the rate of
hire applicable to trip charters is generallymore related to current spot market freight rates and not to
the somewhatlower freight levels that are normally associatedwith time charters.
Twenty-footEquivalent Unit (TIEU)- The basic unit for expressingthe capacityto carry containers on
cellular, part-container,or RoRo vessels. The purposeof this unit is to have a commondenominatorfor
ships designed to move containersof 20, 35, or 40 feet in length, with a standard width and height of
eight feet. Capacity is also expressedin FEU ( = forty-footequivalentunits ).
Ultra Large Crude Carriers - Large tankers of no official size but variouslydescribed as being one
between 350,000 dwt and 550,000 dwt.
Very Large Crude Carriers - Large tankers of no official size but variously described as being one
between 100,000 dwt and 350,000 dwt.
- 9-
THE INTERNATIONAL OCEAN TRANSPORT INDUSTRY IN CRISIS
Assessing the Reasons and Outlook
I. INTRODUCTION
1.
In the course of the WorldBank's assistanceprogramsfor developingcountries fundamentaland
continuouslyongoingchangesin the structureof trade marketsand the organizationof the relatedservice
industrieshave been identified. Particuilarlythe seatrade markets and the internationalocean transport
industry seemed to undergo substantialchange. Freight origins and destinationsshiftec '-.iuchmore
rapidly than in the past, and the types of cargoand their forms of packagingkept changing. Thesetrends
becamemore and more pronouncedsince the beginningof the 1980s. The Bank's first assessmentof the
causes and effects of such developments' concluded that considerable changes in international
manufacturingand product marketing practices have tended to alter the profile of demand for ocean
transport in significant ways. A further conclusion was that technologicalprogress had enabled
shipowners and operators to drastically revamp their service offerings and networks in response to
changing ocean trans,-,ortdemand. Az a result, the organizationof the internationalocean transport
industry has been--andremains--ina corstant state of flux.
2.
During the interveningyears, however,there were manymanifestationswhich seemedto suggest
that this industry was increasinglyafflicted by deveiopmentsthat undermined its ability to serve the
seatrade markets efficiently. The internationalmerchant fleet has become critically overaged, and its
safety record is deteriorating. There are frequtnt reports that freight earnings are below the cost of
operating ships, which is ascribedto substantialtonnageoverhangsthat havedevelopedin manysegments
of the irdustry. Because of inadequate revenue incomes, neglect of maintenance appears to be
widespread. The decline in overall vessel productivityand service reliabilityis said to be largely due to
tonnage in poor condition. There are indicationsthat financial resources for fleet renewal and tonnage
overhaul are becomingmore limited. All in all, the status and appearanceof the industry in the early
1990scouldbe interpretedas signalsthat the oceantransportsector has drifted into a deeply rootedcrisis.
3.
This report documentsthe findingsof a researcheffort within the Bank's Transport, Water, and
Urban DevelopmentDepartmentwhich was aimed at developinga clearer understandingof the crisis in
the internationalocean transport industry. The intentionwas to identify and analyze the root causes, to
assess the attributableeffects on the industry's performance, and to establish a basis for projecting the
future course of internationalocean transport.
I Peters, Hans J. 1989. "Seatrade,Logistics, and Transport". Policy and ResearchSeries 6. World Bank, Washington,D.C.
-
10
-
II. THE INTERNATIONALOCEAN TRANSPORTINDUSTRYAT PRESENT
4.
Towards the end of 1992 the world merchant fleet had a total carrying capacity of about 657
milliondeadweigh:tons (dwt), and almost 69 milliondwt were on order with shipyards in 40 different
countries(see Table I below). During 1992an estimatedtotal of 4.1 billion tons of seaborne cargo was
carried by the world's merchantfleet whichproducedabout 17.5 trillionton-milesin the process. About
40 percent of the oceantransportactivitieswere in the oil trades, includingcrude and petroleumproducts;
another 40 percent was serving the key dry bulk trades, includingiron ore, coal, and grain, as well as
the minor bulks, such as agriculturaland forestryproducts. Only one-fifthof the registeredtonnagewas
e-a ged in the general cargo trades, which also comprisesthe sea carriage of containers.
Table 1: THE WORLDMERCHANTFLEET AND NEWBUILDINGSON ORDER
Status as of end 1992
Category
l
Order Book
dwt (mn)
|
# of units
Existing Fleet
dwt (mn)
# of units
General Cargo Ships
(incl. Reefer tonnage)
2,922
475
92,982
16.094
Container Vessels
(all kind)
4,918
175
29,994
1,281
Tankers
(Oil, Chenical, Gas,
and Product categories)
41,565
672
285,380
7,977
Dry Bulk Ships
(incl. Combination
Carriers )
18,547
266
240,161
5,027
RoRo Vessels
0,720
87
8,146
1,024
WORLD TOTAL
68,672
1,675
65,663
31,403
Source: Fairplay. 'NewbuildingSupplement". November1992. London
Instituteof ShippingEconomicsand Logistics. 'StatsticalTables'. Various issues. Bremen
5.
The consequenceof this market structure with its preponderanceof liquid and dry bulk cargoes
was that the majority of vessels deployedduring 1992 was operatingeither on a charter or tramp basis,
which is common practice in the bulk trades. In the general cargo trades the conference-basedliner
segment was much reduced in comparisonwith previous years. This phenomenonconfirms the earlier
recognizabletrend toward independentaction which has been increasinglyadopted by different carriers,
particularly in the container sector. Under this type of arrangementcarriers negotiate(freight) service
contracts directly with shippers. By doing so, they by-passexisting conference rules for specific trade
routes. Such service contracts often span longer periods, i.e. they are usually not limited to one
shipment,and are widelyconsideredto be more advantageousto shipper and carrier alike than conference
regulatedocean transport.
-
11
-
6.
Continuing a trend that could already be observed during the 1980s, 1992 saw a further
concentrationof fleet ownership. Shipownersin five countries--Greece, Japan, the U.S.A., Norway,
and Hong Kong--controlledover 50 percent of the world merchantfleet. But the present pattern of ship
registrationand 'flags flown' does not reflect the true state of ownership. Almost half of all merchant
ships which were registered in 1992 flew so-called 'Flags of Convenience'(FOCs) of countries which
provide shipownerswith substantialbenefits. '. hese benefitsentailtax allowancesor holidays, freedom
to crew ships with low-wagelabor, regardlessof nationalityand withoutthe involvementof labor unions,
and frequentlyalso less stringentvessel classificationand inspectionrules. Table 2 on page 12 provides
details.
7.
The principal countries that offered FOCs in 1992 were Liberia, Panama, Cyprus, and the
Bahamas,a situationwhich remainedlargely unchangedfrom earlier years. Some Europeancountries-notablyGermanyand Norway--haveestablished'second nationalflags' which provide for essentiallythe
same benefits as FOCs, but they are primarily chosen by shipowners which are resident in these
countries. On the other hand, there was some new developmentduring 1992 which led to a growing
importanceof formerlyless visible FOCs, like Malta. One factorbehindtheseoccurrenceswas the rapid
outflaggingof vesselsfrom the republicsof the former Soviet Union (FSU).
8.
Developingcountries,as a group, coulddoubletheir share of the world fleet during the ten years
preceding 1992, and now account for roughly 25 percent of ownership. However the majority of this
share-almost two-third--representsships owned by parties in Asia. In addition, it is importantto note
that in those developing countries which have instituted liberal maritime regulations, shipowners in
growingnumbers resortedto FOCs. China,Indonesia,and SouthKoreaare examples. Industrystatistics
for the first three years of the 1990sindicatethat this trend continuesunabatedly.
9.
While outflaggingis one phenomenonthat points to a fundamentalchangein the organizationof
internationalocean transport, another one relates to ship management. Developments during 1992
demonstratethat more shipownershave passed the responsibilityfor asset marketingand operations to
professionalship managementorganizations. Theseare usuallyprivate companiesthat are not involved
in ownershipbut engage in managingvessels on a contractualbasis to secure the best rates of return on
their clients'-the shipowners--investments.A very substantialportionof the internationaltanker and dry
bulk fleets were managedunder such arrangements,basicallycontinuinga trend which has set in during
the 1980s. But these arrangementsare not limitedto the bulk sector. As in precedingyears, also in 1992
there was a growing number of general cargo and container vessel owners who resorted to asset
management by professional organizations. Most of these organizationsare located in the world's
principal shipping centers, like London, Hong Kong, New York, and Singapore. The users of these
vessel managementservicescome from all countrygroups, whichalso includedevelopingnationsand--as
the latest development--theFSU republics.
10.
It has thus become difficult to identify the true ownership of, and for that matter the
accountabilityfor many vesselsengagedin seatrading. The flag flownand the port of registrationdo not
any longer reveal conclusively. In addition to managementby third parties, there are usually mortgage
banks involved that have proprietary rights, and ships' officersand ratings may be citizen of a variety
of countries. It is therefore not unusual to identify several parties of different nationalitiesthat are
associatedwith one ship. If anything,oceantransportin the 1990shas become a very complexindustry.
-
12 -
Table 2: THE WORLDMERCHANTFLEET
Ownershipand RegistrationPatterns
Status: December31, 1991
National
Flag
Foreign
Flag
Total
dwt
dwt
dwt
Foreign
Flag as
percentage
of Total
Greece
41 859998
52549313
94409311
55.7
14.8
Japan
32 951196
49 836 719
82 787 915
60.2
13.0
U.S.A.
18 307 576
43 108 154
61 415 730
70.2
9.7
Norway
37 838 056
18 934 850
56 772 906
33.4
8.9
Hong Kong
3 887 664
28 258 783
32 146447
87.9
5.1
FSU
27 233 783
2 579 203
29 812 986
8.7
4.7
China
19 8S5 948
6 058735
25 914 683
23.4
4.1
United Kingdom
5 M70529
17 570 273
23 440 802
75.0
3.7
South Korea
11 414 224
6 361 036
17 775 260
35.8
2.8
Germany
6 555 611
8 967 829
15 523 440
57.8
2.4
Denmark
7 763 652
4 927 169
12 690 821
38.8
2.0
Italy
9 900 320
1 663 541
11 563 861
14.4
1.8
Taiwan
7 368 914
4 1085 53
11 477 467
35.8
1.8
India
10 203 623
610 144
10 813 767
5.6
1.7
Brazil
9 356 082
443 112
9 799 194
4.5
1.5
Sweden
3 342 995
5 717 387
9 060 382
63.1
1.4
Iran
8 274 363
18 863
8 293 226
0.2
1.3
Turkey
7 017 974
561 281
7 579 255
7.4
1.2
Singapore
4 972 367
2 066 801
7 039 168
29.4
1.1
France
2 971 030
3 201 033
6 172063
51.9
1.0
48.2
84.0
Countryof
Domicile
TOTAL
276,945,905 257,542,779
34,488,6
Source: Lloyd'sMaritimeInfornationServices.London
Total as
percentage
of World
Total
- 13 -
m1. DEVELOPMENTSIN THE INTERNATIONALSEATRADEMARKETS
11.
In 1960 the annual volume of internationalseatrade had reached a level of one billion tons, with
equal shares of dry and liquid cargo. Duringthe followingyears the average annual gr^wth rate of liquid
cargo-essentially crude oil and its derivatives-was 11.5 percent. The yearly incrementsof dry cargo
were considerablylower. In the early 1970sthe share of liquid cargo in the annualseatrade volumeshad
increased to about 60 percent. It peaked with 1.87 billion tons (versus 1.35 billion tons for dry cargo)
in 1973. During that year the first internationaloil crisis materializedand had an immediateeffect on
the volume of liquid cargo trades, which declined to 1.5 billion tons in 1975. Meanwhile the annual
volumesof dry cargo continuedto increase, caughtup with the liquid cargo trades in the mid 1970s,and
exceededthe growth of liquid cargo by considerablemargins until 1980 (see Figure i below).
World Seatrade
By Main Trade Categories
F1gure 1
million tons
miliion tons
4500
4500-
-4000
40003500-
3500
3000-
3000
2500
-2500
2000-
2000
1500-
1500
1000
1000
500
500
75 76
=
77 78 79 80
Total Seaborne
Dry Bulk Trade
Trsdeo
81 82 83
84 85 86
-
General
-
Oil Trade
Source: Institute of ShiDping Economics enO Logistics.
87 88
89 90
Cargo Trade
'Statistical
eerbook 1991.
eremen
12.
At the beginning of the 1980s the second oil shock occurred. Unlike in 1973, however, the
effects of this crisis impactedon both trades, and their volumesdeclinedfor several years. By 1983the
total volumeof internationalseatrade had fallen below the level of 1974. But the consolidationphase for
dry cargo was relativelyshort and growthresumedafter 1983, whereasthe decline in annual liquid cargo
volumes continued until 1985. The mild recession in the world economy of the mid 1980s had a
temporary dampeningeffect on both trades. Followinga brief respite each segment continued to grow
- 14 -
after 1987, if at differentannual rates. The average yearly growth rate for each trade category and their
main sub-divisionsbetween 1985and 1990 are shown in Table 3 on page 15. By 1990 the total annual
seatrade volume reached four billion tons, includingabout 2.5 billion tons of dry cargo and 1.5 billion
tons of liquid cargo.
13.
The dry cargo category of seatrade includesdry bulk and general cargo. Subsumedunder the
latterare the containerizedand other forms of unitizedtrades. The share of general cargo in total annual
seatrade volumeshas increasedfrom 12-14percent in the early 1960sto about 20 percent in 1990.
14.
All three phenomena--reducedliquidcargo, steeperproportionalincreasesin dry cargo volumes,
and a steady growth in the share of general cargo--pointto fundamentalchangesthat have taken place
in the organizationand managementof internationalseatrade. Amongthe three principalcategoriesof
seatrade, the liquid cargo segment was the most vulnerable with regard to downturns in the world
economy. Crisis situationshad an immediatenegativeimpact on traded volumes which lingered much
longer than in the case of dry cargo. On the other hand, oice recoveredthe ensuing annualgrowth rates
of liquid cargo trades were higher than those displayedby tire other trades. Noteworthyis the fact that
the general cargo trades were the least affectedby economiccrises and maintainedsteadygrowth trends
during most of the period between 1970and 1990.
15.
During the years ahead the compositionand proportionalshare of cargoes, as well as the growth
rates in the internationalseatrade markets will be strongly influencedby a number of factors. These
factorsreflect predictedfurther changesin industrialpractice, in the structure and managementof global
trading, and in economicand social policiesadoptedby individualcountries. Developmentsalongthese
lines during the 1980ssuggestthat the principaldrivers behindthe predictedchangesare likelyto include
further globalization of manufacturingprocesses, ongoing adjustmentsto production techniques and
organization,more relocationof industries,continuedintegrationof key regional markets, substantial
growth in value-addingat source, an increasinglyforceful drive towardsconservation,and the growing
importanceof environmentalconcern.
16.
The globalizationof manufacturingprocesseshas beensparkedby the search amongOrganization
for EconomicCooperationand Development(OECD)industriesfor countrieswhich afford lower factor
costs and offer other conditionsof comparativeadvantage. These corporate objectives have already
induced substantial outsourcing of intermediate manufacturing and assembly tasks to a variety of
developing countriesduring the 1980s. A recent Bank survey2 not only confirmedthese developments
but projectedmuch further expansionof such industrialpractices. Owiv' to such trends the demand for
long-haulocean transportof manyprimary commoditiesfrom developingto industrializedcountries can
be expectedto diminish. On the other hand, however, there will be an increasingneed for small highvalue shipmentsin short time intervals.
17.
The last observation reflects changes in production techniques and organization which have
evolved for a number of reasons. Firstly, growing integration of the acquisition, production, and
marketing processes through cost-minimizinglogistics managementtechniques has induced the trend
towards inventoryreduction. These developmentshave already led to very specificdemand for speedy
2
Peters, Hans J. 1992. "Service- TheNew FocusinInternationalManufacturingand Trade". PolicyResearchWorkingPaper
Series 950. World Bank, Washington,D.C.
-
15
-
Table 3: THE RISE AND FALL OF SEATRADE
l
.Category
l~
~ ~~
~~~~~~~~"
Voluime Changes
(average annual percentages)
181990
IM9- 2000
~~~~~~~~~~~ACTUALS
PROJECTIONS
l
KEY DRY BULK COMMODITIES
(of which)
2.8
1.6
Iron Ore
2.1
1.2
Steam Coal
4.3
6.5
Coking Coal
2.6
2.2
Grain
3.3
-1.7
Bauxite
5.0
0.7
- 2.4
-2.0
Fertilizers
4.3
2.3
PETROLEUM
(of which)
5.6
1.7
Crude Oil
6.1
1.2
Products
3.1
3.5
1.5
1.6
AgriculturalProducts
2.0
1.3
Forestry Products
2.6
2.1
Ores nd Minerals
1.9
1.6
Steel Products,
includingScrap
0.7
1.8
ALL DRY BULKS
2.4
1.7
ALL LIQUID BULKS
5.7
1.7
ALL BULKSCOMBINED
4.0
1.7
GENERALCARGO
4.7
5.5
"
"
Phosphate Rock
MINORBULKS
(of which)
imt
E0Es
w
Source: For Actuals: Drewry.'Trade and ShippingStatisics". Variousissues. London
For Projections: Peters, HansJ. 1991. 'The Prospeds of Seabome Bulk Trades
- A Reassessment". Mimeo. WorldBank,Washington,D.C.
-
16 -
and highly reliable ocean transport services, which are fully integratedwith land transport systems to
enable streamlineddoor-to-doordelivery arrangements. Secondly,many industriesare seekingout and
have started to use alternative,more cost-effectivematerials. For instance, moderncar manufacturing
incorporates 40 percent less steel than only ten years ago. The value of goods shipped continues to
increase, but they need far less raw materials to be produced and less space for transportation. Thus
many of the customary cargoes in ocean transpon are losing importanceand are replaced by others,
requiring very different types of packagingand transport.
18.
The relocation of industries phenomenon is demonstrated by the fact that in some OECD
economies industrialenterprisesmove entire productioncomplexesto other countriesin order to by-pass
quota restrictionsand other regulatorymarket constraints. Japanesecar manufacturingin the U.S.A. and
Europe is an example. The demand for sea transport of presumably a growing number of finished
industrialproducts--particularlyautomotive--willthus diminish.
19.
The integrationof regionalmarketshas become a universaltrend. There is increasingevidence
of growing trade shares confined to clusters of countries. In particular, this will be the case for
geographic zones where inter-regional trade is promoted through special multilateral arrangements.
Eixamplesare the North AmericanFree fraoe Agreement(NAFTA)covering Canada, Mexico, and the
U.S.A., the Associationof SoutheastAsian Nations (ASEAN), and the European Community (EC).
Close to 65 percent of West Europe's trade is within the EC. As a result of these developments,each
region's volume of seabornetrade with the outsideworld can be expectedto decline.
20.
The value-addingat source representsgrowing efforts by many developingcountries to obtain
better income from indigenous products which were once shipped in their raw state but are now
increasinglyprocessed prior to shipment. For instance, several economies within the Organizationof
PetroleumExportingCountries(OPEC)group havestartedto buildup their own petrochemicalindustries
close to the source of crude oil. The obvious implicationof these trends is reduced demand for bulk
transport of crude, and increased volumes of petroleum derivativeswhich are carried in product and
chemical tankers. Similar observationsapply to other raw materials in the mining and agricultural
sectors, and the related effects on long-termdemand for ocean transport.
21.
Conservationhas been identifiedas anotherfactor which will influencefuture demand for ocean
transport. Previous energy crises have induced major reductionsin oil demand. As a case in point,
Japan could reduce its oil consumptionby 50 percent during the years followingthe oil crisis of the midseventies. There is also growing interest in recyclingwhich tends to suppress the demand for original
raw materials. In several OECD countries up to one-third of nationalsteel productionis derived from
recycledscrap. Similar conservationmeasurescan be observedwith other primary inputsto production.
The effect of such practices has already been such that the demandfor ocean transport for a number of
raw materials has declinedwithin several trade regions.
22.
Finallythere is the roint of environmentalconcern. The main impactof such concem is related
to thfeenergy sector where the demand for alternative 'clean fuel' is growing, particularly in Western
Europe and Japan. Coal and oil as energy source are widely seen as major sources of avoidable
pollution. The outcomeof new energypolicies adoptedin a numberof industrializedcountries translates
into more transportof LiquifiedNaturalGas (LNG)and reduced demandfor transport of oil and coal in
some segmentsof the seatrade market. Anotherexampleof enviconmentalconcernand its influenceon
ocean transport are governmentpolicies restrictingthe expansionof national oil refining capacities-as
- 17
-
is the case in Japan. There will be reduced flow of crude into these countries, which will be offset by
increasing importof pre-processedpetroleumderivativesfrom overseas. Both phenomenawill influence
the future compositionand scale of seatrade.
23.
The medium-term outlook for the growth of seatrade is modest. Average annual growth
projections until 1995 are given in Table 3 on page 15. Trade volumes per year for almost all
commoditiesare expectedto be lower than the annual averagesof the late 1980s. A notable exception
are the general cargo trades which are likely to continue their path of solid growth. The industrial
restructuring and the new approachesto manufacturingand marketingwill contribute to even steeper
annual increases of the general cargo trades. These projections are based on the assumptionthat the
current recession in Japan, North America, and Western Europe will bottom out in the mid 1990s,and
that from 1996 onwardsannual economnic
growth rates will attain levels which were commonduring the
second half of thL.1980s.
24.
Such scenario can be expectedto create a situation whereby the yearly volume of seatrade will
be of the order of five billion tons at the end of the 1990s. The share of dry cargo will increase further
to about 65 percent of total seabornetrade. In the liquid cargo segmentpetrolet in products will have
reached a more prominent stance vis-a-viscrude oil. The annual incidenceof general cargo is forecast
to reach 1.3 billion tons, which would mean a further expansionof this segmentof the seatrade markets
from 20 percent in 1990to a share between26 and 28 percent of all cargotransactionsin the international
ocean transport industry.
IV. HOW THE OCEAN TRANSPORTINDUSTRYCOPES WITH VOLATILESEATRADE
Fxperiencesuggeststhat it takes about six monthsuntil recessionarytrends in
the world economystart to have an impact on the seatrade markets, and that
it takes another 12 to 15 monthsfor the ocean transportindustryto react.
25.
During the first years after the end of World War n the internationalseatrade market grew at
unprecedentedrates. These developmentslasted for almost thirty years and providedshipowners with
attractive earning opportunities. The returns on investments in shipping assets were substantial.
Consequentlythe internationalmerchant fleet grew very fast, more than doublingits collectivecarrying
capacity between 1950and 1970. In view of the continuousrapidexpansionof seatradeand their derived
steady stream of freight revenues-which usually far exceeded the cost of providing ocean transportshipownersbecameso complacentthat manydid not recognizethe potentialeffectsof the oil crisis in the
mid-seventieson the performanceof the world economy,and henceon tradingactivities. In fact, the few
cautioningvoiceswere silencedwhen seatradepickedup againaround 1975,and more ships were ordered
in anticipationof continuedsteepgrowth trends in the seatrademarkets. Andso the world merchantfleet
-
18 -
increasedto 650 milliondwt in 1980. In the processthe collectivecarrying capacityof the fleet doubled
again, but this time in less than ten years. Howeverthere is no market in which expectationsof future
profitability do not sooner or later stimulatethe introductionof excess capacity.
26.
When the resumedgrowth of annual seatrade volumescame to a sudden end in the late 1970s,
the previousexpansionpattern of the worldmerchantfleet changedconsiderably. The collectivecarrying
capacity of the fleet remained within a limited band between 620 and 650 million dwt during the
following ten years. In view of the fact that the annual growth rates of seatrade turned negative and
continued that way for several years, many ocean transport operators adopted for the first time a more
cautiousapproachto fleet developmentand managingtheir assets. But there were differencesof opinion
and in approach amongshipownersserving the different trade segments(see Figure 2 below).
Developmentof the World Merchant Fleet
Variations in Tonnage Composition
( Vessels over 100 grt/gt
)
million dwt (fleet capacity)
million tons (seatrade)
750 -3500
550 -500450 -400350 -2000
300
3000
250
1500
2500
10
200100~ ~~~
100 -
~
~
~
~
~
~
~
~~~10
~~~~~~~~~~~~~~500
5071 72 73 74 75 76 77 78 79 80 81 82 83 64 85 86 87 88 89 90
-
----
Total Tonnag
All Other Cargo
Oil Tankers
-
a
Dry Bulk Carriers
Total Seatradle
Ship Categories
Source: Lloyd's Register of ShipDlng. 8no Feernresearch
Figure 2
27.
After the global recessionof the 1980sbottomedout in 1986 internationaltrade intensifiedagain,
and when the annual seatrade volumes started to grow at rates which had been characteristic for the
heydaysduring the years before the first oil crisis, shipownerstook this as indicationsof a future bullish
seatrademarket. A commonbelief was that this trend would continueunabatedly. The numberof orders
placed for newbuildingsrose again. The accumulatedtonnageon order in 1990exceeded60 milliondwt
and thus reached the highest level since 1977.
-
19
-
28.
When the annual volumes of seatrade declined and there was hardly any reduction in the
combinedcarrying capacityof the world merchantfleet, severetonnage overhangs developed. In 1983,
almost one-thirdof the fleet was unemployed. Tonnageutilizationin the bulk shipping sector was much
more affectedby the cyclical swings in the internationalseatrade markets than the liner trades with
general cargo. The tanker sector
suffered the most pronouncedeffects
(42 percent of the fleet unemployed
in 1983), followed by the dry bulk
Owners' Attitudes
fleet (26 percent), and the general
in Times of Uncertainty
cargo fleet (ten percent). Thanks to
the revival of the seatrade markets
during the second half of the 1980s,
Dry Bulk Vessels
the supply overhangcame down a id
has, since 1989, stabilized around
16
l
ten percent of the world merchant
14
.
fleet's capacity, as a whole. But
12
'
there are differences. In the tanker
10
\
:sector,
excess tonnage represented
lO /\
,
z
~~~~~~~~~~16
percent of the fleet during the
8-I
k
.
final weeks of 1992. It was 12
6/
. -\<
:percent
in the case of the dry bulk
4 -\
't.
fleet, but only 4.7 percent for the
2 ,
,
,
ageneral cargo segment.
The
0
container fleet continued to be
80 81 82 83 84 S5 86 87 88 89 90 91
almostfully employed.
Source:
LAY - UP
Lloyd's
---- DEMOLITION
Shipping
Economist
29.
Most shipowners appeared
unable to accept the fact that during
the 1980s trends had started which
were leadingto fundamentalchanges
in the structure of the international
seatrade markets and in annual
volume growth rates of the different
cargo categories. Thus they were
hesitant to eliminate underutilized
assets in the hope that a renewed
market
would generate
increasinguptum
demand
for ocean
transport, and hence provide for
improved capacity utilization for
their fleets. As a result, a majority
of owners opted for temporary
end Feernieys
Tankers
million dwt
80
70-
6050-
\
40
30
20-
10o8
/'
80
81
82 8
8
8
82
84
85
-
83
LAY - UP
86
87
88
89
90
91
---- DEMOLITION
Figure
3
withdrawal of their ships from the
market by laying them up. This
behavior was most pronounced in
the tanker sector (see Figure 3).
Statistics relatingto changesin fleet
- 20 -
composition and growth rates--as in Figure 2--disguisethe fact that only active tonnage is registered.
Adding laid-up vessels would result in different indicators.
30.
As the declineof seatrade volumescontinuedin the mid 1980s,a numberof owners camnearound
to realize that eliminatingsome of their shipping assets through demolition would be commercially
prudent. Thus the tonnage sola for scrappingincreasedto over 30 million dwt between 1985and 1986.
But as soon as the market seemedto give positive indicationsthrough impressiveadvances in the Baltic
Freight Index--whichreflects developmentsin the freight futures market--during 1987, the number of
demolitionsales shrank. At the same time the number of newbuildingcontracts increased sharply (see
Figure 4 on below). These attitudes and practices point to the fact that the ocean transport industry
distinguishesitself from other industriesthroughvery speculativebehavior. Butthe high level of periodic
investments in shipping, the value of existing assets, and its debt servicing obligations make ocean
transport one of the most capital-intensiveof all industries. Substantialfreight revenues are needed to
keep the ocean transport industry viable and thus in a positionto provide the type of serviceswhich are
required by the changinglevel and structure of internationaldemand for the sea carriage of goods.
The World Merchant Fleet
Newcomers and Departures
NewbuildingContracts
DemolitlonSales
nillmon dwt
40 - -
40 v
35
35
30
30JO
25 -
25
millon dwt
l
GeneralCaroo Ships
20 -20
Bulk CarrtIer
(~Tanker.
15 -
15
10.
10
1985 1988 1987 198R 1989 1990 1991 1992
Source:
Institute
of Shipping Economics and Logistics.
1985 1986 1987 1988 1989 1990 1991 1992
and
Fearnleys
Figure
4
31.
However freight rates have been highlyvolatile since the early 1980s. When seatrade declined
and essentiallythe same number of ships remained availablefor lower overall volumes of cargo, both
phenomenacombinedto spark intensecompetitionwhichprovoked freight rates to contractsubstantially.
-
21
-
And whiletheseeffectscouldbe deemedfavorable
for trade,theysentmanycarriersinto a tailspin. In
Vol ati le Freig h t Ear n i ng s
numbersshipownerswereforcedto reduce
Volatile
Freight Earningsfreightgrowingrates
to defend
their share in the cargo
PANAMAX
BULKERNEWBUILDING
Spot Return,Time-CharterBasis
US$,thousands/day
1-
e8000OWT
costing
USs32.5
million
10 percent return assvmed
Amortiation
oera
years
levels which reflect the minimum charter rates or
freight tariffs to cover all cost of financing,
131
\
BREAKEVEN
managing,andoperatinga cargovessel--andwhich
US$11,350/day
would yield a modest return on investment (see
Figure 5). Between 1989 and 1992 the average
internal rates of return on investments in shipping
assets shrank from 9.5 percent to almost zero. In
real terms the freight rates in most segments of the
seatrade markets have been on a declining trend
during most of the time since the beginning of the
1980s(see Table 4 on page 22).
9
7Source:SealradeWeek
5,
A S
0
N
D
J
F
A
M
J
M
1991
J
1992
SECONDHAND
SUEZMAXTANKER
SpotReturn,Time-Charter
Basis
5 US$thousands/day
152,000
DWT.built1977
23
bought
inJuly1991
atUS$1826
million
21
AhortizationtoScrap overthree yeara
1O
percent
return
assumed
19
17-
is.5BREAK
EVEN
*
119
33.
Sincethe trend in container shippingon the
main trade routes has been such that the ten key
7Source:Seersde
Wek
SON
0
, 0,
D J
Figure
In some specializedmarket segments, such as the
container trades, unchecked ordering of
newbuildingshas led to such severe overtonnaging
that the medium-term prospects for high load
factorsare modest (seeTable5 on page23). The
idicators m this table pomt to another important
fact. International statistics on the degree of
tonnageutilizationdo not reflect load factors, which
is particularly critical in the case of liner trades.
Thus, the high utilizationrates reported (above) for
interpreted with caution. The actual tonnage
utilization-appropriatelyadjusted for load factors-is thereforeusually lower than the statisticssuggest.
13\
A S
32.
The outlook for improved commercial
performanceof shipping assets is not encouraging.
the general cargo and containerfleets should be
US$14,500/day
5
market. But in the wake of such pricing practices
actual rate levels barely covered operating cost.
Withthe renewedslowdownin the seatrademarkets
during the early 1990s,the freight earnings in most
segments of the international ocean transport
industry were considerably below the break-even
F
F
A
M
5
M
A M J9 J
carriers now effectively control more than 70
percentof the
market-with further concentrationof
their market shares predicted-it has become
possible for these carriers to 'rationalize' freight
I__ rates and the level of tonnage deployed. For
exampie,in the trans-Atlanticand trans-Pacific
- 22 -
trades the dominatingcarriers have combinedto establishso-called rate agreementsthrough which they
collectivelypledged to reduce their activetonnageon such trade routes and to abide by commonlyagreed
freight tariffs. These rate agreementshave all the makings of a cartel. Owing to these arrangements,
the container freight rates in the cross-Atlanticand Pacific trades are the only instances in the entire
seatrade market where nominalincreaseshave occurredsince 1990.
Table 4: OCEANTRANSPORTRATE INDICATORS
Gyrationsin Responseto ChangingMarketConditions
I
1990 11992
1986
1988
4,884
2,309
2,485
650
5,325
3,263
3,266
2,841
3,121
1,157 1,498
6,942
7,884
Vessel Capacity:
12000-20000dwt
20000-35000dwt
7.4
4.9
6.0
3.7
12.2
8.4
11.9
7.9
10.0
7.4
Dry Bulk Trades
(Single VoyageRates
in US$/ton of cargo)
Vessel Canacitv:
2500 dwt
120000dwt
18.1
6.0
19.2
3.7
35.1
6.8
32.8
6.9
30.9
4.6
Tanker Trades
(Period Market
in US$/dwt/month)
Vessel C'wacitv:
30000dwt
250000 dwt
6.6
0.8
6.8
1.4
7.9
1.6
11.6
2.7
9.6
1.8
ContainerTrades
(Major ConferenceRates
in US$/TEU)
General Cargo Trades
(Tramp Trip Charter
in US$/dwt/month)
[
1 1984
TradeRoutes:
Europe-Far East
Atlantic westbound
Pacific westbound
Europe-Australia
2,31P
- -
2,778
3,248
1,629
6,386
General Freight Index
annual averages; 1972 = 100
1980 1981
1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992
369
232
321
220
217
208
172
203
261
284
261
250
228
Source: Lloyd's "ShippingEconomist'. Variousissues. London; and MaritimeResearchServices. Parlin, NewJersey
34.
But the vast majorityof carriers in the internationalocean transportindustry is reeling under the
effects of reduced freight earnings. What makes their lot not easier is the fact that the prices paid for
second-hand vessels or tonnage sold for demolition have gyrated in ways which turned out to be
unfavorablefor them. When freightmarkets were solid and shipownersshowedlittle predilectionto sell
tonnage in order to improvetheir cashflow situation,second-handand demolitionprices were relatively
high, but in times of market declineboth pricesdropped (see Table 6 on page 24). Due to the long lead
times in shipbuilding,which may extendover three years betweenorderingand delivery, the movements
in vessel unit prices were less volatile. The actual cost of new ships have steadily increasedsince 1986
in the wake of speculativeordering which has characterizedthe market during most of the intervening
years. The new and costly ships are being successivelydelivereduntil about 1994and will burden their
- 23
-
owners with high cost at a time when they are facing only modestprospects for growth in seatrade--and
thus improved freight earnings.
Table5: INTERNATIONALCONTAINERTRAFFIC
VesselCapacityUtilization
observed
andexpectedloadfactorsin percent
Year
Transatlantic
eastbound
Transpacific
Twestbound
Europe - Far East
eastbound
westbound
eastbound
westbound
1991
62.2
54.4
71.7
60.7
53.1
85.7
1992
62.8
56.4
76.1
63.8
51.3
84.2
1993
62.6
56.3
77.9
64.9
50.2
82.1
1994
62.7
56.4
78.5
65.1
50.0
81.4
1995
64.7
58.5
79.1
65.5
49.0
77.6
1996
66.8
60.8
79.3
65.5
51.1
78.7
Source: For observed indicators: "Containerization
International". Variousissues. London
For expectedload factors: 'InternationalTransportJournal". Issue 49, 1992. Basle
35.
Becauseof continuedpoor revenue earnings, shipownershad to cut cost wherever possible. In
growing numbers they opted for outflaggingtheir tonnage to FOC countries which reduced their tax
burden and enabled them to hire low-wagepersonnel. Unfortunately,however, cost cutting also meant
in many cases neglect or deference of maintenancewhich caused acceleratedphysical deterioration of
shippingassets and has to be seen as a main cause for increasingship casualties. Conmmercial
pressures
on masters to improve the revenue earning perfonnance of their ships have induced reckless loading
practicesin ports and the operationof shipsat speedsbeyonddesign limits with deleteriouseffectson hull
structures. Low-wagepersonneloften impliedunqualifiedseafarers. Human error has been identified
as a principal reason for accidentsat sea and in ports.
36.
Another defensive strategy which has been increasinglyadopted by many owners is to keep
existingshipping assets beyondcommonlyacceptedeconomiclife spans, which are typicallybetween 15
and 20 years. Consideringcurrent prices of newbuildingsand the freight rates the market is willing to
pay, a decision to continue with aged tonnage was more than ever deemed superior--froma corporate
managementpoint of view--toa combinationof scrappingand acquisitionof new tonnage. But for much
of this kind of aged tonnage major repairs would be required before such vessels could continue to
operate safely and profitably.
37.
Ship upgradingor conversionhavebecomeotherattractivepropositionsthroughwhicholder ships
are either technologicallyimproved, e.g. refitted with more powerful and fuel efficient engines, or
physically transformedto serve other trades than the ones for which they were originallydesignedand
built. The upgrading of vessels leads to better operationalperformance--bypermitting faster steaming
and shorter cargo handlingtimes--andthus to enhancedrevenueearnings. Shiftingof convertedtonnage
to other trades, for which the growthprospectsare more promising,has already enabled many operators
- 24 -
to contain further deteriorationof their cashflows. On the whole, however, conversionusually entails
heavy outlays, and proper market analyseswould be necessarybefore committingfunds. During 1990
the average cost of vessel conversionwas US$ 10.6 million.
Table 6: TONNAGE PRICE FLUCTUATIONS
[
T
Tonnage Category
1985
j
1986
|
1988
1 1990
1991
|
1992
NEWBUILDINGS - Prices in current US$ (million)
! Tankers
(80,000 dwt)
22.0
18.8
31.5
41.4
43.0
42.0
Dry Bulk Carriers
(30,000 dwt)
11.3
11.7
18.5
23.8
24.1
24.5
General Cargo Ships
(15,000 dwt)
12.8
14.2
17.3
24.0
24.1
24.2
Container Vessels
(2,500 TEU)
26.0
27.9
32.0
51.0
55.8
59.9
SECOND-HANDTONNAGE- Prices in current US$ (million)
Tankers
(80,000 dwt,
8-10 years old)
6.5
10.8
17.4
28.7
24.8
16.3
Dry Bulk Carriers
(30,000 dwt,
5-6 years old)
4.7
3.6
10.8
12.7
12.7
14.0
General Cargo Ships
(15,000 dwt,
5-6 years old)
3.2
3.3
5.2
10.2
10.2
11.2
Container Vessels
(1,600 TEU,
5-6 years old)
14.1
14.0
14.2
22.2
21.3
22.6
DEMIOLITION- TonnageAcquisitionCost in current US$ (million)
Tankers
(80,000 dwt)
1.8
1.9
3.8
4.0
3.0
2.5
Dry Bulk Carriers
(30,000 dwt)
0.7
0.7
1.3
1.5
1.0
1.0
General Cargo Ships
(15,000 dwt)
0.9
0.8
1.7
1.8
1.3
1.3
Container Vessels
No demolition sales reported
Source: Lloyd's ShippingEconomist. VariousIssues. London
- 25
-
38.
By looking aheadto the end of the current decade, and consideringthe expectedfuture trends in
the international seatrade markets, several inferences can be drawn with respect to managing the
developmentand the organizationof the different fleet segment,. Clearly, the tanker sector remainsth^
most vulnerable. Growth prospects for the liquid cargo trades are modest, yet the fleet remains
oversize;l, and newbuildingcontracts for tankers represent the highest share in the current order books
of the internationalshipbuilding industry. The outlook is more promi.singfor the dry bulk trades.
However the fleet is criticallyoveraged, manyvessels are technologicallyoutmoded, and in a poor state
of repair. Arguably the brightest growth prospects relate to the general cargo, and in particular to the
container trades. High employment indicators for the container fleet seem to suggest the need for a
substantial newbuildingprogram. But, as demonstrated,these indicators are potentially misleadingin
view of the actualand projectedload factors. Thus containervessel owners and operatorsneed to adopt
a cautiousapproachwhen it comesto consideringfleet expailsionthroughthe acquisitionof new tonnage.
The situation is different with the multi-purposegeneral cargo fleet. There is likely to be continued--if
not growing--demandfor vesselswith built-inflexibilityto serve differenttrades and types of cargo. The
expectedintegrationof regional markets will imply a steady increaseof shortsea trading for which this
type of vessel will be in demand.
39.
The future status and performanceof the worldmerchantfleet will be largely determinedby the
shipownerand operator communities' responsebehavior. The internationalocean transport industryis
very heterogenous,and distinguishesitself in this respect from all other transport industries. Diverse
interests and business objectives, complicated multiple and often cross-national ownership and
organizationalarrangements,and ill-devisedpolicies which are maintainedby several governmentsto
promote national fleets at any cost can be expected to impede attempts which would be aimed at
rationalizingtonnageutilizationand fleet management.
V. THE PRINCIPALISSUESIN INTERNATIONALOCEAN TRANSPORT
40.
Continuingsubstantialtonnageoverhangsin the world's merchantfleet seem to suggest a priori
that market forcescouldbe expectedto inducea 'correctingmechanism'through whicha balancebetween
demand (for ocean transport)and supply (of diverse categoriesof tonnage)would ultimatelybe brought
about. Inefficientoperatorswouldbe crowdedout of the market, sub-standardshipswould be eliminated,
and freight rates would consolidateat levels which would turn out to be beneficialfor cargo owners and
carriers alike. Unfortunately,the global realities are quite different. New ships enter the market with
questionablejustification, inefficientoperatorscontinucto operate with governmentprotection, and the
share of poorly maintained and unsafe ships in the internationalocean transport industry is growing
incessantly. All these circumstances can be regarded as harbingers of an emerging crisis of
unprecedentedproportions.
A. RegulatorsInterventions
41.
The internationalocean transport industry has, in a way, become anonymous. Successful
shipowners finance, register, crew, market, and manage their assets without regard of loyalty to any
specific nation or interest group. They have become true internationalists. Their only concern is to
- 26 -
ensure that they capture major marketshares and achievethe highestpossible returnon their investments.
In pursuit of these objectivesthey competevigorouslyand gain market superioritythrough differentials
in freight rates and service offerings, and by establishinga track record of reliability and consistent
quality of service. If left alone, their competitivebehaviorwould create a situation wherebyshippers in
all markets of the world wouldbenefit by being able to choose and obtainthe most advantageousservice
arrangementsfor their ocean transport needs. The fact that this is still widely not feasible can be
consideredas possibly the most serious issue in ocean transport.
42.
Many governmentsmaintain policies which are aimed at protectingtheir national fleets. This
situation applies to industrializedand developing countriesalike. Cargo reservation for national flag
carriers is the most pervasive regulatory instrument. Thus national flag carriers are shielded against
competitivepressures in the internationalocean transport market. As a result, their performance is
usuallyfar below comparableindicatorswhichare characteristicof the internationalcarriers--andthe cost
of their services are higher. In the process, domestic importersand exporters receive lower quality of
service and are faced with higher than necessaryfreight rates. All of this wouldnot be necessaryin view
of the large internationalfleet that competes and operates without regulatory constraints. But the illguided concern about avoidable losses in invisible trade keeps a large number of governments from
acceptingthe fact that buying shippingservices in the internationalmarket would be a most beneficial
decision, and in the best interest of nationaltrade.
43.
in most instancesnationalflag carriers haveto be heavilysubsidizedso that their freight charges
can be made compatiblewith rates which are offeredby carriers operating in free market environments.
In several developingcountries governmentsare also encouragingnational flag carriers to compete in
cross-tradeswhich have neither an origin nor a destinationin the home country. The declaredobjective
is foreign exchangeearning. But to ensure a share for their carriers in these markets, governmentsare
usually again compelledto provide substantialsubsidies. In the majority of developing countries the
policy to preserve transport rights for national flag carriers--in order the improve the invisible trade
account--isill-guidedin the sense that the maintenanceand operation of a nationalfleet are very foreign
exchange-intensive.Withoutdomesticoil resources, steel making,and an efficientshipbuildingindustry,
the only savings that materializeare the cost of crewing and vessel management--assumingthat these
functions would be fulfilled by nationals. A stringent cost-benefitanalysis of such maritime sector
policies and the impliedsubsidies would produce appallingresults in most, if not all countries whose
governmentsmaintain such regulatory attitudes. In addition, their subsidizedfleets inflate the already
over-stockedinternationalshipping market and contributeto further distortions in the market's supplydemand relations.
44.
These developmentshave been encouragedto a considerableextent by the Code of Conductfor
Liner Conferenceswhich was conceptualizedin the 1960sunder the auspicesof the UnitedNations Trade
and Development(UNCTAD) organization. The Code became effective in the mid 1970s after 50
countries had acceded, as was required by its statutes. In essence, the Code provides for a 40-40 split
in the right for ocean transport of cargo by the respectivenational flag carriers between two trading
countries. The remaining20 percent of the trade was to be left to carriers who are involved in ctoss
trading, regardless of their nationality. These provision were to be embedded in bilateral agreements,
which took the form of a conference. A number of industrial nations--suchas the U.S.A.--decided
againstjoining this regulatedconferencesystem, as it was rightfullyfeared that such arrangementswould
induce inefficiencies,and would ultimatelybe harmful to theix .rades.
- 27 -
45.
When the Code was conceptualizedin the 1960s, the situation in the international seatrade
markets, and the organizationard service provisionsof the world merchantfleet where such that there
was a legitimate concern to ensure that all countries--regardlessof their location and status--andtheir
trades received a fair allocation of tonnage for ocean transport. In the meantime, however, the size,
organization,and serviceofferingsin the internationaloceantransportindustryhave changedcompletely.
Competitiveservicesand ample tonnagesupplyare availablein all corners of the world. Regulatingthe
supply and operation of cargo vessels has therefore become redundant. Those countrieswho adhere to
the Code now usually pay a heavy and intrinsicallyavoidable price. In many trading areas ocean
transport services are competitivelyprovided by internationalcarriers who operate outside conference
rules and organizations. The benefits for countries who have opened their seatrade to international
competition are usually substantial. Chile is a prime example3 . However, the fact that a number of
developingcountries--particularlyin Sub-SaharanAfrica--findit difficultto disengagefrom the Code and
its rules gives cause for concern. They are thus underminingthe competitivenessof their own trades,
and their inefficientfleets contributeto the inflationof the over-sizedworld merchantfleet.
46.
Another factor which has tended to affect the market balance is subsidizedshipbuilding. Most
nations with a tradition in shipbuildingwant to keep their yards employed. But significantdifferentials
in factor costs and productivityparameters among yards in different countries have created situations
whereby several of the traditionalshipbuildingnationshave become uncompetitive. Their yards should
thus be closed. The fact is that they are not. Instead,the governmentsof countrieswith 'disadvantaged'
yards have resorted to subsidizing their shipbuilding industries. The forms of such subsidies are
manifold,manyof them are concealed,and their incidenceis usuallyheavy. There are manycases where
state subsidieshave enabled shipyardsto offer newbuildingsat prices which are below the actual cost of
vessel construction. In other situationspotentialpurchasers were enticed to buy new tonnage through
financingarrangementsthat were madeattractiveby interest rates whichwere substantiallybelow current
cost of capital in the internationalmarkets. Extendedgrace periods and amortizationschedulesincreased
the attractiveness of such financing packages even further. The cost of all these direct or indirect
subsidiesburden nationalbudgets extraordinarily,and the usuallyhigh opportunitycost of public capital
call in questionwhether a continuationof such shipbuildingsupport policies is justifiable.
47.
Subsidizedshipbuildingand the abundanceof offers to sell newbuildingsbelow constructioncost
have been additionalfactors that influencethe supply-demandrelations in internationalocean transport.
Shipping service providers whose corporate practices are usually characterizedby speculativeattitudes
acquired below-cost newbuildingseven at times of sluggish seatrade markets. They captured such
opportunities to be prepared when seatrade would grow again. But their expectations were rarely
fulfilled,and the speculativelyacquiredtonnagecausedfurther supply-sideinflationin the ocean transport
market.
B. The Aging InternationalFleet
48.
In the years before 1980, the average age of tankers was 15 years at the time when they were
withdrawnfrom the market to be scrapped;for dry bulk carriers it was 18 years. Both indicatorsseemed
3 For a full descriptionof Chile's experiencewith deregulationof the maritimeindustriessee: Bennathan,Esra et al. 1989.
'Deregulationof Shipping- Whatis to be learnedfrom Chile?" DiscussionPaperSeries 67. World Bank, Washington,D.C.
-
28
-
to confirm the generally perceived life span of 15 to 20 years during which a shipping asset could
performeconomically. Whendevelopmentsin the seatrademarketsafter 1980suggestedthat fundamental
changesin the structure of demand for oceantransportand volumegrowth rates were taking place, many
shipownersbecamemore cautious. Theystarted to order fewer newbuildingsand relied on their existing
shipping assets. As the market contractedfurther, they resortedto tonnagelay-up, rather than sending
their ships for scrapping. Even when the seatrade markets revived in 1986 they kept most of their
existingtonnage, addressing growingdemandmore through re-commissioningpreviouslylaid-up vessels
than through the acquisitionof newbuildings.
As a result of these practices,the averageage of the world merchantfleet increasedcontinuously.
49.
The proportion of vessels older than 15 years grew from 27.5 percent in the mid-1980sto 56.8 percent
in 1992. The average vessel age in 1992was 16.6 years and is expectedto increaseby five percent per
annum, if no correctivemeasuresare taken. The tanker segmentis most overagedwith almost 65 percent
of all vessels older than 15 years, followedby general cargo ships with about 60 percent. The dry bulk
fleet is on average younger--withonly 42 percent of the fleet older than 15 years-, but in some of its
specializedcategories,such as OBO carriers, morethan 70 percentof all units have been tradingfor more
than 15 years. Only the fleet of dedicatedcontainervessels is young, with 72.5 percent less than 15
years of age. See Figure 6 below for details.
The World Merchant Fleet
Age Distribution in mid 1992
dwt share of respective Fleet Segment
80% -
.
-
bOS
- 40%
40% -
30% --
30%
20% --
20%
10%
10%
0%
0%
less than 5
z
15 - 19
10 - 14
number of years
5-9
Oil Tankers
l=]
Gen. Cargo Ships
Source: Lloyd's Register of Shiping
Dry Bulk Carriers
Averge
IFntlri
20 -25
M
Merhant
more than 25
Container Vessels
Fleat
Figure 6
- 29 -
50.
As any physical asset, ships deteriorate over time. The rate of deteriorationaccelerates in the
absenceof proper maintenance. Whentheir freight earningsshrank manyshipownersseverely curtailed
maintenanceexpenditures,and the maintenanceintervalswere extended. A randomsurveyof 100trading
ships by the British Joint Hull Committee in 1991 found that only 18 were in full compliance with the
rules that govern seaworthinessclassification. Of the vesselswith deficiencies40 percent were so badly
damaged that immediaterepairs were required before they would be allowedto accept cargo again.
51.
Resulting from the continuousdeterioration of the world merchant fleet, there has been a
growing incidence of ship casualties. But unlike the dramatic media reports may suggest, the highest
casualty rate occurred in the dry bulk sector (43 percent of all casualtiesin 1991), followedby tankers
(29 percent) and all other vessel categories(28 percent). Between 1988and 1991 the loss ratio--dwt of
lost ships as a percentageof total world tonnage--doubledfrom 0.2 to 0.4. During the last five years 94
dry bulk carriers were lost with 381 lives and 2.6 milliontons of cargo. More than 80 percent of these
casualties were due to structural failure, and over 90 percent of the vessels concerned were older than
15 years. The Institute of London Underwriters reported that 1991 was the worst year in total loss
records. The estimated cost of cargo losses in the dry bulk sector reached almost US$ 800 million,
whereas the replacementcost of lost ships exceedsUS$ five billion.
52.
Tht fleets with flags of four countries--Panama,Cyprus, Greece, and Liberia--accountedfor
almost 50 percent of all casualties. More than three-quarterof all ships lost in 1991 (1.3 million grt)
were registered in developingcountries. The West Europeaneconomiescontinueto havethe lowest ship
loss record. Exemplaryis also the low casualtyrate amongFSU carriers, which can largely be ascribed
to very effectivevessel conditioncontrol by the Soviet Registerof Shipping.
53.
Given the steadily increasing age profile of the world merchant fleet and modest prospects of
improvedfreight earnings--whichare likely to inducemanyshipownersto keepmaintenanceexpenditures
limited--itis foreseeablethat the casualtyrate will increase. This expectationis also reflectedin the risk
calculationsby the Protection& IndemnityClubs which cover the insuranceof 90 percent of the world
fleet. Vessel insurancepremiumshave doubledduring the last 18 months. As a consequence,insurance
is now with 30 percent share the largest single item in ship operatingcost, which has greatly increased
owners' annual expenditures. If the conditionof the fleet does not improve significantly,insurancecost
can be expectedto increase furtherwhich would make manyvesselsuneconomicalto operate. Such cost
increase may even bankruptseveral financiallydistraughtshipowners.
54.
The insurers have startedto take a close look at vessel manningand operatingpractices. Poorly
trained crews have been identifiedas one of the key causes of the escalatingnumber of claims. In
addition to hiring low-wagepersonnel,many vessel operators have also reduced crew sizes in order to
cut cost. In support of this objective several shipyards have developed vessel designs which allow
operators to decrease personnelon board, essentiallyby automatingmanyfunctionswhichare associated
with ship operations. The average crew size was 30 during the early 1970sand is now around 14. But
insurancecompanieshave realizedthat reducedcrew sizes are amongthe main reasons for accidentsand
also of inadequatepreventivemaintenance,much of which is carried out while a vessel is on voyage.
It is therefore to be expectedthat the insurers will shortly introduce a requirementfor minimum levels
of crewing which will be higher than the current numberof personnelon board of most vessels. They
will also insist on higherpersonnelqualificationstandardsand more rigorousperiodictesting of seafarers'
skills.
-
30 -
55.
About 1.2 millionseafarers are presentlyemployedin the internationalocean transport industry.
A previouslyunimaginablesituationhas developedwherebythe global supplyof seafaringpersonnelhas
contracted sharply. The number of new annual job entrants in the traditional maritime nations has
declined. A study commissionedby the InternationalChamberof Shipping in 1991 found that the gap
between demand for and supply of seafaring personnel may widen significantlybefore the end of the
current decade. Major efforts will be required to correct this situation because even in the populous
developingcountrieswith substantialunemploymentthere has been little interest in seafaringas a source
of income. Governmentsin thesecountrieshave usuallygivenlittle attentionto the employmentpotential
of internationalocean transport, in spite of prospectiveconsiderableforeign exchange income through
remittances. If developingcountries are to be counted on as the principal source of future supply of
seafaringpersonnel,then there will haveto be muchmore emphasison improvingtraining arrangements.
The Philippinesare currently providing16 percent of the crews in the world merchantfleet, but a recent
investigationrevealedthat a very high portionof Filipinoseafarers did not possessrequired qualifications.
C. Ocean Transportas a Threat to the Environment
56.
The grounding of the tanker 'Exxon Valdez' in Alaskan coastal waters caused a substantial oil
spill with devastatingimpactson flora and fauna. Tanker accidentshappen all the time, and the total of
the associatedoil spills worldwideexceedsthat of the accidentin Alaska manifold. But extensivemedia
coverageand the ensuing public outragecausedthe 'Exxon Valdez' case to become the starting point for
new standards that apply to tanker design, operation, and their owners' liability. Followingthis event,
the U.S. Governmentpassed a law--theOil PollutionAct (OPA) of 1990--whichholds tanker operators
fully liable for any damagetheir vesselsmay cause. OPA requiresalso that any tanker which will operate
in U.S. territorial waters from the mid-1990sonwardshas to be double-hulled. In the meantime, Canada
has adopted similar legislation,and other countriesare expectedto follow. The oil tanker accidentsoffshore northern Spainand the Shetlandsin late 1992can be expectedto generatemore reactionalong these
lines. The EC is taking steps to regulatetechnical standardsand to rigorously police the operation of
tankers in European coastal waters. However, much of the debate over these issues lacks objectivity.
Double hulls are no guarantee for preventing oil spills. It is rather vessel condition and operating
practices. The Shetland accident was essentiallydue to error of judgement, poorly trained crew, and
unjustifiablypremature abandoningthe tanker 'Braer'. Even if this tanker would have been doublehulled, the accident would have happenedunder such circumstances.
57.
The present internationaltanker fleet includesvery few units with doublehulls or which are built
accordingto an equally acceptablestandard,the mid-deckdesign. Tankers built to this design standard
are equipped with a horizontalseparator of cargo holds that extends from bow to stern. In the case of
hull damage the ambientwater pressureexceedsthe pressureof oil in the tanks and thus preventsspillage
to occur. However since the U.S. market is the principal attractor of world oil trades, a shortageof
OPA-standardtankers will curtail the movementof oil, and thus render many non-conformingtankers
with henceforth limited trading prospects.
58.
Mandatingthe doublehull design for all tankers will necessarilyresultin the introductionof void
spaces on a massive scale. Double hull configurationswill require almost triple the steel surface to be
coated to protect against corrosion. Routine inspection by crew members to guard against coating
breakdownand corrosion, and relatedmaintenancewill be infinitelymore complexand time consuming.
It is ironic that while the future outlookfor seafaringpersonnelhas actually inducedvessel designs that
- 31 -
It is ironic that while the future outlook for seafaringpersonnelhas actually inducedvessel designs that
simplify and reduce labor intensivemaintenance,the double hull design structures will demand vastly
increasedmaintenanceto be performedby highernumbersof personneland by a more skilledlabor force.
If this challengefor the industryis not positivelyaddressedand resolved,the safety risks become not only
obvious but ominous. A case in point is the tanker accidentoff-shore northern Spain. The vessel was
double-hulledbut suffered fatal damageafter hydrocarbonvapor explodedthat had accumulatedin hull
spaces, withouthaving been detected by the crew.
59.
Sincetanker accidentsand relatedoil spills have beenon the rise during recent years the question
of vessel conditionand maintenanceneglecthas been brought up again. In many instancesvessels with
severe structural and mecbrnical deficiencieshave been encountered. Cargo owners and the maritiir
cormunity are therefore pressing for stricter inspection standards to be applied by the international
classification societies, and for shorter intervals between such inspections. Until the mid-1980s there
were principally 11 membersof the InternationalAssociationof ClassificationSocietiesthat controlled
vessel inspection and the issuanceof seaworthinesscertificates. They were based in Western Europe,
the U.S.A., and Japan but had extensive networksof representationall over the world. However since
then the number of such societieshas mushroomedand now totals more than 50, of which the majority
have their base in developing countries. The rules and enforcementstandards of many of the new
societies are lenient, and shipowners can easily switch to those societies which have a record of
willingnessto let questionabletonnagepass. The proliferationof classificationsocietiesand the intense
commercial competition among them have been blamed as key reasons for the loss in confidence in
classificationas a reliable indicatorof a vessel's condition. Too many incidentswere reported of ships
found to be in a poor condition with the classificationcertificatesin order.
60.
A precarious tanker fleet and the requirements of unlimited liability under OPA and similar
legislation have induced the insurers another time to review their practices and rates. The U.K.
Protection& IndemnityAssociationincreasedits premiumsby 150percent in mid 1992, and advisedthat
another similar increasemay have to be applied withinthe foreseeablefuture. But in view of heavy cash
outlays to cover the cost of accidents, like that of the 'Exxon Valdez', and potential future claims that
may go into the billions of dollars many insurers have become wary of continued involvementin the
shipping market. A crisis is buildingup.
VI. CORRECTINGWORLDMERCHANTFLEET DEFICIENCIES
61.
During 1992, the average annual revenue earning performance of all ships in the world's
merchantfleet was about6.2 tons/dwt. Consideringa further growth in annualseatrade volumesto about
five billion tons by the end of the 1990sand a gradual increase to 6.8 tons/dwt per year in the average
revenue earning performance of all vessels in the internationalocean transport market, the fleet would
have to expandfrom 657 milliondwt in late 1992to about735 milliondwt in aggregatecarrying capacity
in the year 2000. It is unlikelythat greater productivitygains couldbe achievedbecause the proportion
of older vessels in the world fleet can be expectedto remain relatively high during the current decade.
Older ships operate with comparativelylow speeds and are also prone to be out of commissionduring
times of required frequentrepairs. Thus their revenueearningpotentialis limited. In addition, there will
- 32 -
be no quick end to the pervasiveproblem of port congestion,particularlyin developingcountries. Ships'
downtime in ports reduces their commercialperformance.
62.
On the other hand, the repair and insurancecost of a substantialportionof the older tonnage can
be expected to increase so much that further trading will become commerciallyprohibitive. More
rigorous inspection arrangements and seaworthiness certification standards by the international
classificationsocieties--inresponseto growing pressure by cargo owners and the maritime community-are bound to exacerbatethese developments. This observationapplies to about 40 percent of the current
world fleet, particularly to pre-1975 built vessels. It is estimatedthat during the next eight years about
260 million dwt of overaged and deficienttonnage will have to be withdrawn from the market for good.
A high percentage of this tonnage will representtankers which do not comply with the environmental
protectionrequirementsunder OPA and similar rules.
A. The Demandfor Newbuildings
63.
In view of the projected net increasein carryingcapacityof the world's merchantfleet, and the
need to replace decommissionedvessels, roughly 330 million dwt of new tonnage will have to be built
between 1993 and 2000. A review of changes in the compositionof the internationalmerchant fleet
auring the last eight years provides indicationsabout differencesin the demand pattern for the various
categoriesof cargo ships (see Table 7 on page 33). In line with their preponderancein the world's fleet
and the anticipated massive withdrawal of overaged and deficient vessels, the highest demand for
newbuildingswill be in the oil tanker and dry bulk carrier sectors. However, it can be expectedthat the
average size of new oil tankers and dry bulk carriers to be orderedwill differ from the carrying capacities
which were typicalof newbuildingsduring the 1970sand 80s. The new vessels will be smaller and with
built-in versatility to be able to carry different types of bulk cargo. Both phenomenawill ensure more
operationalflexibility and enhancedcommercialperformance.
64.
In conformity with the projectedgrowth of gas, chemicalsand oil product trades, a substantial
demand for specializedtankers is expectedto materialize. Sincethe market is already relativelysaturated
with purpose-builtcellular containervessels, and given the fact that the majority of these vessels is less
than ten years old, it is likely that the demand for newbuildingsin this vessel category will be modest.
On the other hand, there has been a renewed interest in general cargo ships whose share in the world
merchant has declined during recent years. The new type of general cargo ship will, however, be
different from a traditionalvessel in this category. The perceivedneed for more operationalflexibility
and the impliedcapacityto carry different types of cargo, such as breakbulkand containers,on the same
voyage will lead to modern multi-purposevessels. Port limitations in many developingcountries will
induce a trend whereby manyof these vesselswill be equippedwith highlyefficientcargo handlinggear,
or be designed to RoRo configurationwhich allows cargo loading and discharge over ship-integrated
ramps. Table 8 on page 34 provides further details on expecteddemand for newbuildingsin the different
vessel categories.
65.
A market analysis by the Associationof West EuropeanShipbuilderssuggeststhat the presently
installedyard capacities for shipbuilding,worldwide, are of the order of 18 inillioncompensatedgross
tons, which translates roughly into the ability to build 27 million dwt of new tonnage per year.
Considering the projected pattern of demand for newbuildings(see the annex on page 45), there is
sufficient capacity supply to meet such requirements in the near future. After 1995, however, the
- 33
-
demand-supply relations in the newbuildingmarket can be expected to deteriorate, if no corrective
measures are taken.
Table 7: THE INTERNATIONAL
COMMERCIALLYOPERATEDFLEET
Changesin Fleet Composition
Status In the mid 80s
Number
dwt
Share
(mill.) in Total
dwt(%)
Status in the early 90s
Number dwt
Share
(mill.) in Total
dwt(%)
Change
(in dwt)
5,723
240.7
39.3
5,962
256.1
39.8
6.4 %
Chemical Tankers
874
6.2
1.0
968
6.2
1.0
0
LNG/LPTolkers
755
10.3
1.7
802
11.0
1.7
6.8 %
Dry Bulk Carriers
4,595
183.9
30.0
4,660
199.7
31.1
8.6 %
QCriits
372
31.3
6.4
352
36.8
5.7
- 6.3 %
Container Vessels
1,027
21.1
3.4
1,189
27.0
4.2
27.9 %
t(Sigleck
7,166
25.3
4.1
6,757
24.5
3.8
3.2 %
General Cargo Ships
(Multi Deck)
7,266
56.9
9.3
6,274
48.2
7.5
Reefer Ships
1,273
6.7
1.1
1,386
7.6
1.2
13.4 %
RoRo Vessels
960
7.7
1.3
1,022
8.2
i.3
6.5 %
tii37--0 4.8
0.1
311
0.6
0.1
25 %
Vessel Category
Oil Tankers
O
Girenercatlo Ships
Combined
Pnesen,
-
15.3 %
go-
- - -
Source:Insttuteof Shipping
Economics
andLogistics.'StatisticalYearbook". Variousissues. Bremen
66.
As can be inferred from Table 9 on page 35, the bulk of shipbuildingactivities in recent years
took place in a limited number of countries. The twelve leading shipbuildingnations presently control
over 90 percent of the market. For manyyears now, the Far Easternyards had the lion's share in these
activities, with Japan and South Korea in the lead. The compositionof the leading shipbuildingnations
has remained essentially unchanged since the early 1980s. To maintain the market shares of their
shipyards in newbuildingactivities, the different countriespursued a variety of strategies. In addition
to subsidy schemes these strategies focused on yard industry restructuring. Such restructuring led to
improvedproductivity. The most notable result of the restructuringmeasureswas the reductionin labor
involved in shipbuilding. Since 1975 the related work forces were reduced by 62 percent in WestK
European shipyards, and a staggering73 percent in Japaneseyards. Increased automationof building,
activities, reinforced by computer-aidedtechniques, allowedthe yards to cut cost and thus to maintain
their market shares. But during the interveningyears of slackeningdemandfor newbuildings,the cost
pressures continued,particularly in the Far Eastern and West Europeanyards.
- 34 -
Table 8: THE WORLDMERCHANTFLEET
NewbuildingRequirementsfor PrincipalTonnageCategories
in milliondwt
Category
1992- 1995
1996 - 2000
Oil Tankers
22
65
SpecializedTankers
(Gas, Chemical,and
Product categories)
7
23
Dry Bulk Carriers
(incl. Combination
Carriers )
44
86
ContainerVessels
8
7
GeneralCargo Ships
( inct. RoRo tonnage)
5
24
Reefer Ships
2
3
Source:Author'sestimate
67.
In the meantime,however, severalcountriesin the former socialistblock of Eastern Europehave
been able to establishfirm market niches. Low wages and comparativeadvantagesin other factor inputs
have enabled yards in these countriesto offer newbuildingtonnageat attractiveprices. China has been
another country that has been able to penetrate the shipbuildingmarkets. Chinese-builtvessels have a
consistent record of high quality and reliability,and are thus in demand. But many Chinese yards are
still antiquatedand are in need of major improvements. Notwithstandingthe subsidyissue, for many of
these developingnations, engaging in shipbuildingactivitieshas been beneficial. Since shipbuildingis
an assembly industry, there are many forward and backwardlinkages with other parts of the national
economies. A recent Bank survey' which was addressingoptions for the shipbuildingindustriesin the
FSU countriesconcluded that for each one millioncurrency units of shipbuildingcontracts, 40 percent
would accrue to a yard and that the balanceof 60 percent would benefit national steel manufacturers,
equipmentsuppliers, and others.
68.
During the remainderof the 1990s,severalchangesin shipbuildingand individualcountry shares
are likely to materialize. The number of large and medium-sizeshipyards will increase. There are
presentlyover 80 countriesengagedin shipbuilding,and yards in more than 60 percent of these countries
are capable of building vessels with carrying capacitiesabove 5,000 dwt. The Far Eastern yards will
maintain their market dominance,with Japan continuingin the lead, if not with market shares sustained
during the 1970sand 1980s. China can be expectedto expand its shares. South Ko-ea's shipbuilding
industry will enter a stage of stabilization,but is likely to defenda market share of around 20 percent.
The West and Northern European shipyards with their superiority in the developmentand building of
sophisticatedand specializedtonnagewillremain a marketforce. Recent initiativesby major shipbuilders
4
Peters, Hans J. 1993. "WaterborneTransportin the Russian Federation- Trends,Issues, and RemedialOptions". Mimneo.
World Bank, Washington,D.C.
- 35 -
in the region to jointly design and market standardizedhigh quality tonnage, like the E3 tanker,
demonstrate their deterninedness to stay in the market. The E3 designation stands for European,
Environmental,and Economical.
Table 9: THE WORLD'S LEADING SHIPBUILDING NATIONS
Ranking by Percentage Share in Tonnage on Order
1985
1988
1992
Japan
43.3 %
SouthKorea
32.5 %
Japan
39.0 %
South Korea
19.0 %
Japan
25.8 %
South Korea
21.1 %
Brazil
6.1 %
Yugoslavia
5.0 %
Denmnark
5.4 %
Taiwan
3.5 %
Taiwan
3.9 %
China
5.1 %
China
3.4 %
Brazil
3.5 %
Taiwan
3.3 %
Germany
2.1 %
China
3.3 %
Romania
2.9 %
Poland
2.0 %
Germany
3.2 %
Brazil
2.7 %
Spain
2.0 %
Poland
3.1 %
Germany
2.4 %
Yugoslavia
1.9 %
Spain
3.1 %
Great Britain
2.4 %
Romania
1.7 %
Italy
2.7 %
Poland
2.3 %
Denmark
1.7 %
Romania
2.3 %
Spain
2.3 %
U.S.A.
1.5 %
Denmark
1.9 %
Croatia
2.1 %
11.8 %
All Others
9.7 %
All Others
9.0 %
All Others
Total Tonnage on Order
year-end records
1985: 46,696,555 dwt
1988: 38,536,093 dwt
1992: 68,672,316 dwt
Source: Fairplay. 'NewbuildingSupplement".Various issues. London
69.
The shipbuildingindustriesin the FSU and East Europeancountries, and their ability to attract
orders will remain an important factor in the shipbuildingmarket during the remainderof the 1990s.
Yet, while Poland and Romaniahavebeen able to establishtheir yards firmly in the internationalmarket,
there is much doubt regardingyards in the different maritimerepublicsof the FSU. Many of these yards
have b_en and remain engagedin the constructionof naval vessels. The extent and pace in which such
naval yards can be converted to build merchant tonnage will determine these countries' prospects to
partake in international shipbuilding activities. The most cumbersome obstacle to overcome are
centralizedand archaic managementorganizationswhich stand in the way towards required reforms.
- 36 -
70.
In the Americas,the formerly importantBrazilianshipbuildingindustry is expectedto be unable
to make much headwayduring the next ten years. With its present limitationsas a shipbuildingnation,
Brazil is likely to engage in building various types of vessels of less sophisticateddesign for the home
market, and to a lesser extent for foreign customers. The U.S. plans for streamliningthe construction
of merchantships is slow in coming, and the nationalyards are so burdenedwith the excessivecost of
factor inputs that it is very unlikely for a competitiveshipbuildingindustry to emerge in the foreseeable
future. Oceania and Africaare still backwardshipbuildingregions. No major advancescan be expected
to materialize there. On the other hand, countries like India, Indonesia, Malaysia, and Turkey are
consideredto become contendersin the internationalshipbuildingmarket.
B. The Demandfor Repair. Upgrading.and Conversion
71.
While no more than 2,000 newbuildingsare likely to be deliveredfrom the world's shipyards in
any one year, in excess of 20,000 vesselswill probablyundergosome type of formal repair. Ship repair
and shipbuilding are closely related industries, drawing on many of the same facilities, skills, and
resources. There are three basic divisionsto ship repair classification. Firstly, there is scheduledrepair,
which is centered around the main event--dry docking--andaccounts for about 75 percent of the total
workload. Secondly,there is unscheduledrepair work, which is often damage related, or necessitated
by deterioratingvesselperformance. And thirdly, there is ship conversionwhich is the most specialized
and costly segment of the market.
72.
Due to the downturr.in the internationalseatrademarkets during the first half of the 1980sand
the concomitantreductionin newbuildingorders, only a limitednumberof new ships entered the market,
and the world merchantfleet was aging rapidly. At the same time expenditureson vessel maintenance
have been at minimal levels. But as the market picked up again and freight rates started to rise, there
were not only positive indicators for repair demand but there was also a substantial accumulationof
workload arising from years of neglect. Such demand is estimated to have risen by seven percent in
1987, and a further ten percent in 1988. Since then the level of demand has remainedhigh, with the
exceptionof a brief downturn in 1991.
73.
Several developmentsduring the 1980shave had their influenceon ship repair activities and
reducedthe need for fixed installations,such as dry docks. New technologyhas enabled far more work
to be undertaken on vessels while they remain afloat, which has led to the growth of a whole new
industryof underwaterrepair, often locatedaway from traditionalyard centers. At the same time there
has been an increase of repair on vessels while they remain in service. In addition, advanced hull
coatings have enabled shipownersto move to a five year dry dockingcycle.
74.
The ship repair industry had to internalizefinancialproblemsin the early 1980sin the same way
in which shipownershad to cope with the consequencesof sluggishseatrade markets. During the 1980s
a considerableproportionof repair activitiesmigratedfrom NorthernEuropeand Japan to the lower cost
areas of Singapore, Southem Europe, the Far East, and the MiddleEast, which caused major changes
in the structure of the repair market. Between1985and 1990the volume of repair work carried out in
SoutheastAsia, for instance, is estimatedto have nearly tripled. Conversely, Northem Europe saw its
share in global repair activitiesfall from nearly 35 percent to just above 20 percent. Those yards that
have been able to attract repair businessbenefittedessentiallyfrom two circumstances: low wage labor
and location. Repair facilitieswhich are situatedwithin the key seatrade lanes, like in Singapore,have
- 37 -
a major locationaladvantage. But as the patterns of trade change yards may lose such advantage. The
most critical issuesin ship repairpricing are the cost of labor, which generallyrepresentabout 70 percent
of a yard's total expenditure,and the productivityof that labor. Developingcountries which consider
entering the ship repair business--inthe expectationthat rising labor cost in yards of the industrialized
countries may induce further shifts towards low wage countries--willsucceed only if high productivity
levels can be assured.
75.
If the 1990sare to be the decade in which quality is to be restoredto a positionof pre-eminence
in shipping, then price will play a lesser role in determining repa, workload distribution, whereas
technicalstandards assume increasingsignificance. All major ship repair regions can expect an incredse
in their total workload during the next five years, with the largest rises forecast for the countries of
SoutheastAsia. But the extent to which this will materializewill dependon the availabilityof sufficient
capacityand labor. Furthermore, the yards around the Arabian Gulf can expect to gain further market
shares. The regions which are forecast to experiencemore erosion of their market share are Southern
Europe and the Far East.
76.
In contrastto ship repair, ship upgradingand conversionare concentratedin a few leadingyards
which have developedexpertise and reputationin particularmarket niches. Contract valuesare usually
high. Unlike repair, much of the cost in upgrading and conversion activities is accounted for by
equipment, like a new main propulsion unit in re-engining, and materials, such as steel for vessel
lengthening. With newbuildingprices remaininghigh and shipownersseeking to take advantage of
improved trading prospects, the trend towards life extensionof existing tonnage is likely to continue,
which adds further impetus to ship upgradingand conversiondemand. A sobering dimension of this
demand is the fact that a total of some 3,500 high volume bulk carriers and tankers will face the third
or fourth special surveysby the classificationsocietiesduring the period 1993-96. There are indications
that many of these vessels may undergo conversionduring this process. On the basis of a nominal
refurbishingtime of two months per vessel, this would imply an average requirementof 120 berth per
year. Taking the approximately80 yards worldwide, capableof upgrading and conversion work on
vesselsof this size, with an averageof 2.5 berths per yard, the maximumcapacityis around 200 berths.
By implication, such type of vessel conversionand classificationrepair work alone could occupy on
average almost 60 percent of total availableyard capacityfor this market segment.
C. The Demandfor Tonnage Demolition
77.
Shipbreakingwas attractiveduring periods when steel pric-eswere high and scrap could be used
for quick conversioninto material for a variety of purposes, such as concrete reinforcingbars. A very
large crude carrier of about 200,000 dwt yields around 33,000 to 35,000 tons of steel scrap. Countries
with limited or no indigenousiron ore sources found scrappingattractiveduring times of rapid growth
and expandingconstructionactivities. South Korea and Taiwan were prime examples. Both countries
are dynamic steel exporters but poorly endowed with domestic iron ore and coal deposits. Hence, the
foreign exchange cost of purchasingships for scrappingcould be directly offset by reduced feedstock
importsand steel export earnings. But shipbreakingis very labor intensive,and as wages increased and
the price of steel in the world market started to decline, these countrieswithdrew from shipbreaking.
78.
Current shipbreaking activities are primarily concentratedin South Asia, although China has
entered the market and holds prospects to expandinto these activitiesmuch more rapidly than the other
- 38 -
countries. For further details on countrieswhich are active in shipbreaking,see Table 10 below. While
presently not involved in shipbreakingactivities, there are indicationsthat Vietnamhas much potential
to become an active player in this field. But in contrast to South Korea and Taiwan the present
shipbreaking regions all have sizeabledomestic ore or coal deposits and typically do not export steel.
Vesselspurchased for scrappingare therefore a net drain on already slim foreign exchange reserves.
Table 10: ANALYSISOF VESSELSBROKENUP IN 1992
DevelopingCountriesare in the Lead
Total
No.
Tankers
dwt
;Z.
('000)
Dry Bulkers
dwt
No.
('000)
dwt
Gen. Cargo Ships
No.
('000)
dwt
('000)
China
36
3,187
15
2,442
12
666
9
79
India
109
2,733
32
1,528
13
420
64
785
Bangladesh
34
1,727
12
1,370
3
113
19
243
Pakistan
20
1,715
13
1,472
4
214
3
29
Turkey
7
185
2
106
2
41
3
38
Thailand
1
15
--
1
15
Mexico
1
13
1
13
Spain
2
5
2
5
1
3
1
3
1
2
2
2
2
1
I
I
Pe
--
-*-
--
--
-
--
--
3
Greece
1
3
Por*ugal
1
2
Denmark
2
2
--
--
Japan
2
1
-
--
Netherlands
I
I
--
--
Gernany
1
1
United Kingdom
I
I
220
9,593
TToAL
--
|
--
--
--
-
--
--
--
--
--
-
-
*
*
74
6,919
34
*
I
I
1,453
112
I
1,221
Source: Lloyd's ShippingEconomist. Researchfiles. London
79.
The projectedannual demandfor tonnagedemolitionis expectedto amounttc 26 million dwt in
1993 and to increase to 38 milliondwt annually towards the end of the current decade. The act.dlly
scrapped tonnage was barely ten million dwt in 1992and much less during the preceding three years.
There are two factors accountingfor this discrepancy. One is low productivityin those countries were
ship scrappingcurrently takesplace. At the extremewas a West Africannationwhere it took 26 months
to break a medium-sizebulk carrier. Taiwanesebreakersused to accomplishthe same task in under four
weeks. But the productivityrates in all other countriesare also three to four times lower than those that
- 39
-
were achieved in South Korea and Taiwan when yards in both nationswere still active in this field. At
present only shipbreakingyards in Turkey operate at comparablelevelsof efficiency.
80.
Most disruptive, however, is the shortageof capital. Breakersin developingcountries have to
buy the tonnage to be scrappedfrom internationalshipowners. And they have to pay in hard currency.
Their access to foreign exchange is curtailedbecause the nationalgovernmentshave other priorities for
their limitedcapital resourcesand commercialbanks haveusuallyconsideredthese activitiesas too risky.
And thus a dilemma has developed: there is much need for shipbreakingbut no cash to do it. In the
absence of efficient and reliable scrapping arrangements,tonnage supply in the international ocean
transport market will remain heavily inflated. The financial performance of carriers will deteriorate
further, and deficientvessels will continueto trade with the result that the annual incidenceof accidents
is likely to increase dramatically. If no remedy can be found, the crisis in the internationalocean
transport industry will intensify.
VII. THE FINANCINGDILEMMA
81.
Addressingthe projected demand for newbuildings,ship maintenance,repair, and conversion,
and tonnage demolitionwill be costly. It is estimated that the cumulativecost of these three activities
during the next eight years will amount to almost US$ 400 billion in constant 1992prices, increasing
from US$ 43.5 billion in 1993 to US$ 63.7 billion in 2000. Shipbuildingwill require the lion's share,
representingabout US$ 330 billion, followedby maintenance,repair, and conversion(US$ 51.7 billion),
and then demolition (US$ 10.5 billion). Details about the underlyingassumptionsand of the expected
annual cost streamsare given in the annex on page 45.
82.
As regards newbuilding,maintenance,repair, and conversion,the key question is whether the
internationalocean transportindustry will be able to mobilize such considerablesums. The first point
to note is that the scaleof collapse in freightearningsand vessel asset prices in the spaceof a few months
during 1992--and as experienced during numerous preceding market cycles--representsa degree of
volatility which is hard to imagine in any other industry. The effectsof the 1992 market downturn on
ocean transport companies' profitabilityunderlinejust how importantit is for shipownersto be able to
read the tendencyof cycles and de-gear, either through buildingup cash balancesor reducingdebt, when
entering a downwardphase. But it continuesto be surprisinghow few carriers appeared to be able to
achieve this.
83.
All too often shipownershave fallen into the trap of increasingtheir capital expenditurewhen
freight markets where expanding,on the assumptionthat the net proceedsof ship sales would ensure the
maintenanceof adequateliquidbalances. In practice, however,fallingsecond-handprices generallyresult
in such owners becomingdangerouslyoverstretchedduring subsequentdowncycles. The current phase
of the cycle, in which the squeeze on operating margins is exacerbatedby sharply rising repair and
insurancecost, is proving most punishingfor owners who made this mistake. As a result, the liquidity
of many carriers is very poor.
84.
Ever since moving away from total self-financingin the 1960s,the ocean transport industry has
overwhehninglyrelied on mortgage loans from commercialbanks for the financingof ship acquisitions.
- 40 -
However, over the past three years, the banks' appetitefor ship finance has been tempered by fears of
debt-financedexpansion. There are relatively few commercialbanks which specialize in ship finance,
probablynot exceedingone hundred. Their present portfolioto shipping is estimatedto be of the order
of US$ 75 billion. Several of these banks had to internalizehuge ship loan losses and are therefore
reluctant to further engage in asset-securedlendingfor vessel acquisition.
85.
Capital adequacyis another factor which will influencethe extent to which banks will be able to
provide funds for ship financing. Reference is made to the Basle Convergence Ratio which will be
applied to all internationalbanks from 1993onwards, and will as such have substantialimplicationsfor
the way in which banks will conduct their lendingbusinessin future. The Basleregulations reduce the
gearing ability of the banks which means that the margins on loans will need to increase. Shippingwill
have to competefor resources which will become scarcer in the medium term. Capital adequacy is a
problem and will result in banks having to be more discerning in the amounts they lend. For ocean
transport industry borrowers it also means that their equity contributions will have to increase
substantially.
86.
There are differences between liner businessand bulk shipping that are significantfor the way
in which the two sectors of the industry are financed. Tankers and dry bulk ships are appraised as
individualunits, whereas in liner shipping a vessel is consideredas part of an internationaltransport
structure. Bank lendingfor ships to be used in liner trades therefore tendsto be corporate financewhich
is based on earning multiplesand the overall worth of the business. From a bankingperspectivea good
liner company represents a strong corporate profile with a prospect of steady vessel revenues. The
emphasisis on fleet continuity,so that the ship is essentiallya unit of transport, and not primarilybought
and sold for asset play profits, which characterizes the investment behavior of many bulk operators.
87.
Lending for individual bulk carriers is more risky because their asset values and earning
performanceare very vulnerableto cyclicalmarketswings. The fact that manyof such vesselsserve only
one cargo owner increases their vulnerability. With soft markets likely to persist in the short term and
operatingcost pressure unlikelyto ease, the squeezeon the profitabilityof bulk shippingcompanieswill
intensify. All these circumstanceshave led banks to take a much more cautious view when it comes to
asset-securedlending for tanker or dry bulk vessel acquisition. Sincemost of the projecteddemand for
newbuildingsrelates to these ship types, this developmentis cause for particular concern in that the
availabilityof traditional fundingcan be expectedto becomevery limited.
88.
Aggravating this situation is the fact that the provisions under OPA and similar regulations
regarding pollution liability have become major deterrents for banks to be further involved in the
financingof tanker acquisitions.At issue are the rapidlyincreasingcost of securingship mortgagesunder
the MortgageAdditionalPerils Insurancewhich was establishedto cover financiers' risks resultingfrom
the U.S. oil pollutionlegislation. Owingto thesecircumstances,ship loansmay becomeunprofitablefor
banks if the cost of insuring ship mortgagesrise much more. The worst case scenario for bankers is a
vessel which had an accidentin U.S. waters and was then arrested becausethe operator could not meet
damage claims through insuranceor other sources. The mortgageecould thus lose the security on the
loan: the ship.
89.
In order to meet their financialneeds, shipownershave tested possiblealternativesto mortgagetype lending by commercial banks. In some countries, like Denmark, Germany, and Norway,
considerable amounts of private capital have been mobilized since the 1960s through the tax-driven
-
41 -
limited partnership markets. But these sources have contracted as the commercialperformance and
prospects for ocean transportdeteriorated. In a numberof cases, ownershavealso benefittedhandsomely
from different forms of financial assistance to the ocean transport industry through construction,
operating, and credit subsidieswhich were providedby severalgovernments. However, there are now
concerted efforts which are spearheadedby the OECD and the EC to gradually dismantlesuch subsidy
schemes.
90.
Under pressure from its underemployedshipbuildingindustry the U.S. Governmenthas started
to take the firmest stance as regards subsidiesto the oceantransport industry. Rigltly or wrongly, the
view is taken that U.S. yards are disadvantagedthrough unfaircompetitionfrom foreignshipbuilderswho
enjoy financialsupport from their governmentsand are thus able to undercutprices. A conflictappears
inevitablein view of the fact that the U.S. Governmentis contemplatinglegislation--theproposedGibbons
Bill--whichwould provide for penalties to be levied on ships built with subsidies, which call on U.S.
ports. In summary,the current backgroundto the provisionof newbuildingcredit and subsidiessuggests
that conditionswill become tighter during the comingyears.
91.
Most financialinstitutionsthat are willingto further engage in ocean transport industry related
lending consider cashflow-basedlending as the most stable--andsecure--formof funding and as the
potent.allymost effectiveinstrumentto hedgeagainst the cyclicalpattern of demandfor ocean transport.
The level of such type of lending is tailored to the projectedearning capacity of a vessel, which means
that shippingrevenuescover operatingeynensesand capitalcost. Bankswhichhaveadoptedsuch lendilng
policy now require that the financialpackage be carefullystructuredto suit vessel employment,so that
debt can be serviced withoutcausingundue stress to either borrower or lender. To ensure this, lenders
increasinglyinsist on secure long-termcharters as a guaranteeof regular vessel earningsto meet the debt
service.
92.
These developmentsmight be consideredas harbingerof a new order in ocean transport. At the
core of this observationare the shipper-carrierrelations. In order to gain access to the capital markets
for both investmentand long-termdebt, the ocean transport industry will need to establishmore lasting
relationshipsbetween owners, operators, and cargo interests. It will not be the spot charter market or
second-handship values that support the investmentsin new ships, but renewedlong-term contractual
relationshipsbetween the owners of the cargo and tomorrow's shipowners. Cargo owners should be
prepared to work in cooperationwith shipownersand operatorsin establishinglong-termstability in the
cost of seabornetransportation. In practice, however, there does not seem to be any rush on the part of
most cargo ownersto make such arrangements. Freightmarketsremaindominatedby short-termcharters
and decision-makingwhich is essentiallybased on the cheapesttransportationcost, regardlessof quality.
But is precisely this situation which has generatedso much deterioration in the quality of service, the
safety record, and the financialperformanceof the ocean transport industry.
93.
The cargo owners' hesitancecan be explainedby a number of factors. Firstly, many of them
sustained heavy losses in the 1980s on long-term charters contracted in the 1970s. Secondly, there
remains the readinessof many independentowners to order ships speculatively,and they are willing to
contract cargo for ocean transport under any circumstances. Thirdly, there is the inability of most
shippers to plan for their long-term requirementsin a way that they used to do in the 1960sand early
1970s. The structure and compositionof the internationalseatrade markets, and related development
trends have become very different from the situation that characterizedthese markets during the first
- 42
-
decades after World War II. The high degree of volatility that characterizes contemporaryseatrade
markets makes cargo flow projectionsdifficult.
94.
Notwithstandingtheir hesitance,the cargo owners' need for reliable, flexible,and cost-effective
transportationcould best be matched with the shipowners' requirementfor sufficient remunerationto
compensatefor the risk they are taking through a readiness by both sides to enter into longer term
transportationcontracts. Such contracts should be based on mutuallyagreed freight levels and extend
over a substantialperiod, with a duration in some cases of up to eight or ten years. Only within such
a stable framework, in which operating flexibilitycan still be maintained,one can see a possibility to
establish orderly ship replacement programs and develop consistent relationships with financing
institutions.
95.
One promisingarea in which new tonnagefinancingmight progressfurther in the next few years
is that of leasing. Lease financinghas been employedby the ocean transport industry for decades, but
it has so far failed to dislodge the ship mortgage loan as the principalmode of finance. This situation
is somewhatsurprisingin view of the fact that leasingis quite prevalentin the multi-billiondollar aviation
sector and the potential for leasing structures to channel long-term funds into the financing of ships.
During the heyday of aircraft financing, shipownerslooked with envy on the amounts of capital which
were raised without apparent difficultiesto finance the constructionof new aircraft. The most striking
feature during this period was the massivegrowth which took place in aircraft leasing, and the rapid
expansionof the specialistaircraft leasing companies. Why was it not possible for the ocean transport
industry to attract this type of financingon the same scale? The answer is fairly straightforward.
Shipping is much more heterogenous,with much less standardizationof asset design and employment.
Aviation is dominated by national carriers and by a relatively small number of large manufacturing
companies, whereas ocean transportis not. Passengergrowth projectionsfor the aviationindustry were
buoyantbut forecastsof consistentgrowth in the seatrademarketslackedcredibility. The operatinglease-as opposed to the finance or capital lease--hasbeen the vehicle through which enormous amounts of
money have been mobilized for aircraft financing, and it is the form of leasing which has the most
obviousapplicationto shipping. The bareboatcharter of vessels incorporatesthe basic characteristicsof
an operating lease.
96.
Given the history of the ocean transportindustryover the past two decades, it is hardly surprising
that a tensionshouldhavebuilt up betweenshipowners'requirements--essentially
consistingof longerloan
periods and easy start terms--andthose of their bankers, who want to recover as muchprincipal as they
can as quickly as possible. Lease financing, offering level rental payments over an extended period,
would seem to give shipownersexactly what they need, while requiring no technical innovationon the
part of the financing institutions. It is therefore perplexingthat it has not become more widely used.
97.
There are in fact a numberof obstacleswhich have preventedthe increaseduse of leasingin ship
finance, some of which may now be losing importance,while others are more fundamental. From the
shipowner's standpoint,by far the most serious objectionhas been the loss of flexibilitywhen it comes
to selling a leased vessel. This objectionhas gained in force as operatingearningshave steadily formed
a smaller and smaller proportionof the total investmentreturn which shipownersexpect when buying a
vessel. Particularly during more recent years, the prevalence of the asset play approach to ship
investment,in which high internal rates of return were sought and frecuentlyobtained from the highly
geared acquisitionand quick resale of second-handships, made the thoughtof being locked into a longterm lease contract an anathemato many ship operators. However, now that the potential for realizing
- 43 -
high capital profits from ship investmenthas abated, and the risk of realizing substantialcapital losses
has once again become a material consideration,one can assume that many owners will be much more
prepared to considerthe advantagesof leasing. This may take the form of sellingtheir vessels to other
owners and bareboat charter them back, or through entering into operating leases with financing
institutions.
98.
Should leasing become more prevalent in the ocean transport industry, it would imply that the
ownershipof vessel assetswouldbe increasinglyin the hands of financinginstitutions,and oceancarriers
would no more than operate these assets. Howeverit is as yet unclear where such amassingof ownership
would take place. One can assumethat the traditionalship mortgagebanks wouldshow little predilection
to get involved on a major scale. Some first indicationsseem to point more into the directionof longterm investmentinstitutions,such as pension funds and insurancecompanies. Japanese trading house
have also shown interest. And there are some financialorganizationsof the large internationalindustry
groupings, like the General Electric Capital Corporation(GECC), which have started to look into ship
leasing. GECC has recently formed the First International Leasing Corporationwhich is intended to
specialize in the ocean transport market. But overall there is not yet a dependablenetwork of leasing
organizationsavailableto ship operatorsat a scale that is comparablewith the aviationindustry.
99.
The lack of effective financingarrangementsfor the acquisitionof tonnage to be scrapped is
equally disconcerting.At the same time there are at present no indicationsthat sufficient funds will be
available in the immediatefuture for required investmentsin modern demolition facilities which will
ensure high productivityrates. While shipbreakingwill remain a labor-intensiveactivity,the sheer extent
of volume increases in the tonnage to be scrapped--whichis expectedto reach levels four times higher
than at present--will necessitatethe introductionof more mechanizedand also automatedprocesses. If
the achievementof such prerequisitesis left to the few fledglingdemolitionyards that presentlyexist in
a limited number of developingcountries, there is little hope for major improvementsin shipbreaking
capacities and output. The fact that the governmentsof these countrieshave shown little inclinationto
providethe funds for required investmentsin breakingfacilities, not to mentionforeign exchangewhich
is needed to acquire tonnageto be scrapped,aggravatesthis situation.
100. Since the prospects for steel prices during the next few years are rather bleak, the financial
justification of investmentsin shipbreakingfacilities is by implicationquestionable. Thus it is highly
unlikelythat commercialbanks couldbe enticedto providethe requiredfunds. But in some of the OECD
maritime nations the aggregate number of obsolete vessels has reached such proportions that resident
shipownershave started to seek out collectiveoptions for scrapping. Japan is a case in point. Japanese
shipownershave combinedto negotiatevessel demolitionin South Asiancountries--especiallyIndia--and
in the Philippines. Under such arrangementsthe Japaneseclients wouldpre-financethe cost of breaking
facilitydevelopmentin thesecountries,and providetechnicalassistanceduring the start-upphase. While
this approach--ifit materializes--willhelp to mitigatethe financingdilemmain ship breaking, it will not
be enough to overcome the discrepancybetweendemand and supply. A concerted internationaleffort
is required to tackle the issue. The London-basedInternationalMaritimeIndustries Forum has tried to
rally support from diverse industry-relatedgroupings,but so far withoutnotable success.
101. Finally there is the issueof requiredcapacityexpansionsin the shipbuildingindustry. As regards
ship maintenance,repair, and conversionthere is not much needfor major investmentsin new facilities.
Since the key shipbuildersare locatedin the industrializedeconomies,it can be safely assumedthat their
expansionrequirementscouldbe met throughresourcemobilizationin the domesticcapitalmarkets. The
- 44 -
scale of projected demand for newbuildingscan be expected to attract venture capital, and even
investmentsin aspiring yards in some developing countries are likely to be justifiable, provided that
convincing corporate management strategies are adopted. Overall, however, the aggregate capital
requirementsof the internationalocean transport industryduring the next eight years are presently far
from secured. There are at the momentno effectivearrangementsto correct this situation. In fact, there
are more doubtsthan assuranceshangingover the industryand the marketsit serves. Therefore the crisis
has become real.
VIII. CONCLUDINGOBSERVATIONS
102. The internationaloceantransportindustryhas drifted into a seriouscrisis. The industry endured
precarious situations in the past but the makings and scale of the current situation have no precedent.
Too manyadversedevelopments--inthe trade, financial,and insurancemarkets, as wellas in international
legislation--havematerialized during recent years. Their combined effects on the industry are farreaching. If it can be fairly admittedthat some of these developmentswere beyond the control of the
industry, the point has neverthelessto be made that muchof what has led to the crisis was self-afflicted.
It is now just a question as to when the bubble will burst. At that point a large portion of the
international merchant fleet will be unfit for transport. The implications for world trade will be
devastating.
103. If such developmentis to be avoided, the internationalocean transport industry will have to
undergo a major realignment. Such process will not come easy as so many parties with different
commercialobjectivesand practicesare involved. State interventionwill complicatethis situationeven
further. Ways have to be foundwhich will be conduciveto institutingrequiredadjustments. Despitethe
proliferation of diverse industry associations, these have not been able to develop consensus about
necessaryactions. The internationalbodiesthat have beenset up to enforce industrystandardsand safety
regulations-like the International Maritime Organization--havenot been successful in fulfilling their
mandatessatisfactorily. Their standingand enforcementcapabilitieswill have to be enhanced through
coercivemeasuresto be agreed upon by appropriateinternationalfora.
104. There can be no doubt that oceantransportwill becomemore costly, once the required technical
standardsand safety rules are fully enforced. The short-termgains to cargo owners which materialized
through uncontrolledcompetitionamong shipownersare becoming largely offset by increasing freight
losses, the growing unreliabilityof services,and rising insurancecost. The tragedy of many lives lost
at sea aggravates these circumstancesonly further. In the end everybodywill suffer from the crisis in
internationalocean transport, if no correctivemeasuresare taken.
105. For the required industry realignmentto succeed there has to be full cooperationbetween ship
operatorsand cargo owners. Both parties have to show willingnessto form alliancesunder which cargo
volumesand transportcapacitiesare teamedup for long periods and under predictableconditions. While
such arrangementsmay deprive cargo owners from the short-termbenefitsof the spot market, they will
gain in the longerrun through reliableand safe oceantransport. If both parties can find ways to achieve
such cooperation,it can be expectedthat the cost of ocean transport will ultimatelydecline again after
the questionabletonnagehas been eliminatedfrom the market and thus the risk of insuring and financing
industryassets has abated.
- 45 -
ANErX
TE INTERNATIONALOCEANTRANSPORTINDUSTRYIN CRISIS
Assessing the Reasons and Outlook
ExpectedDemand for Shipbuilding,Tonnage Demolition,and Vessel Repair and Conversion
during the Period 1993 - 2000
UnderlyingAssumptions
A. WORLD MERCHANTFLEET CAPACITYREQUIREMENTS
Year
SeatradeVolume
(in billion tons)
RevenueEarning Performance
(tons/dwt, on average)
Total TonnageReguired
(in milliondwt)
Actual
1990
1991
1992
4.00
4.05
4.10
6.08
6.02
6.24
658
673
657
Projected
1993
1994
1995
1996
1997
1998
1999
2000
4.17
4.25
4.33
4.42
4.52
4.66
4.81
5.00
6.25
6.32
6.40
6.50
6.62
6.75
6.80
6.80
667
672
677
680
683
690
707
735
The requiredNet Additionto the World MerchantFleet
between 1993 and 2000 is 68 milliondwt.
Note: The projectedimprovementsin average revenueearning performanceare expectedto materialize
due to (a) a gradual reduction in the numberof slowsteamingand repair-intensivevessels which will be
scrapped, (b) the conversion and technologicalupgrading of another substantial portion of existing
tonnage which will lead to inproved operating performance, and (c) the gradual introduction of
newbuildings,which are expectedto represent over 40 percent of the world merchantfleet by the year
2000. Finally, the port reforn programs which are being institutedin a growing number of countries
worldwideare likely to lead to reductionsin the number of days that vesselshave to spend to load and
unload cargo in ports, thus increasingtheir commercialperformance.
- 46 -
B. EXPECTEDANNUALVESSELSALESFOR DEMOLITION
Year
Tonnage Sold
(in milliondwt)
Actual
1992
18.0
Projected
1993
1994
1995
1996
1997
1998
1999
2000
26.0
28.0
30.0
32.0
34.0
36.0
38.0
38.0
The Total Tonnageexpectedto be sold for Demolition
between 1993 and 2000 is 262 million dwt.
Note: (1) The total annual volume of tonnage actually scrapped--as opposed to tonnage sold for
scrapping--was4.1 million dwt in 1989, 2.6 million dwt in 1990, 4.8 million dwt in 1991, and 9.6
million dwt in 1992. (2) The forecast increase in annual tonnage sold for scrapping is expected to
materialize because of growing incidence of structural/mechanicaldeficiencies at the level of the
individualoveraged ship. The costs to remedy these deficiencies, limited earning prospects for such
vessels during their remaining life cycle, higher insurancepremia, and more rigorous stances by the
classificationsocieties, can all be expectedto combineas forcefulinducementsto scrap.
C. NEWBUILDINGREQUIREMENTSDURINGTHE PERIOD 1993TO 2000
Two factors apply: (1) net addition and (2) replacementof scrappedtonnage. The expectednet
addition is 68 milliondwt, and the projectedvessel retirement is 262 million dwt. Thus, the estimated
volume of newbuildingswill be of the order of 330 milliondwt.
The requiredAverageAnnualOutput of Newbuildings
between 1993 and 2000 will be 41.25 million dwt.
Note: Actualnewbuildingdeliveriesworldwidewere 19.9 milliondwt in 1989,24.3 milliondwt in 1990,
and 24.7 million dwt in 1991. The estimatedexisting intemationalnewbuildingyard capacity is 17.7
millioncompensatedgross tons (cgt), which translates roughly into an equivalentof 27 milliondwt.
47
-
-
D. EXPECTED DEMANDFOR VESSELREPAIRAND CONVERSION
The industry measures ship repair/conversiondemand and output through a workload index,
which is referred to as 'standard man-years' (SMY). In 1989, the estimatedglobal labor input to ship
repair and conversionwork was 137,850SMY, up from 117,140SMY in 1985. The projectedworkload
in the internationalconversion/repairindustry is as follows:
1985 1992
1993
1994
1995
1996
1997
1998
100
123
124
128
125
122
118
118
1999 2000
117
116
1985 = 100)
Note: It is assumed that the level of demand for repair and conversionwork will taper off towards the
end of the current decade, as the world merchantfleet is graduallyrejuvenating,and older tonnage with
high maintenanceintensityis successivelywithdrawnfrom the market.
E. THE ESTIMATEDCOST OF PROJECTEDSHIPBUILDING,TONNAGEDEMOLITION,
AND VESSELREPAIR& CONVERSION
I. ShipbuildinR
Averagenewbuildingprices in late 1992were as follows:
Container Vessels
US$ 1,750/dwt
Dry Bulk Ships
US$ 500/dwt
Gas Carriers
US$ 1,500/dwt
Oil Tankers
US$ 600/dwt
General Cargo Ships
US$ 1,600/dwt
RORO Vessels
US$ 2,500/dwt
Note: (1) Consideringthe compositionof new tonnagethat was delivered, it has been assumed that the
weighted averageunit price for a newbuildingin 1992was US$1,OOO/dwt.(2) A total of 330 million
dwt of new tonnage is forecast to be orderedduring the period between 1993and 2000.
The estimated Total Cost (in constant 1992 prices) of the impliedShipbuildingProgram
v/ill be US$ 330 billion.
- 48 -
II. TonnageDemolition
The average price paid in late 1992 for vesselsto be scrappedwas US$ 140/ldt. This indicator
was roughly equivalentto US$ 32/dwt in the case of tankersand dry bulk carriers, and US$ 85/dwt for
general cargo ships.
Note: (1) Consideringthe compositionof tonnage that was scrapped(in which dry bulkers and tankers
representedthe main portion), it has beenassumedthat the weightedaverageunitprice paid during 1992
for the acquisitionof tonnageto be scrappedwas US$40/dwt. (2) A total of 262 milliondwt of existing
tonnage is forecast to be sold to demolitionyards during the period between 1993and 2000.
The estimated Total Cost (in constant 1992 prices)of the implied DemoliffonProgram
wili be USS 10.48 billion.
III. Vessel ReDair& Conversion
At the beginningof the 1990s,the averagevalue of conversionwork was US$ 10.6 million/ship.
The average annual ship repair and maintenancecosts were:
Reefer Ships
US$ 515,000
Oil Tankers
US$ 487,000
Container Vessels
US$ 338,000
Dry Bulk Carriers
US$ 297,000
RoRo Vessels
US$ 280,000
General Cargo Ships
US$ 174,000
Note: (1) In 1989the actualglobal ship repair and conversionrevenueswere US$ 6.108 billion, which
are estimatedto have increasedto US$ 6.270 billion in 1992. (2) The progression in annual revenues
(as a proxy for estimated cost) is expectedto develop in tandem with the projected workload indices,
which implies that
the estimated Total Cost (in constant 1992 prices)of Vessel Repair & Conversion
duringthe period between 1993 and 2000 will be US$ 51.70 billion.
-
49 -
F. SUMMARYOF FORECASTCASHFLOWSFOR SHIPBUILDING,
TONNAGEDEMOLITION,VESSELREPAIR AND CONVERSION
(all indicationsare in billion US$, in constant 1992prices)
Year
| Shipbuilding
I
|
Tonnage
Demolition
Repair and |
Conversion
ANAUAL
TOTALS
1993
36.000
1.040
6.536
43.476
1994
33.000
1.120
6.587
40.707
1995
35.000
1.200
6.801
43.001
1996
35.000
1.280
6.642
42.922
1997
37.000
1.360
6.483
44.843
1998
43.000
1.440
6.270
50. 710
1999
55.000
1.520
6.217
62.737
2000
56.000
1.520
6.164
63.684
GRAND
TOTAL
330.000
10.480
51.700
392.100-
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