Repairs and Spares Impacting Ship Operating Costs
Vessel operating costs are expected to rise in both 2017 and 2018, according to the latest survey by international account and shipping consultant Moore Stephens. Repairs and maintenance and spares are the cost categories which are likely to increase most significantly in each of the two years.
The survey is based on responses from key players in the international shipping industry, predominantly shipowners and managers in Europe and Asia. Those responses revealed that vessel operating costs are likely to rise by 2.1 percent in 2017 and by 2.4 percent in 2018.
The cost of repairs and maintenance is expected to increase by 2.0 percent in both 2017 and 2018, while expenditure on spares is predicted to rise by 2.0 percent in 2017 and by 1.9 percent in 2018. Drydocking expenditure, meanwhile, is expected to increase by 1.7 percent and 1.8 percent in 2017 and 2018 respectively.
The survey revealed that the outlay on crew wages is expected to increase by 1.7 percent in each of the years under review, with other crew costs thought likely to go up by 1.6 percent in 2017 and 1.5 percent in 2018.
The increase in expenditure for lubricants is expected to be 1.6 percent in both 2017 and 2018. Meanwhile, projected increases in stores are 1.5 percent and 1.7 percent in the two years under review, while management fees are expected to rise by 0.7 percent and 1.0 percent in 2017 and 2018 respectively.
The cost of hull and machinery insurance is predicted to rise by 0.5 percent and 1.0 percent in 2017 and 2018 respectively, while for P&I insurance the projected increases are 0.7 percent and 1.1 percent respectively.
The predicted overall cost increases were highest in the offshore sector, where they averaged 4.8 percent and 3.8 percent respectively for 2017 and 2018. By way of contrast, predicted cost increases in the container ship sector were just 1.1 percent and 0.8 percent for the corresponding years.
Operating costs for bulk carriers, meanwhile, are expected to rise by 1.9 percent in 2017, and by 2.4 percent the following year, while the corresponding figures for tankers are 2.1 percent and 2.7 percent.
Respondents to the survey highlighted various areas of concern likely to result in increased operating costs over the next two years. Crew costs were high on the list, with one respondent noting, “Crew costs are 60 percent of our operating expenditure, and weigh heavily when there is high demand for – but a limited supply of – manpower and when employers are required to meet increasingly onerous requirements.”
Another noted, “Crew and insurance related expenses are the two major factors in our operating expenses but, while we expect insurance costs to fall over the next two years, we anticipate that crew costs will remain the same.” Another still said, “Most shipping companies, but especially those operating tankers and chemical and gas carries, are facing the prospect of increases in costs through 2018 for hiring qualified crew.”
The increasing cost of regulatory compliance was referenced by a number of respondents, one of whom said, “New regulations are certainly going to have a major impact on our operating costs.” Elsewhere it was noted, “Retrofitting vessels with technology which has not been fully vetted for compliance with existing and new regulation can destroy cashflow.”
Respondents were asked to identify the three factors that would most affect operating costs over the next 12 months., Overall, 21 percent of respondents (similar to last year’s survey) identified finance costs as the most significant factor, followed by crew supply, which stood at 19 percent and displaced competition in second place. Competition itself was down from 19 to 15 percent and from second to equal third place, which it shared with the cost of new regulations, which was included in the survey for the first time. Demand trends and raw material costs, meanwhile, shared fourth place at 10 percent, with labor costs fifth at nine percent, all significantly down on the figures in last year’s survey, which were respectively 17 percent, 11 percent and 13 percent.
Richard Greiner, Moore Stephens Partner, Shipping & Transport, says, ““One year ago, expectations of operating cost increases in 2017 averaged 2.5 percent, so the fall now in that expectation to 2.1 percent must be regarded as good news. Predicted increases in operating expenditure are a matter of concern for any industry, and particularly one such as shipping in which a range of factors have conjoined in recent years to inhibit (and, in some cases, eradicate) profit margins. But shipping has seen a lot worse. If it does transpire that operating costs rise by 2.4 percent in 2018, for example, that will still be less than one-sixth of the actual operating cost increases absorbed by the industry 10 years previously.
“It is significant that, for the first time, new regulations were included in the list of factors which respondents could cite as most likely to influence the level of operating costs over the next 12 months. It was even more significant, perhaps, that 15 percent of respondents did indeed identify the cost of regulatory compliance as a major consideration when weighing future operating cost increases. The Ballast Water Management convention, now with an extended implementation window, is still potentially the most expensive item on the menu, but by no means the only one. Tellingly, one respondent referred to new regulations which ‘most of the time are unclear and indefinite.’
“The fact that repairs and maintenance and spares emerged as the items with the largest projected cost increases in both 2017 and 2018 was perhaps unsurprising in that they are two items of expenditure on which owners and operators might conceivably have economized or delayed in previous years, and such economies cannot be sustained over longer periods without impacting safety.”