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Questioning Media Assumptions About the Shipping Industry

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Image courtesy Mobilisation Nationale Wakashio

By Capt. Sivaraman Krishnamurthi 10-07-2020 05:22:00

A recent series in Forbes on the Wakashio grounding and the state of the shipping industry has attracted considerable attention. Some of its assumptions and interpretations are worth further examination, and in the interest of objectivity, a detailed analysis with supporting data follows below.

Assumption 1: Shipping is a boom industry

The cyclical nature of shipping is the stuff of Economics 101. Demand for shipping service is derived from commodity trade, geographic separation and dynamic patterns of global production and consumption. Viable investment in this sector is, to quote Warren Buffett, all about time in market rather than timing the market. A quick look at the Baltic Dry Index will show us that there was more volatility in the period after the 2009 financial market meltdown than between 1985 to 2000.

Assumption 2: Growth in deadweight tonnage and ship size has led to more profits for shipowners.

If size were determined by profit motive, the world would only have large ships. Size is driven by demand forecast for large inventories of low-cost commodities. A larger ship costs more to finance and operate, but it is cheaper for the trader to move his goods, thanks to economies of scale. Even better, larger ships emit less CO2 per ton-mile hauled. 

Profitability is a function of income, cost of investment and operations. It is also a function of appetite for physical and financial risk. Critically, profitability is an inverse function of competition. The shipowning industry is a text-book case study of a near-perfect competitive model. 

As an example, A.P Moeller-Maersk’s fleet makes up just 1.5 percent of the world fleet and 17 percent of the world’s container ships. The 2019 consolidated profit of Maersk Group was just $44 million against a revenue of $9.6 billion. Their average annual profit stands at just $676 million over the past six years. This is what competition can do even to market leaders, let alone the stragglers. I cannot recall when a shipping group figured in the top 10 of the Fortune 500. 

By contrast, in 2019 Apple led the smartphone global market with an 18 percent share by value. Its 2019 revenue was $260 billion and its profits were $38 billion. Toyota led the automobile segment with a 10 percent market share, revenues of $20.3 billon and profits of about $1.5 billion.

Like shipowners, these multinational corporations ‘flag’ their manufacturing and marketing centers all over the world where they find business efficient and convenient. Free trade prefers flags of convenience.

Assumption 3: “Flag of convenience” ship registration is inimical to the Paris Agreement, and these flags wield disproportionate influence at IMO

The biggest blow to the Paris Climate Accord came from the second-largest emitter of greenhouse gases, the United States - not from Panama, the Marshall Islands or Liberia. 

Like the United Nations, IMO is a democratic meeting ground of maritime nations. IMO encourages its 174 member states to debate on technical issues concerning shipping, share and understand national priorities and finally vote on adoption of Codes, Standards and Conventions into national legislation.

Each member state has a vote, and Panama, Liberia and Marshal Islands represent only three votes. Their tonnage is owned by three leading ship-owning nations - Greece, China and Japan. The EU block represents 20-odd votes. It is a delicate balance, and it is not dominated by any particular group of states (for example, the OECD). 
 
Assumption 4: Panama, Wakashio’s flag state, has lax standards of safety and environmental compliance  

All flag administrations, including Panama, are signatories to IMO conventions and committed to their adoption. They register tonnages, maintain records and legislate adopted standards. 
The biggest cost to a ship is fuel, followed by port and canal dues, operating costs and finance costs. Cost of registration is not even a consideration.

The recent Forbes article tries to connect recent major incidents involving the Wakashio, Gulf Livestock 1 and New Diamond to their ship registration in Panama. It is worth drawing attention to other recent casualties involving ships flagged in OECD countries – for example, the sinking of the Italian-flagged Costa Concordia, the fire aboard the Italian-flagged Norman Atlantic and the sinking of the U.S.-flagged con/ro El Faro. 

These three incidents bear an uncanny resemblance to the Wakashio, the Norman Atlantic and the Gulf Livestock 1 casualties, but these ships were not flying “flags of convenience.”

Two of the 2020 incidents are a direct result of poor professional judgement. What goes underreported in the mainstream media is that the seafaring community is facing a dangerous humanitarian crisis, with hundreds of thousands of seafarers overdue for relief but unable to go home due to COVID travel restrictions. It does not take much expertise to figure out the impact of mental stress on safe ship operations. 

Assumption 5: Panama is unfit to register ships as they do not have the ability to inspect ships and delegate this function to class societies, whose consultancy arms interfere with due diligence

Nearly every flag state in the world - including France, Australia, Japan, the United States, UK and Cyprus - delegates this specialized inspection function to class societies. Class inspections are an efficient and indispensable regulatory vehicle from building a ship to the end of its life. Conflict of interest is a valid concern, though minor at this point. The larger problem, as with large audit firms, is that class can only help the responsible owner to sustainably manage risk. Class is limited in its ability to reprimand the shipowner who tries to cut corners. Port state control regimes across the world, Rightship and oil major SIRE inspection system have plugged this gap well. 

It is worth noting that the flags of the Republic of the Marshall Islands, Liberia and Panama are all featured in Paris MoU Port State Inspection White List, alongside Australia, the UK, Germany, USA and Japan. Within the ‘White List’ (an unfortunate turn of phrase in these sensitive times), Liberia and Marshall Islands return an outstanding safety record despite a large fleet in their “flag of convenience” registry. 

Assumption 6: Ships are a half trillion-dollar subsidy front for the oil industry to help burn “extremely toxic” sludge from refineries

The maritime commodity trade is worth $20 trillion per year. Over seven billion people would go without basic goods if ships were to stop plying the oceans even for a couple of weeks. 
When the COVID pandemic hit earlier this year, cargo ships continued to keep the world fed, clothed and warm at enormous personal hardship and risk to seafarers and shore workers. It is true that ships burn about seven percent of all crude oil production in the world as marine fuel. This works out to about 320 million tons of fuel oil each year. 

In our anxiety to decarbonize shipping, it is so easy to forget that global cargo fleet delivers 1.9 billion tons of goods to the world – and use far less fuel per unit of work than any other form of transport. Cargo ships emit 1.24 grams of CO2 per ton-kilometer hauled on average; by comparison, trains emit 20-40 grams per ton-kilometer, trucks 50-90 grams and planes 600-900 grams. 

Let us also compare toxicity of fuels.  Beginning in 2020, IMO brought the sulfur content limit down to 0.5 percent for marine fuels. This fuel switch has increased the CO2 emission per btu to the point that it is on par with gasoline and diesel. But unlike gasoline, marine fuels have no benzene or aromatics. From a scientific context, it is a little difficult to link marine fuels with “extreme toxicity.”

Shipping is key to free trade and global development

Ships and crews are multinational in character. Well-meaning and well-informed stakeholders should support and challenge them to stay safe and healthy, and should help them when they lose their way and founder or beach. It is self-destructive to blame them because they strayed into our waters, intending only to bring us food and goods from afar. 

Capt.Sivaraman Krishnamurthi FNI was the past president of The Nautical Institute, London and is currently the founder and CEO of TrimSail Digital Solutions, India. He spent 25 years at sea and 12 years in corporate shipping. He aspires to apply sensible technology to solve maritime challenges. He can be reached at krish.sivaraman@trimsail.com.

The opinions expressed herein are the author's and not necessarily those of The Maritime Executive.