SK 2005

Global Maritime Sector: A Review

Global Maritime Sector: A Review

Shashi Kumar, Ph.D., Master Mariner

OutlineOutline

1. Introduction 1. Introduction

2. Market Developments2. Market Developments

3. The U.S. Merchant Marine3. The U.S. Merchant Marine

4. Global Issues4. Global Issues

5. Outlook5. Outlook

IntroductionIntroduction

• “Not since the days of the Vikings”• Concurrent highs in all three major

shipping markets• Spectacular year for the industry• Major drivers

– PRC– India– U.S.A.– Other fast growing nations

Shipping Fleet Valuation: 2003 Vs. 2004Shipping Fleet Valuation: 2003 Vs. 2004

391

508

0 100 200 300 400 500 600

Source: R.S. Platou 2005

Market Developments—NewbuildingsMarket Developments—Newbuildings

020406080

100120140

1000

TE

U

2500

TE

U

4000

TE

U

7000

TE

U

Han

dysi

ze

Han

dym

ax

Pan

amax

Cap

esiz

e

Han

dym

ax

Pan

amax

Afr

amax

Sue

zmax

VLC

C

Container Dry Bulk Tanker

2003 2004Source: LSE

Source: LSE

Market Developments—2nd Hand Price, 5 Yr Old Ships

Market Developments—2nd Hand Price, 5 Yr Old Ships

0102030405060708090

100

1000 T

EU

2500 T

EU

4000 T

EU

5500 T

EU

Handysiz

e

Handym

ax

Panam

ax

Capesiz

e

Handym

ax

Panam

ax

Afr

am

ax

Suezm

ax

VLC

C

Container Dry Bulk Tankers

2003 2004

Source: LSE

Market Developments—Tankers Average Freight Rate in $1,000/day

Market Developments—Tankers Average Freight Rate in $1,000/day

22.7

21.8

17.7

21.4

12

50.6

39.9

32.1

33.3

18.5

88.7

65.2

47.5

42

32.4

VLCC

Suezmax

Aframax

LR2 Product

MR Product

2004

2003

2002

Source: R.S. Platou 2005

Market Developments—Dry BulkMarket Developments—Dry Bulk

• Capacity utilization -- 97% • Capesize tonnage--$100K/day

max, $62,500/day average• Average daily earnings doubled for

Capesize and Panamax size

Market Developments—Liners Market Developments—Liners

• Revenue per 20 foot container rose 6.4%

• Trans-Pacific trade grew at 13%• The Wal-Mart rumor• NVO Service Agreement approved

in 2004– Confidential contracts allowed for OTIs

from 2005

Market Developments—Cruise IndustryMarket Developments—Cruise Industry

145 150 155 160 165 170 175

2001

2003

2004

$/PAX/Day

Carnival Cruise Lines’ Net Revenue Yield Changes

Best ever operating year for CCL

175,000 people on CCL ships at any one time

Source: AP

Market Developments—ShipbuildingMarket Developments—Shipbuilding

• S. Korean yards are now the undisputed world leaders

• Record orders for new construction• All three S. Korean yards posted losses

– Increasing price of steel– Appreciation of the Won

• China State Shipbuilding Corp now is among the top five shipyards

The U.S. Merchant MarineThe U.S. Merchant Marine

• Some signs of life• International Shipholding Group to build

an undisclosed number of LASH vessels• New entrant eyeing the Hawaii trade

– Pasha Transport Hawaii– Ocean Blue Express– Matson’s aggressive response

• Puerto Rico trade– Trailer Bridge bought out K Corp.

• Capital market developments

Shipping-related IPOs in 2004Shipping-related IPOs in 2004

$ million

0 100 200 300 400

Top TankersU.S. Shipping Partners

Teekay LNG PartnersArlington Tankers, Ltd.

Hornbeck Offshore SvcsDrytank AS

Horizon Lines

$ million

Source: LSE

Developments in the U.S.Developments in the U.S.

• The American Jobs Creation Act– Subchapter R to the Internal Revenue Code

• Tonnage Tax option

• Also amends subpart F of the tax rules

• Marad, Ex-Im Bank joint initiative– Working capital loan for freight forwarders who could

extend credit to their export clients

• Security-related developments– ISPS and MTSA went into effect on 7/01/2004

• USCG approved 9200 VSPs, 3100 PFSPs, 43 RSPs

– CSI operational in 33 ports, 21 countries– C-TPAT has 8,200+ voluntary members

Developments in the U.S.Developments in the U.S.

• Security-related developments– Are our ports and facilities more secure

today?– More vessel detentions for safety

reasons– Highly vulnerable to nuclear threat

• Congressional Research Service Report

– Who should pay for the security costs?• U.S. Gulf ports model

Developments in the U.S.Developments in the U.S.

• Short-sea shipping– Marad’s “blue highways” SCOOP

• Expansion of Osprey Lines’ gulf coast container-on-barge service

• Columbia Coastal’s Albany Expressbarge service

• PoNY/NJ’s Port Inland Distribution Network

Developments in the U.S.Developments in the U.S.

• Maritime Security Program – Boost the nation’s military support capability– Assist the merchant marine and the shipbuilding sector– 60 ship fleet is now complete

• 47 ships approved in 2003

• 13 approved in 2004

– Have a balanced fleet• 1st five slots to be issued to U.S.-flag product tankers

owned by U.S. citizens

• Temporarily assigned to three Maersk tankers under charter to OSG and 2 heavy lift ships

• National Defense Tank Vessel Construction Assistance program is now in limbo!

Developments in the U.S.Developments in the U.S.

• Marad Ship Scrapping Program– Ghost Fleet to be scrapped by September 30,

2006– 121 ships still at anchor– Four ships sent to Hartlepool, U.K., have run

into legal problem– Marad’s leadership, management acumen, and

its contracting practices under criticism

Developments in the U.S.Developments in the U.S.

• East Coast Stevedoring Contract– Six year master contract ratified in June 2004– Considerable opposition from newer ILA

members– Baltimore, Charleston, and Hampton Roads

rejected master contract as well as supplementary local agreements

– Will cost employers $8.7 billion over the next six years

ILA & ILWU Base Hourly Wages ComparisonILA & ILWU Base Hourly Wages Comparison

0

5

10

15

20

25

30

35

1987 1990 1993 1996 1999 2002 2005 2007

0

5

10

15

20

25

30

35

ILA ILWU

Source: ILA

ILA Investigation ILA Investigation

• Investigation of mob influence within ILA– Several indictments in 2004

• Extortion• Conspiracy• Mail and wire fraud

– Many top ranking leaders behind the slammer!

• Exec VP of ILA• Member of the ILA Exec Council• ILA International VPs in Miami & New

York

Port and Terminal OperationsPort and Terminal Operations

• Massive bottlenecks at LA and LB– Increased automation did not help

• Unprecedented growth in volume• 80+ new Post-Panamax container ships

expected to enter the market in 2005• Resurgence of all-water services to the

East Coast– New distribution centers at East Coast ports

• Panama Canal wins in the short-run

Panama Canal Rate HikesPanama Canal Rate Hikes

42

4954

0 10 20 30 40 50 60

5/1/2005

1/1/2006

1/1/2007

Price/TEU($)

Source: PCA

The LNG EraThe LNG Era

4

-1

31

8

-5 0 5 10 15 20 25 30 35

U.S.

Japan

China

India

Annual growth rate% 1994-2004

Source: EIA

The LNG EraThe LNG Era

• Iran, Russia, and Qatar—dominant LNG fields

• $30 billion investment in the next 20 years

• World LNG consumption to double in the next 15 years

• LNG infrastructure controversy– Local– Regional– National

The Human ElementThe Human Element

• A two-year global collective bargaining agreement between ITF and the Joint Negotiations Group

• Significant increase in the cost of operating specialized vessels– Crew cost for VLCCs went up by 7.8% in

2004 and now comprises 40% of the total– Crew cost for Panamax bulk carriers—46%

• Very tight market for senior officers with special endorsements like LNG

• As a career, shipping has lost its charm

Maritime PiracyMaritime Piracy

445

325

21

30

0 100 200 300 400 500

2003

2004

Piracy Attacks Crew Deaths

Source: IMB

OutlookOutlook

• Will the brilliant market conditions continue?• Will the Chinese economic miracle run out of

steam?• The new Excelerate Energy Bridge terminal in

LA—harbinger of the future?• The sea is too unpredictable to be lulled into

complacency