Pier Review

The June 2013 issue of the Maritime Reporter & Engineering News reached us today. It was the publication’s 2013 Yearbook.

Little space has been devoted to the real maritime industry in recent years by the editors and writers of this periodical, but this issue was an exception. Dr. Shashi Kumar was interviewed by the Editor, and for once, space was allotted to what has historically contributed to the development of commercial and industrial empires – international cargo trading.

Although Dr. Kumar, a highly respected Master Mariner, Fulbright Senior Specialist Fellow and Professor Emeritus of International Business and Logistics, pulled no punches in his criticism of the trend toward “mammoth ships”, as well as the decline of the U.S. merchant marine, the Editor added a superfluous footnote to the article assuring us that Dr. Kumar’s views are “not those of the U.S. Merchant Marine Academy, the Maritime Administration, the Department of Transportation or the United States Government”.

That’s right – superfluous – because it was obvious that sensible comments such Dr. Kumar provided have never been uttered by the above-mentioned departments of the U.S. government.

When asked about today’s opportunities, Dr. Kumar said, “I think the liner market is highly concentrated at this point with effective barriers to entry. This market is particularly dear to me – my Ph.D. was about the competition and the contestability in deep-sea liner markets. I’m not anticipating any major East/West growth. There’s no way a new entrant can enter this market effectively today. More consolidations are only to be expected among the top tier carriers. There’s going to be more growth in the North/South trade, for example the intra-Asia trade, and possibly also the intra-America trade”. [Like Short Sea Shipping, maybe?]

“But looking at the U.S.-flag deep-sea fleet, we are lagging far behind international growth trends. As an island nation, we need efficient shipping services and the U.S. companies should play an active role in this rather than become bystanders. Regretfully, shipping has lost its charm for many traditional players; it does not get the attention it deserves.” [Let’s hope the Editor felt this dig.]

When asked to comment on the Jones Act, Dr. Kumar made it a point to emphasize its importance. “I certainly believe that a country such as ours needs the Jones Act. We need it for economic reasons as well as for ‘insurance’ reasons and for providing critical logistical support. This is an island nation that needs maritime presence and capability, and that is exactly what the Jones Act has provided.”

Dr. Kumar took the liberty of rephrasing the next question posed by the Editor, “Is there anything else on the legislative horizon?” Dr. Kumar said, “It would be interesting if the question would be asked: ‘What is the biggest size ship you should build?’ I personally feel that there should be some sort of finite limit on ship sizes and believe me, it is coming from a market economist!

“Let’s look at the Maersk 18,000 TEU containerships. Can you build something bigger than that; yes you can. But does it make any sense? Take the case of the big bulk carriers the Brazilians built; what is the point? The goal was to bring down the unit cost, but as we discovered in 2012, their unit costs went up. I hope they don’t go with their original plan to build 40 or so of those VALEMAX dry bulk carriers. It seems like commercial dreams are overpowering rational thinking.

“Historically, looking back at the 1970s (known as the golden era of oil tankers), there was a plan to build million dwt crude oil tankers which thankfully did not materialize. The biggest ship they ever built was the Jahre Viking, which had a capacity of 574,000 dwt. [Also known as “Knock Nevis”, “Seawise Giant” and “Happy Giant.” Cf. Our Vol. XXI, Art. 36]. That ship was so big that not one charterer could fill it by themselves; it always took two or three charterers, which was a problem in itself. The ship was eventually scrapped a few years ago. But there is a clear indication in the tanker market today that you are better off to go with VLCCs rather than ULCCs.

“I hope something like this will happen in the container industry as well as the dry bulk sector. I would rather see the the 18,000 TEU ship or the odd Valemax as a rare exception rather than the rule.”

“So then,” the interviewer asked, “what are the drivers for building mammoth ships?” Dr. Kumar replied, “I believe the expectation is that the current manufacturing and consumption patterns will continue forever, but we know that’s not going to be the case. We are already seeing a decline in Chinese manufacturing of consumer goods bound for the U.S. There is increasing interest in ‘near sourcing’ and signing contracts with manufacturers located closer to us in Latin and Central America. So, the big question is will the market support these huge ships in the long run.” Dr. Kumar left the answer up to us, and he made it easy for us to understand the costly developments brought about by the illogical moves of carrier officials who have insisted that “bigger is better”.

“Anyone who characterizes 2012 as even marginally better for shipping than 2011 can do so only because the bar was set far too low.” he stated. “Both last year and the current one will go down in maritime business annals as part of a bleak, monotonous, and particularly long period of volatility that began in 2009. This was yet another excruciating year for the global maritime community …
Overall, worldwide sluggish economic growth, along with prolonged excess capacity and escalating operating costs, worsened the market stagnation. The much-awaited resurgence in global commerce and maritime trade is still on hold, and instability continues to plague major trade regions and shipping routes …

“Not surprisingly, a recent Moore Stephens report rated one out of every ten British shipping companies as a ‘zombie,’ a colorful addition to the shipping finance vernacular. These are companies with a low asset base, barely covering their costs and close to bankruptcy. Trade journals report that the value of publicly traded shipping companies has declined on average 75%, in some case up to 90%. The general feeling among investment gurus is that few public shipping companies today have any equity, let alone good will value. The current risk exposure of banks engaged in shipping finance is $ 475 billion, according to an estimate from the shipping consultant Petrofin. This,” he concluded, “explains the recent Lloyd’s List finding that barely 15 banks are actively engaged in new shipping-finance initiatives.” –