Confidence levels in Shipping Industry at a low

The average confidence level expressed by respondents in the markets according to the latest Shipping Confidence Survey from international accountant and shipping adviser Moore Stephens in which they operate was 5.0 on a scale of 1 (low) to 10 (high). This compares to the 5.6 recorded in November 2015, and is the lowest rating in the life of the survey, which was launched in May 2008 with a confidence rating of 6.8.

All main categories of respondent with the exception of brokers (up from 4.6 to 5.1) recorded a fall in confidence this time, most notably charterers (down from 5.5 to 3.9), which is the lowest confidence rating by any category of respondent in the history of the survey. Confidence on the part of owners and managers was also down, from 5.7 to 4.8 and from 5.8 to 5.5 respectively.

Geographically, confidence was down in all major areas covered by the survey – in Asia from 6.0 to 4.4, in Europe from 5.4 to 5.1, and in North America from 5.7 to 4.7.

A number of respondents continued to express concern about the level of over tonnaging, with one pointing out, “New building deliveries for 2016 will increase the total fleet by 10.5%, 7% of the current fleet is older than 20 years, and cargo volumes in 2015 were just 4.5% higher than in 2014, so the expected available fleet per metric ton of dry cargo available will be higher at the end of 2016 than it is now. As a result, there is no chance of freight levels improving.” Another respondent said, “As long as shipowners operate based on hope rather than on solid economics, there will always be booms and busts.”

Particular concern was expressed about the state of the dry bulk market wherein no dry bulk business makes any remote sense. There are too many players, too many operators, and too many vessels chasing too few cargoes. Most fixtures are concluded merely to keep the banks happy in the belief that some tiny amount of cashflow is coming in. It is noted, that dry bulk is simply at the bottom level of business.

The need for accelerated demolition states that scrapping activity is far from sufficient to compensate for incoming new tonnage. Low scrapping prices provide little motivation for owners to demolish ships, although increased scrapping may help achieve equilibrium in the dry bulk sector sooner rather than later.

Falling oil prices were also a recurring topic in responses to the survey. Global bulk oil movements will be the key to conditions in the tanker market over the next 12 months. With storage facilities almost full to capacity, there will be nowhere to stock additional supplies unless global economy picks up and oil production is regulated. Meanwhile there is some solace in soft oil prices, as the prices are yet low. The wet markets stand a better chance of remaining profitable on the back of weak crude oil prices. Elsewhere, however, there was concern about the effect of falling oil prices on the offshore maritime sector, There are companies in the offshore shipping market which are under pressure and in potential danger of being shut down.”

Demand trends, competition and tonnage supply featured are the top three factors cited and are likely to influence performance most significantly over the coming 12 months. Demand trends, which were up by two percentage points to 26%, remained in first place, with competition (unchanged at 21%) in second place. Tonnage supply, at 15%, occupied third place, one percentage point ahead of finance costs. Operating costs, up by six percentage points to 12%, featured in fifth place, ahead of fuel costs and regulation at 4%, the latter representing a five percentage-point drop on the figures for November 2015.

Overcapacity in any industry will inevitably lead to price-cutting and eventually to financial difficulties for the weakest, the least well-prepared, or sometimes simply the unluckiest. Shipping has had its share of bankruptcies, foreclosures and restructurings during the past few years, and it is likely that we will see more over the coming months, with negotiations doubtless enlivened by the fact that shipping’s purse-strings today are often controlled by an intriguing mix of private equity and traditional shipping finance.

The simple answer to overcapacity is to reduce the numbers, disposing of excess units is more difficult in shipping than in most other industries, particularly when there are record numbers of new vessels just waiting to be delivered. Increased ship recycling is one obvious answer, although current low scrap prices mean that fewer numbers of most tonnage types are being recycled.

Therefore, in a climate of continuing overcapacity, increased regulation, ongoing political unrest and economic instability, the shipping industry will continue to lower growth in the International Trade given the continued low growth of GDP in the world as compared to the supply remaining high due to existing over capacity coupled with substantial new deliveries of new tonnage and inadequate scrapping of older tonnage.

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THE INDIAN LOGISTICS SECTOR - 2016

India’s logistics sector is poised for accelerated growth, led by GDP revival, ramp up in transport infrastructure, e-commerce penetration, impending GST implementation, and other initiatives like ‘Make in India.’

This offers opportunities across the spectrum for companies in transportation, storage, distribution, and allied services. Empirical evidence suggests the Indian logistics industry grows at 1.5-2 times the GDP growth. Infrastructural bottlenecks that have stifled sector’s growth and promoted inefficiency are also being addressed by the government.

Building of dedicated rail freight corridors will promote efficient haulage of containerised cargo by rail. Also, setting up of various industrial corridors along the dedicated freight route will metamorphose the warehousing business– from small warehouses spread across the country to large, global-size warehouses concentrated in a few hubs.

The proposed new goods and services tax (GST) regime and e-commerce will alter the landscape in warehousing, supply chain management and third party logistics business. GST implementation will be a game-changing event for businesses and particularly for organized logistics players.

It is stated that the logistics requirement for e-commerce will grow as exponentially as e-commerce.

Indian logistics sector is estimated to have grown at a healthy 15% in the last five years. However, growth in sub-sectors varies, with the lowest being in basic trucking operations and highest in supply chain and e-tailing logistics. Some studies estimate the share of India’s logistics spend in GDP at 13 - 15% (versus 7-8% in developed countries), implying overall size of $180-220 bn (direct costs +wastages from inefficiencies). A comparison with other countries shows inefficiencies are high in the Indian logistics sector.

With the present government thrust and focus on movement of goods by sea, making use of the vast coastline as well as rivers it is envisaged that in time to come the movement of goods by road will be a lot less as compared to today.

Further, considering the government’s plans to link railway network directly to ports, this in turn will increase railway’s shares in logistic movement.

The focused efforts for increasing the ease of doing business in the country will definitely have long term positive impact. The reduction in the cost of doing business is as important as the simplification of processes. Foreign consumption is beyond our control, however domestic consumption substantially depends on the growth of the Indian economy while attention is always on national policies and partially on state governmental actions, all the cutting edge levels of governance, including the local self-government units like Municipalities and Panchayats, have a role in making India business friendly.

Infrastructural bottlenecks across modes (rail, road, waterways) have stifled the sector’s growth. Capacity constraints and inefficiencies can be noted from the high transit time in rail as key train routes operate at >110% utilisation, thus leading to an average speed of 25 km per hour. The road sector is fraught with inadequate and low-quality highway availability, thereby limiting the trucks’ size and impacting economies of operation. Despite being an economical mode of transport, railways have lost market share in freight movement to roads in the last few decades due to capacity constraints. Water transport is 6 - 7% although comparatively low it’s the most convenient and environmental friendly mode compared to the others. Compared to other countries, India’s rail share in goods transport is 35%, which has come down from 60% in 1980s and 48% in 1990s.

Also, low penetration of new technology in the supply chain process is resulting in damage of goods. India has the least warehouse capacity with modern facilities, and given the fragmented industry state (large share with unorganised players), investment in IT infrastructure is almost absent at required scale.

Another key constraint is administrative delays. Despite being a relatively low-cost country, logistics cost in India is higher due to administrative delays and bureaucratic led by paper work—leading to huge inventory investments and wastage—and a complex tax structure.

The maritime and logistics sectors are totally dependent on the rest of the economy, especially the manufacturing and the infrastructure sectors. Of course, the Indian economy does not function in isolation and the economic indicators have been unimpressive throughout the world, even in China. But there are several possible governmental interventions which could make India a better place for business, and a better place to live in.

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MAIB 2014 Report - No Crew Deaths on UK Vessels - An excellent achievement

The Marine Accident Investigation Branch (MAIB) U.K. established in 1989 following the Herald of Free Enterprise disaster, is an independent unit within the Department for Transport in U.K. The MAIB investigates marine accidents involving UK vessels worldwide and all vessels in UK territorial waters. Their job is to help prevent further avoidable accidents from occurring and not to establish blame or liability.

Empowered by the Merchant Shipping Act 1995, it is a government agency headed by the Chief Inspector of Marine Accidents. The MAIB is the marine equivalent of the much older Air Accidents Investigation Branch and the more recent Rail Accident Investigation Branch, all of them report directly to the Secretary of State for Transport.

Investigations are thorough but are strictly limited to establishing cause, promoting awareness of risks and preventing recurrence. Reporting of accidents to the MAIB is mandatory for all commercially operated vessels in UK waters and for all UK registered vessels worldwide. The MAIB receives between 1000 and 2000 incident reports annually of which 30 to 50 become full investigations with published reports. The choice of which accidents are investigated is made on the basis of the scope of the safety lessons which may be learned as a result of the investigation. The reports do not apportion blame and do not establish liability.

In 2014 the Marine Accident Investigation Branch received 1270 reports of accidents of all types and severity which led to 31 separate investigations being launched.

Recently, MAIB has published their annual report for 2014. The highlights of the report are given below:

• For the fifth year in succession no UK merchant vessel of > 100gt was lost;

• The overall accident rate for UK merchant vessels > 100gt was unchanged from 2013 at 88 per 1000 vessels;

• There were no crew deaths on UK merchant vessels >100gt in 2014 and a review of available records from the last 50 years shows that this has never happened before;

• The average number of deaths over the last 10 years is 4 per year

Several maritime countries, including India, have a marine accident investigation branch either as an independent unit or within their maritime administration and carry out marine accident investigations in a similar way.

Major IMO Conventions (SOLAS, MARPOL, LOAD LINES, STCW, etc.), ISM Code/Safety Management System, National and Classification requirements aim towards minimizing loss of life, personal injury, loss and damage to property (ship and cargo), accidents, pollution incidents and hazardous occurrences, and thereby build-up a good safety culture throughout the world fleet. The shipping industry is continually striving for achieving zero accidents and in spite of good efforts, this may not be possible as something, sometimes does tend go wrong.

The MAIB (UK) 2014 report states that there were no crew deaths on UK merchant vessels > 100gt, and that this has never happened before for the last 50 years. This indeed is laudable. Further, that for the fifth year in succession no UK merchant vessels of > 100gt were lost, is also a very good record. 

The afore-said highlights of the MAIB (UK) 2014 report is good encouragement for the rest of the world’s shipping industry to strive even harder towards the goal of zero accidents.

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Accidents at sea due to misuse of alcohol

Misuse of alcohol by some seafarers has been an age old problem. Long voyages away from home, family and friends, monotony, lack of social interaction, isolation, etc. makes some seafarers get addicted thus dependent upon the soothing effects of alcohol. A seafarer under the influence of alcohol is a hazard for the safety of ship and personnel.

Incorrect use of alcohol directly affects the fitness and ability of a seafarer to perform watch keeping and other duties making accidents much more likely.

In recent years this problem has been addressed by putting stringent restrictions on the consumption of alcohol through STCW, ILO, OCIMF, ISF, INTERTANKO, Flag and Port States, ISM/SMS shipboard manuals, etc.

Accordingly, some companies have introduced a zero alcohol policy, whereas other allow restricted intake (0.04% blood alcohol level, about 2 units) during periods more than 4 hours before reporting for watch or duty.

The afore-said alcohol policy has had the desired effects and accidents due to misuse of alcohol have reduced, but still there are a few accidents taking place probably due to ineffective implementation on such ships.

In a recent case investigated by MAIB(UK), in the early hours of 18 February last year the Scotish village of Kilchoan was disturbed by the sound of metal grinding against rocks, a vessel sailing from Belfast to Skogn, Norway had missed a course change at a waypoint and crashed into the rugged coastline near Mingary Pier, having narrowly missed another outcrop of rocks.

Half an hour later the master advised Stornoway Coastguard that there was no damage, no pollution and there were no injuries, however when the Tobermory lifeboat reached the stricken vessel, it was clear that the situation was more serious. The vessel’s hull had been breached, an engine room sludge tank was filling with water and the steering gear was damaged. As the ship came off the rocks, 25 tonnes of marine gas oil (MGO) spilled into the Sound of Mull.

MAIB found that the root cause was alcohol - specifically, the half litre of rum that the chief officer had consumed in his cabin, prior to going on watch. This led to missing an important course alteration at a way point and grounding thereafter.

The company has taken corrective and preventive measures in their fleet to enhance compliance with SMS with particular emphasis on control of alcohol consumption and bridge resource management.

The above accident is a good lesson to be learnt by all companies to once again review the implementation and effectiveness of their SMS alcohol policy in the interest of safety on board and to further enhance safety culture.

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‘CABOTAGE’

The Indian Cabotage rules are contained in Sections 406 and407 under Part XIV of the Merchant Shipping Act 1958 (The Act). In summary, pursuant to these Sections only Indian flagged vessels or vessels chartered by an Indian citizen or company, operating under a license granted by the Director General of Shipping (Director General), can carry cargo from one Indian port to another Indian port. Foreign flagged vessels are permitted to carry cargo only if Indian flagged vessels are not available after attaining due permission from DG Shipping. 

Marine transport in India has evolved considerably over the past few years to become an integral component of India's economic development. Fuelled by the strong growth of its domestic industry, India is rapidly cementing a position as a key player in the maritime sector globally. 

The country's focus on strengthening the domestic maritime industry, and its role in supporting broader economic goals, is highlighted in the National Maritime Agenda (the Agenda) developed by the Indian Ministry of Shipping and Transport. Among other things, a key objective of the Agenda is for India's total foreign trade to account for 5% of global market share by the year 2020. This target is in line with the present Government's wider policy of economic reforms, including the recently released Foreign Trade Policy that, along with a range of reforms of export policy and procedure, includes a commitment to nearly exports by 2020 to $900 billion. 

Traditionally the movement of goods by sea in India has reflected relatively higher total annual imports compared to total exports. India's Total Import from April-2014 to March-2015 was approximately 450 Billion USD 

Industry bodies such as the Indian National Shipowner’s Association (INSA) have suggested that the absence of a regime that supports absolute Cabotage in India is a major reason for low investment in coastal shipping. Consequently INSA has opposed any relaxation of current Cabotage law by arguing that this move would potentially undermine the position of the domestic shipping industry in coastal trading. 

However, recent economic reforms have triggered a high rate of economic growth in India in which has, in turn, significantly increased demand for the transportation of goods. As demand is mostly serviced by rail and/or road transport systems, shipping transport services merely 8 - 9% of total current demand. 

In coastal shipping, the passage of goods in both directions is not equal. This leads to imbalance; the cargo movement pattern is dependent on the production and availability of goods, demand and the distance separating production centres from the points of destination of those good. 

In its opposition to any proposed relaxation of Cabotage in India, it is noted that there is no level playing field between the foreign lines and Indian shipping lines which are subject to tax, duty on bunker charges, domestic customs issues, etc.

It appears that the solution to this quandary is likely to come from seeking a balanced solution; the Indian government reportedly plans to seek a relaxation of the Cabotage rules whilst avoiding undue hardship to the Indian shipping sector, possibly by providing tax, duty and cargo incentives to them. In the context of India's wide-spread economic reforms, such a move could form the next step in sustainably expanding India's role in coastal shipping considering the government’s thrust in enhancing this sector.

It is apparent that coastal shipping will be integral to the growth of the Indian economy generally and also specifically towards the achievement of the nation's ambitious trade targets.

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‘The Rough Road of Steel Scrap Prices’

At the beginning of 2016 the scrap steel and iron prices have reached multi year lows, and some markets are even lower than back in 2008 when the overall markets collapsed. Since then the prices have dropped even lower!! In the past year and half the overall global demand for metals has dipped way down below what we have seen not only in copper prices, but steel, aluminum, stainless, and almost all other metal prices decrease significantly. The market is in a large flux right now and because of the world supply and demand for both the finished metal and its raw materials, there is not a lot of room for people to see the prices going up anytime soon. 

Scrap metal prices are a function of the price of finished steel. In 2015 US scrap export volumes dropped sharply by 15% mainly due to markets in Turkey, Middle East and Asia opting to purchase (cheap) billets from China instead of scrap. This has resulted in global scrap prices remaining under pressure which has continued during the first two months of this year albeit with the billet-scrap price advantage reducing. The recent gains in iron ore prices may produce modest gains in scrap prices. 

One good indicator of the market is the price of oil. The sharp drop of the oil prices has affected the economy of many countries as well as the demand of many industries. Hence we will be hard pressed to see the market improve in the near term though the Brent crude has recently shown some resilience and in fact a small bounce. Until we have situations like oil prices are leveling out, China cutting back on their steel manufacturing capacities, general improvement in world trade, etc. we may not see firmer prices. The US Presidental election has also to be factored in. 

Hence 2016 is expected to be a tough year for the steel, scrap steel and commodity markets in general and not many pundits are betting on a sharp turn around.

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Revival of INSTC – ‘An Opportunity for India in Central Asia’

The International North South Transport Corridor (INSTC) is an ancient trade route that connected South Asia with North Europe for centuries. This route was used by European, Indian, Russian and other foreign traders. Thousands of Indian traders have used this route to reach out to central Asian markets from 15th to early 19th centuries.

 The modern day International North South Transport Corridor (INSTC) is a multi-modal trade transport network that includes rail, road, and water transport from Mumbai in India via Bandar Abbas in Iran to Moscow and in St. Petersburg in Russia. It addresses the need for greater economic and energy cooperation between South, Central, West Asian and Northern European region.

The INSTC envisages movement of goods from Mumbai (India) to Bandar Abbas (Iran) by sea, from Bandar Abbas to Bandar-e-Anzali (an Iranian port on the Caspian Sea) by road, and then from Bandar-e-Anzali to Astrakhan (a Caspian port in the Russian Federation) by ship across the Caspian Sea, and thereafter from Astrakhan to other regions of the Russian Federation and further into Europe by Russian railways.

The successful activation of the corridor will help connect India to Russia within 16-21 days at competitive freight rates leading to development of trade on the INSTC.

The INSTC was initiated by Russia, India and Iran in September 2000 to establish transportation networks among the member states and to enhance connectivity with the land locked region of Central Asia. The agreement was ratified by all the three signatory states and has been in force since May 16, 2002.

Later on, the INSTC was expanded to include eleven new members, namely: Republic of Azerbaijan, Republic of Armenia, Republic of Kazakhstan, Kyrgyz Republic, Republic of Tajikistan, Republic of Turkey, Republic of Ukraine, Republic of Belarus, Oman, Syria, Bulgaria.

The Foreign Trade Policy of India, 2015-20, has highlighted the importance of the International North-South Transport Corridor (INSTC) in expanding India’s trade and investment links with Central Asia.

The strategic significance of INSTC for India is immense:

 a. The INSTC has particular economic and strategic relevance to India given the increasing regional ambitions of China through its One Belt, One Road Initiative. The proposed INSTC trade corridor could help India secure its interests in Central Asia and beyond.

b. India is expected to negotiate a comprehensive economic partnership agreement with the Eurasian Economic Union, which consists of Belarus, Kazakhstan, Kyrgyzstan and Russia, with Armenia likely to join. This agreement would help India expand its economic, trade and investment opportunities in this region.

c. At present, India has to depend on the routes through China and Europe to reach out to Eurasia, which are long, expensive and time consuming. Therefore, we are in need for a route which would be relatively shorter, cheaper and, more importantly, safer and well secured. It is estimated that the INSTC can reduce time and cost of container delivery by 30-40 per cent.

d. From India’s point of view, this corridor would help India to reach out to Central Asia and Russia, and enable transportation of goods at cheaper cost to the European markets. In addition, Indian exports could potentially get a competitive advantage due to lower cost and less delivery time.

At present, India, with the help of Russia and Azerbaijan, has successfully tested the main routes of the North South International Transport Corridor in order to assess its cost-effectiveness and the possibility of Indian companies using the route for trade with former Soviet republics.

A lot of work still has to be done to revive this ancient trade route in a modern way with multi-modal transport. We are looking forward to participate in this alternative trade route by providing a transport logistics service for the benefit of International and Indian trade to/from central Asia and North Europe.

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