Global Ports Forum

Perspective
Published July 16, 2011

OVER the last few years, thanks largely to Hollywood’s ‘Pirates of the Caribbean’ franchise, maritime buccaneers have acquired a highly romantic image.

Given the realities of modern commercial shipping, a sensible compromise might be for the IMO to revisit its prohibition on small arms onboard merchantmen.

The reality of modern piracy is far removed from the images peddled by Tinseltown. In the most recent nautical attack, Somali pirates on July 6 attacked the 900-foot Brillante Virtuoso, which was carrying over 141,000 tonnes of fuel oil from Ukraine to Qingdao, China, 32 km off the Yemeni port of Aden. The vessel’s 26 crew members abandoned ship after the attackers fired an RPG round into their sleeping quarters.

According to ship manager Central Mare Inc, the vessel and its cargo were recovered, despite the fact that the rocket-propelled grenade started a fire on board.

While piracy is a worldwide annoyance, its epicentre is now the failed nation state of Somalia, where brazen hijacking of vessels in the Indian Ocean as far away as the Seychelles have in the past decade netted the maritime miscreants billions of dollars.

Though little noticed, tankers have been targets of opportunity for both pirates and terrorists for some time.

While media attention has focused on Somalia, the problem is global. On Jan 16, 1999 the 131,654 dwt French-flag tanker Chaumont was attacked by pirates while transiting the Malacca Straits’ Phillip Channel in Indonesian waters near Singapore. The attackers tied up the crew and the fully loaded tanker sailed at full speed through one of the world’s busiest shipping lanes for 70 minutes without anyone at the helm.

In waters near the site of the latest attack, in October 2002 the 299,364 dwt French tanker Limburg was rammed by an explosives-laden boat off the port of Ash Shihr at Mukallah, 568 km east of Aden. A crewman was killed and the double-hulled tanker was breached. The impact on the Yemeni economy was immediate, as maritime insurers tripled their rates. Al-Qaeda later claimed the attack.

On Nov 15, 2008 the Somali pirates captured their biggest prize yet, the VLCC (very large crude carrier) 162,252-ton Sirius Star, 500 nautical miles south-east of Mombasa, the farthest out to sea Somali pirates had struck up to then. With a capacity of two million barrels, the Sirius Star carried the equivalent of more than a quarter of Saudi Arabia’s daily production, a cargo worth more than worth US$100 million at the time. On Jan 9, 2009 the vessel was freed in exchange for a discreet US$3 million ransom.

The International Maritime Organisation, the UN’s 162 nation maritime counterpart, is notorious for the plodding nature of its legislative process. Under current IMO regulations, merchantmen are forbidden to carry firearms for self-protection, charmingly archaic legislation that signally fails to address the realities of the post 9/11 world. The IMO estimates that maritime traffic now accounts for 80 per cent of the world’s commerce.

Cut-throat competition to reduce profits, flags of convenience, miserable wages – all are problems bedevilling the maritime community while creating a nightmare for security specialists.

It is not as if seafaring nations have not been trying to cope. On Aug 22, 2008 the multinational naval coalition Combined Task Force 150 (CTF 150), set up after the Sept 11 attacks to patrol the Arabian Sea and the coast of Africa to combat terrorism, established an eight-mile-wide, 885-km-long nautical corridor – the Maritime Safety Protection Area (MSPA) – in the Gulf of Aden in which patrols would be conducted to provide safe passage to merchantmen. CTF 150 aircraft also monitored the channel.

Needless to say, today the CTF 150 was reactive, not proactive.

The issue of how to cope with East Africa’s pirates has been the topic of heated debate for several years, from bleeding heart liberals advocating attempting to rebuild Somalia’s shattered economy to the more muscular response of CTF 150 members, who advocate more of a ‘Dirty Harry’ approach, that is, kill them if at all possible and avoid the nasty legal issues of tussling with maritime law niceties, which dates back centuries and is the most convoluted legal corpus on the planet.

Given the realities of modern commercial shipping, a sensible compromise might be for the IMO to revisit its prohibition on small arms onboard merchantmen. While sailors, alcohol and firearms have traditionally proven a volatile mix, one of the reasons for the current IMO restrictions, creative solutions might be found, something on the order of nuclear submarines’ dual launch controls, whereby two responsible officers have to unlock the missilery in tandem.

What is clear at this point is that water hoses don’t work and that the CTF can’t be everywhere. As an old Afghan proverb puts it, a people who do know something about firearms: ‘Five of them would run from the bang of one empty gun.’ It’s worth considering how many would retreat form a half-dozen weapons fully locked and loaded.

Dr John Daly writes for OilPrice.com

The overall index fell 0.28 per cent or four points to 1,449 points after having risen for three sessions previously. The index has stayed erratic in recent weeks and has declined close to 20 percent this year.

‘Capesize rates are likely to come under pressure next week, as spot Chinese iron ore demand is in the midst of a significant lull. Prospects are more encouraging for panamax rates as Chinese and Asian thermal coal demand remains very strong,’ said Jeffrey Landsberg, managing director of dry bulk consultancy Commodore Research. ‘Electricity demand in China and across Asia due to surge during the upcoming weeks as temperatures have grown warmer in much of the region.

The outlook for dry bulk rates has been grim because ship supply has outpaced demand to ship commodities.

The situation has been compounded by the deployment of a vessel owned by top iron ore producer Vale of Brazil, the first of the world’s largest dry bulkers to enter the fleet.

India’s monsoon was also reducing iron ore exports as rivers rise, hampering goods transportation.

‘Dry bulk freight rates are expected to remain subdued in July on the back of the Indian monsoon season, which will most likely reduce iron ore exports from India. Also, China could be importing lower volumes of iron ore due to current high level of inventories,’ said brokerage ICICIdirect.

‘On the positive side, from a medium-term perspective, China’s thermal coal fixtures are likely to remain firm while lifting of the Russian wheat export ban and the recovery of Australian coal mines could lend support to dry bulk freight rates.’

The Baltic’s capesize index fell 0.52 per cent with average daily earnings falling to US$13,941, having risen earlier this week to their highest since January. Capesizes typically haul 150,000 tonne cargoes such as iron ore and coal.

The Baltic’s panamax index rose 1.26 per cent. Average daily earnings for panamaxes, which usually transport 60,000-70,000 tonne cargoes of coal or grains, reached US$13,458.

‘Despite the rates seemingly finding some sort of floor in the East, the outlook remained very fragile with a long list of ships still available and more to come,’ the Baltic Exchange said in its weekly report on Friday.

Brokers said they were watching for further developments in China, which is facing its worst power shortages in years and likely to have an impact on dry freight activity. Uncertainty over prospects for the world economy could also potentially hurt demand for raw materials.

China must balance the need to control inflation and keep its vast economy growing although any policy steps would need time to take effect, its central bank governor chief said on Friday. — Reuters

It keeps mum on weather its Vale Brasil is barred from entering Dalian

(RIO DE JANEIRO) Brazilian mining giant Vale said on Tuesday that it had rerouted 391,000 tonnes of iron ore, its first cargo aboard a new class of giant bulk carriers, to Italy from its original destination of China.

The cargo is being shipped aboard the Singapore-flagged Vale Brasil, the world’s largest dry-bulk vessel, a ship designed to reduce the cost of shipping the main steel ingredient to China – the company’s biggest market.

‘The alteration (of the destination) is part of the flexibility in Vale’s integrated logistics policy that allows Vale to reallocate the destination of exports, based on the needs of the market,’ the company said in a statement.

Earlier this year, Vale said that it had not received permission for its so-called ‘Chinamax’ or ‘Valemax’ vessels to enter Chinese ports fully loaded.

When asked whether Chinese authorities had blocked Vale Brasil from entering the port of Dalian, a company spokeswoman declined to comment.

However, the statement said that ‘Vale’s expectation is that Vale China, the first vessel of the Valemax class totally produced in China and financed by Chinese financial institutions, will have a Chinese port as its first destination’.

The iron ore aboard the Vale Brasil can be used to make about 261,000 tonnes of steel, or nearly three and a half times the amount used to build San Francisco’s Golden Gate Bridge.

Vale has commissioned 30 of these ships, to be delivered through 2013. All are larger than the previous largest bulk-carrier record holder, the 365,000 tonne MS Berge Stahl.

The fleet is expected to drive world freight rates lower as the new vessels add transport capacity to a market that has already seen a rapid increase in ships and ship size.

In the past year, the Baltic Exchange Dry Bulk index , a measure of dry-bulk shipping costs around the world, has plunged 45 per cent.

Vale faces increasing competition in China from Australian miners. While Australian ore generally has less iron content than Brazilian ore, it is mined closer to China, the world’s largest iron-ore market and steelmaker.

As at June 20, the cost of shipping ore to China from Vale’s port of Tubarao in Brazil was US$19.75 a tonne, according to the Metal Bulletin website, or more than double the US$7.75 it cost to ship ore from Australia’s port of Dampier.

As at late Monday, the Vale Brasil was steaming south-west along the South African coast near Durban, on course to re-round the Cape of Good Hope and re-enter the Atlantic Ocean, according to MarineTraffic.com. — Reuters

June 9 (Bloomberg) — A.P. Moeller-Maersk A/S may be the only shipping line to profit from growing trade between Asia and Europe even as rates reach a two-year low.
While Maersk is ordering the world’s biggest ships for the routes, companies such as Hapag-Lloyd AG may lose out. Maersk, the largest container shipping line, probably was the only major operator to make money on Asia-Europe trade in the first quarter, said Ben Gibson, a freight derivatives broker in London at Clarkson Plc, the world’s largest shipbroker. The shares jumped as much as 1.9 percent today.

Maersk Only Europe-Asia Shipper Showing Profit

Container lines have contracted for new ships with capacity equal to 24 percent of the existing fleet, according to Paris- based data provider Alphaliner. The price of carrying containers to northern European ports from Shanghai has dropped to $874 per standard box, the lowest since July 2009. The peak was $2,164 in March last year, data from the Shanghai Shipping Exchange shows.
“It’s a very tough freight lane at the moment, but Maersk is definitely in a better position than its rivals because of its size,” Jacob Pedersen, an analyst at Aabenraa, Denmark- based Sydbank A/S, said in a telephone interview. He has an “overweight” recommendation on Maersk’s stock.
The Copenhagen-based company’s shares have gained 9.1 percent since container freight rates peaked on March 5, 2010. Maersk advanced today to 45,920 kroner as of 4:20 p.m. in Copenhagen trading, after four days of declines.
Quarterly Losses
“Maersk is leading when it comes to having the lowest costs per transported container and is therefore in a better condition with the current low rates,” Jesper Langmack, managing director at PFA, Denmark’s second-biggest fund, said by e-mail.
PFA, which has about 250 billion kroner ($50 billion) in investment assets, returned 37.1 percent on Danish shares last year, compared with a 32.7 percent gain for all of the country’s stocks including dividend payments. Langmack’s portfolio had Maersk shares worth about 700 million kroner at the end of 2010. The Copenhagen-based fund doesn’t comment on its holdings.
Maersk’s stock is “cheap” because the market isn’t giving the company credit for its ability to keep reducing costs, Robin Byde, an analyst with HSBC Bank Plc in London, said today in a note. “Despite weaker container rates in recent months, Maersk is well-placed to cut unit costs with its new bigger ships,” he said, repeating his “overweight” recommendation on the stock.
Bigger Than Ever
Maersk on Feb. 21 ordered 10 vessels able to carry 18,000 containers from Daewoo Shipbuilding & Marine Engineering Co., and has an option to order 20 more. The new container ships will be about 30 percent bigger than the largest vessels now in use.
Hamburg-based Hapag-Lloyd, Europe’s fourth-largest container line, is grappling with surging fuel prices and increasing competition that culminated in a first-quarter net loss of 22.1 million euros ($32.3 million).
The “rise in the oil price, the weak U.S. dollar and growing competition are making business more difficult,” Michael Behrendt, chairman of the executive board of Hapag- Lloyd, said in an earnings statement on May 12. The German shipping company aims to balance higher fuel costs by increasing prices, Behrendt said then. Volume on Far East routes was down 8.5 percent as the company declined lower-price contracts.
Crude oil is up 10.7 percent this year to more than $101 a barrel while the euro reached a one-month high against the dollar on June 7.
No More Service
Taiwan’s Wan Hai Lines Ltd. and China’s Pacific International Lines Private Ltd., which have about 2.9 percent of the container market, said in a May 31 statement that they would stop service on the Asia-to-Europe route and instead slot charter space on China Cosco Holdings Co. container unit.
CMA CGM SA, the world’s third-largest container line, will lift rates on the Asia to North Europe route in response to “on-going deterioration of revenues,” the Marseille-based line said yesterday on its website. Privately held Mediterranean Shipping Co. of Geneva, the second-largest line, declined to comment.
The route between Asia and Europe is particularly hard-hit by falling freight rates because it’s where most of the world’s largest container ships, which are too big for the Panama Canal between North and South America, are used.
Ongoing Losses
“Several container shipping lines reported losses in the first quarter and I expect this to continue,” said Philip Damas, an analyst at Drewry Shipping Consultants Ltd. in London. Container shipping companies “are now going for market share and the perceived need to fill their new ships at much lower prices, whereas in 2010 their priority was to minimize overcapacity.”
Shipping lines usually call at ports in Japan, South Korea, China and Singapore before leaving Asia to sail through the Suez Canal, which connects the Indian Ocean with the Mediterranean, and onto northern European ports such as Rotterdam, Amsterdam, Antwerp, Southampton and Hamburg.
Some 154 ships with capacity above 10,000 standard containers will start operating between 2011 and 2014, according to Eurogate GmbH & Co. KgaA, Europe’s largest port operator.
“The current fall of container freight rates on the east- west routes is supply-driven, not demand-driven,” said Damas.
Because of Maersk’s container earnings, at $2.6 billion last year more than at any other shipping line, the company is better able than competitors to weather the changes in global shipping capacity and cargo.
$100 More
Last year, Maersk Line made almost $100 more than its rivals per each transported 40-foot container, based on earnings before interest and taxes, Chief Executive Officer Eivind Kolding said in a March 7 interview.
The company is feeling the lower rates, said Lee Sissons, Maersk Line’s trade director for Asia to Europe services.
“The situation does present a risk to profitability levels, and it is our expectation that we may see services being re-structured or changed in the short term,” he said in an e- mail. “It remains our objective to keep Maersk Line services stable, avoiding unnecessary changes to our customers.”
Most of the container ships being ordered and delivered this year are the largest container vessels built, with capacity of more than 10,000 standard boxes, or TEUs, Gibson said. They are typically used on the long routes between Asia and Europe, partly because they are too big for the Panama Canal and for West Coast ports to handle. Maersk’s margins suggest it was the only carrier to make money on the route, he said.
Zodiac Orders
Zodiac Maritime Agencies Ltd. and Neptune Orient Lines Ltd. ordered 10,000-container-plus ships last year as the end of the global recession revived U.S. and European demand for Asian-made goods.
Maersk Line operates more than 500 vessels and has a number of containers that if stacked on top of each other would span more than 2,500 kilometers (1,554 miles), or the equivalent of 8,550 Eiffel Towers, according to Maersk. The company has some 17,000 employees and an additional 7,600 seafarers, according to information on its website.
Container trade to Europe from Asia in the first four months increased 5.8 percent to about 4.5 million containers, according to Container Trades Statistics.
“There’s a lot of spot-market trade on Asia to Europe, but Maersk has more of its cargo fixed on long-term contracts that were signed some time ago, so the company is less exposed than rivals to the recent drop on the spot market,” said Pedersen, the Sydbank analyst. “Maersk also has newer ships than its rivals and that gives a competitive advantage. Maersk can keep costs low and that’s the way to make money.”
To contact the reporters on this story: Niklas Magnusson in Hamburg at nmagnusson1@bloomberg.net Christian Wienberg in Copenhagen at cwienberg@bloomberg.net
To contact the editor responsible for this story: Angela Cullen at acullen8@bloomberg.net

June 7 (Bloomberg) — The most bearish investor in the oil- tanker market right now may be the one with the most at stake.
At a time when analysts covering Frontline Ltd. expect shares of the world’s biggest supertanker operator to gain 1.7 percent in 12 months, its Chairman John Fredriksen says the biggest crash in the cost of ships has yet to happen. It will be within “a year or two” that the market “collapses,” the 67-year- old said in an interview in Oslo last month.

Frontline Billionaire Bets Tankers Collapsing

For Fredriksen, whose fortune was valued by Forbes magazine at $10.7 billion in March, that will be an opportunity to buy more vessels at a discount, he said. For other investors, it may mean that the more than doubling in freight rates predicted for next year by forward freight agreements, traded by brokers and used to bet on future shipping costs, is too optimistic.
“Betting against John Fredriksen tends to be a bad idea,” said Erik Nikolai Stavseth of Arctic Securities ASA in Oslo, whose recommendations on the shares of shipping companies returned 16 percent in three months. “He’s been a bellwether and he’s always been able to spot the cycle early,” said the analyst, who has a “sell” rating on Frontline and expects the U.S. shares to drop about 32 percent in a year.
The industry is contending with a glut of capacity as the fleet expands twice as fast as demand. Even as owners cut vessel speeds by an average of 11 percent in the past 12 months to save fuel and anchored 21 percent more ships, earnings slumped 81 percent. Rates on the Middle East-U.S. route have been negative since March, meaning owners are paying customers to use their ships, data from the Baltic Exchange in London show.
Aristotle Onassis
Fredriksen, born in Norway and a citizen of Cyprus, will be adding to a fleet that at its peak in 2005 was eight times bigger than the one Aristotle Onassis had when he died in 1975. Fredriksen has probably controlled the biggest tanker fleet of any investor in history, said Sverre Bjorn Svenning, an Oslo- based analyst at Astrup Fearnley, an investment bank.
“We’ll wait until the market collapses and then we’ll buy up what’s there,” Fredriksen said May 25.
Hemen Holding Ltd., a Cypriot holding company indirectly controlled by trusts Fredriksen established on behalf of his family, holds a 33.78 percent stake in Frontline, making it the largest shareholder, according to a filing in April with the U.S. Securities and Exchange Commission.
Frontline, based in Hamilton, Bermuda, will report a loss of $1.95 million this year, compared with net income of $161.4 million in 2010, according to the mean of 18 analyst estimates compiled by Bloomberg. They are anticipating profit rebounding to $33.7 million in 2012, the estimates show.
Freight Derivatives
Freight derivatives are also predicting a rally. Rates on the benchmark Saudi Arabia-to-Japan route will average $22,160 a day in 2012, compared with $9,952 now, according to data from Imarex ASA, a broker of forward freight agreements.
Shipping companies generally hire out their vessels on a mixture of single-voyage and long-term charters. A five-year charter costs $34,500 a day while a three-year accord is at $33,000, according to data from Clarkson Research Services Ltd., a unit of the world’s biggest shipbroker. Frontline said May 25 it needs $29,700 to break even on each of its supertankers.
“Our view seven months ago was that the tanker market was heading into a five-year nuclear winter and that’s the situation the industry is in now,” said Andreas Vergottis, an analyst at Tufton Oceanic Ltd., which manages the world’s largest shipping hedge fund. “The balance of power has transferred from owners of ships to users of ships.”
Charter Rates
The long-term charter rates helped shore up the value of second-hand ships. The cost of a 5-year-old supertanker slumped to $82.25 million by June 6, from as much $162 million in July 2008, according to the Baltic Exchange, better than the drop in returns for owners. Rates on the benchmark Saudi Arabia-to-Japan route rose to about $177,000 a day in July 2008.
Shares of Frontline dropped 58 percent in the past 12 months in Oslo trading, compared with an 18 percent decline in the Bloomberg Tanker Index. Frontline has the second-biggest weighting in the six-member gauge, behind Hamilton, Bermuda- based Teekay Corp., whose tankers haul about 10 percent of all seaborne oil supply.
Frontline will trade at 94.15 kroner in 12 months, compared with 92.6 kroner yesterday, the average of 17 analysts’ estimates compiled by Bloomberg show. The company, founded in 1985, has a market value of $1.3 billion, down from a peak of about $5.3 billion in 2008.
Seaborne oil cargoes will rise 3.2 percent this year, compared with 7.5 percent growth in the supply of all classes of tankers, according to Clarkson Research Services. About 90 percent of global trade moves by sea, according to the Round Table of International Shipping Associations.
Oil Prices
Oil traded in New York, a global benchmark, rose 40 percent in the past year, driven by demand, disruptions to Libyan supply and concern that protests in the Middle East may spread to Saudi Arabia and other key producers. The contract closed at $100.22 a barrel on June 3. Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley predict prices will keep advancing.
The carrying capacity of the supertanker fleet will expand more than 10 percent this year and keep growing for at least the next three years, according to Maritime Strategies International Ltd., a London-based forecaster of freight costs.
Frontline’s fleet is dominated by ships hauling 2 million- barrel and 1 million-barrel cargoes. The bigger vessels are known as very large crude carriers and the others suezmaxes, named because they are the largest carriers able to pass through Egypt’s Suez Canal fully loaded. Daily rates for suezmaxes fell 81 percent to $6,163 in the past 12 months, according to the Baltic Exchange, which publishes prices for more than 50 maritime routes.
Ship-Fuel Costs
As returns tumbled, ship-fuel costs surged, gaining 29 percent to $655 a metric ton in a year, according to data compiled by Bloomberg. Some owners accept negative charter rates on single voyages because the customer will contribute to fuel costs, making it less expensive to sail to another region where earnings are higher.
Unprofitable charters won’t end any time soon because the fastest growth in oil demand is in Asia not western economies, said Tufton Oceanic’s Vergottis. It takes less time to ship Middle East crude to Asia than to the west, cutting down on journey times and freeing up tankers more quickly, he said.
The economy in China, the world’s biggest energy consumer, will expand 9.5 percent this year, more than three times the pace of the U.S., according to the median of as many as 72 economists’ estimates compiled by Bloomberg.
“It’s a brave investor who bets against these guys,” said Jonathan Chappell, a New York-based analyst at Evercore Partners Inc. “We are not as bearish as they are, but we believe it’s too early in the cycle to get involved in some of the leveraged shipping stocks, including their own.”