Tankers in the 21st Century

The first decade of the 21st century has been one of great change, one of boom and bust.
The decade started with the backlash of Erica and Prestige in Europe with the EU lobbying for advancement of single hull phaseout.
 
The big impact on the industry happened further East with the growth in the Chinese Economy.  Increasing demand for oil pushed up freight rates to new highs and kept them there for most of the decade.   Shipbuilding boomed untilt the end of the decade when the credit crunch began to bite. 
 
One industry figure has said that the teens will be a 'decade of cost management'.
 
If this is the case it is worth comparing the 'teens' with the last such decade, the 80's.
 
What have the 80's and the teens got in common?
 
Oversupply of Tonnage   Freight rates are determined by a relatively small oversupply or undersupply of tonnage.  In both the 70’s and the noughties there was a massive building boom tied to a massive economic boom.   In tonnage terms the noughties boom is much greater.

 

Global Recession  The world was still suffering from the two oil shocks in the 80’s.  Demand was down and consequently demand for oil was down.

 GDP growth in both decades faltered.  The recent separation of growth between emerging and ‘advanced’ economies is also an issue.  This is of significance as it demonstrates while the ‘advanced’ economies wrestle with a debt driven ‘own goal’ the major (BRIC) emerging economies are unaffected and have access to funds.  This is significant as these companies may use that access to funds and trade to increase their own share of the shipping market in their own country.

World oil production has flattened to some degree except in Asia Pacific where growth continues. 

Energy Costs  Fuel costs were relatively high in the 80’s following the two oil shocks.  Slow steaming and fuel saving initiatives is a feature of both the 80’s and 10’s.

There are some additional factors in the teens such as the drive for low sulphur and distillate fuels which will drive energy costs up further than were the case in the 80’s.  Much of the energy saving technology has been incorporated in the new fleet so that few easy options will be available for energy saving,

 
Whats Different?

What factors are different in the ‘teens', compared with the 80’s?

Environment     The focus on the environment in the 10’s is dramatically different.   From invasive species and ballast water treatment to oil pollution, air quality and greenhouse gases the industry is being watched and criticised.   The great industry environmental win, the reduction in oil pollution from tankers, is not widely recognised as the success that it is and will  be lost in the political fallout of any big tanker spill.

 
Quality, Charterers and Port State  The 80’s were not noted for compliance and quality.  Flag state regulation was, in some cases limited and class societies under pressure to support owners cost pressures.  The advent of Port State and USCG blacklists for flags and classes has meant that a flight to the cheapest flag with the lightest touch is not an enduring answer.

Port state has become increasingly important in monitoring the importance of the owner, flag, class partnership and the use of targeting also makes sure that a fall from grace by an owner, flag or class will quickly result in detention and commercial/market consequence.

In the midst of this the oil majors are not likely to change their focus on vetting.  The Deepwater Horizon incident demonstrates that the costs of oil pollution have grown and that the charterer will carry the can for any uninsured losses beyond the liability limits.  The European reaction to Erica and Prestige reinforce the view that vetting is here to stay and in an oversupplied market there is no commercial drive to compromise.

The growth of Chinese imports and the heralded move to 50% of crude imports being carried on Chinese bottoms may change these dynamics although it is hard to see how as most loading terminals operate some form of vetting system and traders require oil major approvals.

Finance

Given that the current recession was driven by banking failures and that financial levers, such as low interest rates, are being used to drive growth, interbank interest rates are at a historic low at present.  Interest rates grew in the 80’s for a variety of reasons not least to drive out inflation.   This means that those with floating rate finance on their ships are benefitting at present and particularly in comparison with the 80’s where interest rates were at record highs.  The bad news is that if growth takes off the amount of ‘quantitative easing’ (printing money) that central banks have indulged in will result in inflation which will result in a rise in interest rates to control inflation.  There will be a race to see whether the growth drives freight rates before interest rates drive bankruptcy.  Those with a high equity base and a strong balance sheet will clearly benefit.

Technology  Ships in the 80’s were simple.  Indeed some of the ships that changed hands in the 80’s were born in the 50’s.   Modern ships are much more complex and it seems unlikely that they can be handled without competent and well trained staff.  It could also be argued of course that ships have become too complex.  Technology does not make things easier.  Compare the simplicity of a 1980’s domestic central heating control system with the digital controls now available.

Another ship related issue is the robustness and simplicity of ships and their basic equipment.   Many of the ships trading in the 80’s were overbuilt in comparison with today’s standards.  This meant that corrosion took time to bite and fatigue was less of an issue.   As shipbuilding technology has progressed and scantlings have been ‘optimised’, along with the increased complexity of double hull structures and the difficulties of inspection, the same amount of neglect will have more serious results.

Manning

One feature of the 1980’s was a flight from the more expensive manning sources to cheaper ones.   Outsourcing to manning contractors was also an important tool.    Subjectively at the same time, with the efficiency of ships from the growth in tanker’s to containerisation, there was a glut of officers.  Many ships had mixed complements of senior officers European and other nationalities in the other ranks.  There was no shortage of cheaper officers and indeed as the 90’s and the breakup of the USSR came along another source of well educated cheaper officers appeared.

The 10’s do not offer the same opportunities.  There is already a shortage of officers and limited opportunities to find another cheaper manning source.

Complexity

All of the above adds to a complex industry.  Since the 1980’s ISM has been introduced, the ISPS code, air pollution aspects of MARPOL, localised and regional legislation and more and more complex systems.

Communications-the global village The instantaneous nature of communications means that operating problems can quickly come to the attention of charterer’s and port state organisations.  Reputations can be destroyed quickly.  Ideas for saving costs can equally be broadcast quickly and the pressure to follow the herd can become great.

Management and Mindset Ten years of boom does not equip you for a bust.  Systems, priorities and attitudes all need to be changed.  In a high freight rate environment the priority is to minimise downtime with the result that expenditure on spares, repairs and on anything that can delay a ship is easily justified.  When money is available inefficient management can be hidden.

Corporate Structure

In the 80’s the industry was transitioning from one dominated by large oil company fleets and large family owned businesses.  The trend in the 90’s and 00’s is for smaller oil company fleets and for many of the family owned businesses to morph into public corporations.  The increase in public corporations increases the transparency of companies and exposes them more to ethical and governance considerations which constrain (correctly) some actions.  On the other hand the pressure to ‘do something’ can lead to following the herd.

The growth of national fleets, especially in China, may put further pressure on the markets.
 
The conclusion is inescapable.   The decade we are in is unique in the history of the industry and there are few precendents as to how to deal with it.
 
 
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martin shaw,
17 Sep 2014, 03:46
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