Marine Link
Monday, January 22, 2018

Drive For Quality To Afflict Owners, Benefit Builders

The inherent problem currently undermining the tanker market — oversupply of tonnage in a climate of poor demand for oil — is epitomized by the VLCC sector. In 1992, for instance, the delivery of 22 VLCCs (5.9 million dwt) to the fleet was broadly in line with scrapping. During 1993, however, deliveries far outweighed sales for demolition, a fact which further distorted a supply-demand balance already firmly weighted against the owner. It is provisionally estimated that 37 VLCCs (10.1 million dwt) entered the world tanker fleet during 1993, while only 25 vessels (6.1 million dwt) were reported sold for demolition. In a period of such fragility, the accompanying steep increase in operating costs — a direct result of the 1990s' "drive for quality" — has served merely to compound the current problems.

Unfortunately for the tanker owner, it would appear likely that these increases have yet to run their course, a point highlighted in Drewry's recent survey, "Ship Costs in the 1990s: The Economics of Operation and Ownership." The report, published in February 1994, suggests that the following key operating cost trends are likely to dominate the 1990s: • A further hardening of the insurance market as underwriters continue to make up for the losses suffered in earlier years. Thus, despite the encouraging reduction in casualties in 1992 and 1993, owners are likely to face further increases in the cost of hull machinery (H&M) insurance, maybe by as much as 20 percent per year to 1995/1996. The position is likely to be further exacerbated by newbuilding and secondhand price developments. If, for instance, newbuilding prices firm again in 1994-1995 and then continue at strong levels on the back of replacement demand, H&M premia should also rise to reflect the higher unit value of the fleet.

• Repair and maintenance (R&M) costs, which increased sharply during the late 1980s and early 1990s, are forecast to rise still further during the remainder of this decade, a response to: (a) the continued aging of the world fleet (older vessels are likely to require more frequent drydocking for main event repairs and more time in drydock for increasingly extensive repair work) and (b) the increasing attention to "quality," the outcome of which is likely to be a further tightening of vessel inspection procedures.

• The combination of a shortage of skilled seafarers and the campaign to improve standards is forecast to result in a rapid rise in crewing costs, particularly for those officers and ratings who will be in real demand. While this rapid escalation in costs will severely handicap owners, it is likely to be of great benefit to the shipbuilding industry. With nearly 60 percent of the world's tanker fleet over the age of 15 years at the end of June 1993, newbuilding demand will undoubtedly surge in the latter half of the 1990s. While OPA '90 and the March 1992 Amendments to the International Maritime Organization's (IMO) MARPOL 73/78 convention will not compulsorily curtail the lifespan of most tankers, the increasing number and stringency of inspections that a vessel must undergo may force owners to end the trading lives of their vessels earlier than anticipated. The degree to which this occurs will be strongly influenced by developments in three key areas: (1) classification society procedures; (2) port state control strin- "With nearly 60 percent of the world's tanker fleet over the age of 15 years at the end of June 1993, newbuilding demand will undoubtedly surge in the latter half of the 1990s." gency; and (3) checks by insurers. The Enhanced Survey Program (ESP), formulated by members of the International Association of Classification Societies (IACS) in response to MARPOL 73/78's requirement for "an enhanced program of inspection" for tanker and bulk carriers, is likely to have a significant impact on R&M costs in the 1990s. The scale of such cost increases is almost impossible to gauge, given that the system only entered into operation on July 1, 1993, but it is possible nonetheless to comment on the likely areas of impact. One of the chief areas of increase will be in respect of the extended Intermediate Survey. The evidence that many tankers and bulk carriers require structural repairs between special surveys is likely to lead to much greater steel renewal requirements for vessels over 10 years of age. Such is the spread of new port state control regimes that it is tentatively suggested that there will soon be a system of port state control in every region of the world. In December 1993, for example, 17 Asia Pacific maritime nations signed a new regional port state control agreement in Tokyo. The new system known as the Tokyo Memorandum of Understanding (MOU) will take effect from April 1,1994 and will operate in close conjunction with the Paris MOU and Latin America's Vina del Mar Agreement, the long-term aim being for the 17 nations to inspect 75 percent of the foreign-flagged vessels operating in the region by the end of the decade. In the same month, there was significant progress in the campaign to establish a port state control regime in the Caribbean, with a provisional agreement to put into place as soon as possible a port state control scheme. Preliminary discussions are also reported to have taken place in South Africa, India, Kenya, Tanzania and some Middle Eastern Gulf States with a view to establishing similar port state control systems.

Complementing these advances, there are signs that those nations with port state control schemes already in operation are noticeably tighter in their control of foreignflagged vessels, especially those with questionable safety records. One of the best examples of such a philosophy has been seen in Europe, where it was reported during December 1993 that still further measures are being planned by the European Commission to step up the fight against substandard vessels. Though precise details have yet to be announced, it is reported that measures may include: • Focusing inspections on first-time callers to European ports, ships from flags with dubious safety records, ships suspended by classification societies and vulnerable vessels. • More stringent rules regarding the rectification of faults and provision for banning vessels from EU waters.

In addition, speculation is rife that the European Commission will soon allow only vessels classed by members of IACS to enter European ports.

In Australia, the findings of the "Ships of Shame" inquiry — prompted by the loss of several bulk carriers which had visited Western Australian ports—are likely to lead to tougher port state control checks for foreign-flagged vessels, including tests of crew ability. Senator Bob Collins, Transport and Communications minister, stated that the Australian Maritime Safety Authority had inspected 1,720 foreign ships during 1992, and found more than 70 percent to have some kind of problem.

In the U.S. — already stringent checkers of foreign-flagged vessels the marine safety chief of the U.S. Coast Guard (USCG), RAdm. Arthur Henn, pronounced during 1993 that the U.S. plans to "shine a bright light" on poor ship operators by making vessel inspection and boarding files generally available so as to prompt greater compliance with existing international safety conventions. With regard to checks by insurers, underwriters are increasingly introducing their own vessel inspections as a means of assessing the risk they are taking on themselves. The U.K. Mutual Steamship Assurance Association was, for example, planning to inspect up to 600 ships in 1993 as part of a campaign to control claims.

This marks a sharp increase on 1992, when around 450 ships were inspected, taking the total to nearly 1,000 vessels since the launch of the scheme in June 1990. In addition, reports suggest that insurers too are becoming more stringent in their checks on vessels. It was reported in August 1993, for example, that more than 20 shipowners were refused renewal terms for the current underwriting year by the Standard Steamship Owners' Protection & Indemnity Association for failing to meet the standards required by the Club.

In its 1993 annual report, the London P&I Club announced that it refused quotes on two-thirds of vessels offered last year.

In addition, it also declined to renew coverage for 36 vessels totaling 436,000 grt. The net is clearly tightening on owners of substandard tonnage, a trend that is likely to be welcomed by the world's shipbuilders.

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