Operating costs on downward track

Operating costs that have fallen for six consecutive years are to be welcomed, but ship operators should not become complacent as there are plenty of road-bumps ahead.

According to accountancy and advisory network Moore Stephens, total annual operating costs in shipping dropped by 1.3% in 2017. Its ship operating expenditure-benchmarking tool OpCost 2018 reveals that operating costs for the tanker, bulk carrier and containership industries were all down that year, marking the sixth consecutive year-on-year decrease in overall ship operating expenditure.

According to Moore Stephens’ partner Richard Greiner, all expenditure categories in 2017 were down on those for 2016. On a year-on-year basis, the bulk carrier index dropped by three points (or 1.9%), while the containership index was down by two points, or 1.3% (compared with the 2016 fall of one point or 0.6%). Meanwhile, the tanker index was down by three points (or 1.7%).

Results in focus

The greatest cost decreases were in the Insurance category. Here, costs fell by 4.1%, and all vessels, in all tonnage and size categories included in OpCost paid less, on average, for their insurance in 2017 than in the year before. Bulk carriers paid 6% less overall, tankers paid 3.4% less and containerships paid 5.8% less. The largest insurance cost reduction was 6.5% for both containerships of between 6,000 and 10,000 teu and capesize bulk carriers.

Mr Greiner said the reductions “may be due in part to a significant reduction in the overall incidence of large, expensive casualties over the past couple of years”, though he noted that “the size and frequency of the cost reductions is still worthy of note given the cumulative cost of comparatively-smaller but still-expensive claims routinely fielded by hull and machinery underwriters”.

“It is perhaps not surprising, then, that the International Union of Marine Insurance recently called for a better understanding by underwriters of the assets being insured in the marine market,” he said. “Expenditure on protection and indemnity insurance was also down, which is again a reflection of the relative dearth of major casualties over the course of the year. The International Group , through its pooling agreement, reinsurers and owners themselves, will have felt the benefit of that in their pockets.”

Just as in 2016, the Stores category saw the second-highest level of cost decreases in 2017. Stores spending in 2017 was down by 3.5% overall compared with a 2.9% drop in 2016. All ships experienced a decline, with very large gas carriers of between 70,000 and 85,000 cbm experiencing a fall of 8.4%. For tankers, stores costs fell by an average of 4.5%, while bulk carriers marked a 3.6% decline. For containerships, stores expenditure dropped by 3.4%.

However, Mr Greiner believes that this decline may not be sustainable “if shipping markets continue to display signs of a recovery — if not to the heady days of ten years ago, then at least to more-profitable levels”. He adds that “the tangible uptick in world oil prices will also have a knock-on effect on lube oil costs”.

Making repairs

Taking third place in cost reduction ranking was the Repairs and Maintenance category. “Again, this is likely to change sooner rather than later. Shipping remains a highly-competitive industry, but one where tighter regulation and better oversight by the likes of Port State Control should mean that there are fewer sustainable employment opportunities than at any time in recent memory for poorly-maintained vessels.”

There was an overall 1.7% fall in repairs and maintenance costs (compared with the 0.8% reduction in 2016). The biggest drop at 4.9% was recorded by chemical tankers of between 40,000 and 50,000 dwt. Repairs and maintenance expenditure went down by 3.4% for tankers and 1.5% for bulk carriers.

In 2017, the smallest reduction in operating costs concerned crew expenditure. There was an 0.1% overall average fall in 2017 crew costs compared with the 2016 figure. Tankers experienced a crew cost fall of 0.5% on average, and for bulk carriers, the overall average fall in crew costs in 2017 was 0.6%. There was no overall expenditure rise for crew costs in the containerships in 2017.

Mr Greiner notes that the limited reduction in crew costs comes after years of increases. “In some sectors, a weaker trading environment in 2017 could be one of the reasons behind this,” he says. “So, too, may be the emergence of a new era of reportedly-impressive seafarers entering the market from new training institutes in developing countries. A more pressing concern may be the difficulties being experienced by owners and operators in finding experienced crews for specialist ships, which will clearly come at a price.”

Looking ahead

According to Mr Greiner, confidence in shipping held up well last year and has kept doing so in 2018.

“There remains an appetite for investment and recourse to the necessary finance,” he says. “Oil prices are going up, and the Baltic Dry Index, although somewhat volatile, is gradually leaving the really bad days behind. Given a favourable geopolitical wind, that should lead to increased activity, and most likely to higher operating costs.”

However, he also notes that big challenges are ahead for shipping that will test owners, operators, charterers and investors. Planning needs to continue for Ballast Water Management Convention implementation and decisions must be made on how to fund it. Meanwhile, measures to detect and eliminate cybercrime will come at a price for hardware, software and manpower, he says.

As for how owners and operators can meet the International Maritime Organisation’s 0.5% global limit on the sulphur content of fuel oil used on ships (from 1 January 2020), Mr Greiner notes that moving to low sulphur fuel is expensive and that installing the likes of scrubbers is both pricy and disruptive, which will lead to a rise in operating costs.

“Decisions will be influenced by individual risk profile and commercial strategy, but will undoubtedly be costly,” he warns.

Noting that shipping is used to fluctuations in costs and industry fortunes, Mr Greiner says that when the markets significantly improve, operating costs will probably go up.

“Such increases must, however, be balanced against the technological advances which have already started to make shipping markedly more efficient and more cost-efficient,” he notes. “There will be more significant operating efficiencies — and more fluctuations in overall operating costs — to come. That is what makes shipping such a challenge.”

The Baltic Exchange’s next Shipping Economics & Investment course will be on January 14 and 15 in London. More information can be found here.