Ship operating costs decline for seventh year in succession

International accountant and shipping consultant BDO says total annual operating costs in the shipping industry fell by an average of 1.8% in 2018, compared to the 1.3% fall for 2017. All categories of expenditure in 2018 were down overall on those for the previous 12-month period, with the exception of repairs and maintenance costs.

The findings are set out in OpCost 2019 (www.opcostonline.com), BDO’s unique ship operating costs benchmarking tool, which reveals that total operating costs for the tanker, bulker and container ship sectors were all down in 2018, the financial year covered by the study. On a year-on-year basis, the tanker index was down by 4 points, or 2.4%, compared to the 3 points (1.7%) fall the previous year. The bulker index, meanwhile, fell by 4 points, or 2.6%, compared to the 3 points (1.9%) fall recorded in last year’s OpCost. The container ship index was down by 2 points, or 1.3% - identical to the fall recorded for the previous 12 months.

There was a 1.1% overall average decrease in 2018 crew costs, compared to the 2017 figure of 0.1%. By way of comparison, the 2008 report revealed a 21% increase in this category. Tankers overall experienced a fall in crew costs of 1.8% on average, compared to the 0.5% fall recorded last year. All categories of tankers reported a reduction in crew costs for 2018 with the exception of Panamax Tankers, which recorded an increase of 0.1%, compared to a reduction for 2017 of 0.7%. The most significant reduction was the 2.7% recorded by Aframax Tankers, which also recorded the biggest reduction in 2017 at 1.7%.

For bulkers, meanwhile, the overall average fall in crew costs in 2018 was 1.1%, compared to 0.6% recorded for the previous year. Handymax Bulkers recorded a 2.3% fall in 2018, with a 1.7% fall for Panamax Bulkers and 0.1% for Handysize Bulkers. Capesize Bulkers were the only category of bulker to record an increase in crew costs, of just 0.1%, compared to the fall the previous year of 0.8%.

As was the case in 2017, there was zero overall increase in expenditure on crew costs in the container ship sector in 2018. The last overall movement for this category of ship was the 1.1% fall recorded for 2016. With the exception of vessels of between 2,000 and 6,000 teu, all categories of container ships recorded a fall in crew operating costs in 2018. In the case of ships between 6,000 and10,000 teu, the fall was 2.7%, equalling the figure recorded by Aframax Tankers as the largest reduction in crew costs recorded in OpCost 2019.

Expenditure on stores was down by 4.9% overall, compared to the fall of 3.5% in 2017. Mirroring the results in the previous year, all vessels in all categories recorded a fall in stores costs for 2018, none bigger than the 7.6% recorded by container ships of between 2,000 and 6,000 teu. In the tanker sector, the most significant fall was the 6.4% posted by Aframax Tankers. Panamax Bulkers and Capesize Bulkers led the way in the bulker sector, each recording a 6.7% reduction in stores expenditure.

For tankers overall, stores costs fell by an average of 4.8%, compared to the 4.5% recorded for 2017, while in the bulker sector the reduction was 6.1%, compared to a fall of 3.6% in 2017. In the container ship sector, meanwhile, there was a 5.7% fall in stores expenditure, compared to a drop of 3.4% the previous year.

There was an overall increase in repairs and maintenance costs of 0.6% in 2018, compared to the reduction of 1.7% in 2017. Both categories of chemical tanker posted increases, led by the 1.6% increase posted by Chemical Tankers 40,000 to 50,000 dwt. There were also significant increases in the container ship sector, most notably in the case of ships of between 1,000 and 2,000 teu and between 2,000 and 6,000 teu (3.1% and 2.9% respectively).

In the tanker sector, Suezmax owners spent 2.3% more on repairs and maintenance in 2018 than they did in the previous year, while increases were also posted for Tankers 5,000 to 10,000 dwt (1.2%) and Handysize Product Tankers (1.1%). Repairs and maintenance costs were also up in the bulker sector for Capesize Bulkers (1.5%) and Handysize Bulkers (0.3%). Product Tankers, meanwhile, recorded the largest fall of 1.6% across all categories.

For tankers and bulkers overall, there was zero overall increase in repairs and maintenance costs in 2018, compared to the falls of 3.4% and 1.5% recorded in 2017. In the container ship sector, however, there was a 3.2% overall increase in repairs and maintenance costs in 2018, compared to zero movement the previous year.

The largest overall drop in operating costs in 2018 was the 7.1% fall recorded for insurance, compared to the 4.1% fall in 2017. Ro-Ros were the only category of vessel to record any increase in insurance costs (1.7%). Everywhere else, there were sizeable reductions in insurance outgoings, none bigger than the 9.9% posted for Handysize Product Tankers. Not far behind were Chemical Tankers 15,000 to 40,000 dwt (9.8%), Panamax Bulkers (9.7%) and container ships of between 1,000 and 2,000 teu (9.3%).

For tankers overall, there was an 8.3% fall in insurance costs in 2018, compared to the 3.4% reduction in 2017. For bulkers, the reduction was 8.5%, compared to 6.0% the previous year, and for container ships the corresponding figures were 7.6% and 5.8%.

Richard Greiner, Partner, Shipping & Transport at BDO, says, “This is the seventh successive year-on-year reduction in overall ship operating costs recorded by OpCost, and will doubtless be regarded as good news throughout the industry. However, at the same time, the solitary overall increase across all categories of operating costs in 2018, that in respect of repairs and maintenance, should be regarded as encouraging news on a number of levels. It indicates an ongoing commitment to the increasing imperative of regulatory compliance, to maintaining safety and protecting the environment, and to continued operation. Moreover, it does nothing to confound the incipient belief that shipping may be displaying signs of a slow recovery to improved profitability. Nobody spends money on repairs and maintenance for vessels that are not expected to trade. Increasingly, vessels that do not meet industry standards will find it difficult to continue trading as regulation bites harder and more comprehensively on a global scale.

“In 2018, as was the case the previous year, the biggest cost reductions were to be found in insurance, reflecting, among other things, the intense competition for business in insurance markets throughout the world. The next biggest level of reductions came, as was again the case in 2017, in the stores category, a trend largely driven by the fall in the cost of lube oils.

“The smallest of the reductions in operating expenditure in 2018, as was the case in the previous year, came in the crew costs category, down by just over 1% on the previous year. Crew costs have been one of the most volatile elements of operating expenditure in the modern shipping industry, but there are reasons to believe that such volatility is likely to decrease. There are a variety of factors impacting crew costs, including fluctuating trade levels, the improved bargaining position enjoyed by seafarers under the MLC 2006 Convention, the emergence of professionally trained crews from dedicated institutions in developing countries, technological advances resulting in reduced manpower requirements, and the continuing difficulty of finding sufficient numbers of certain specialist officers and crew. These factors should balance each other out over time so that increases of more than 20% in crew costs are at least unlikely to be seen - increases the industry has witnessed and survived in previous years.

“Shipping is used to fluctuations in costs and industry fortunes. For example, OpCost records that, at year-end 2008, the average daily operating cost for a Panamax Bulker was US$6,321; in 2018, it was US$5,472. For a Handysize Product Tanker, the comparable figures are US$7,908 and US$7,285.

“Shipping’s fortunes will continue to fluctuate, but confidence is holding up well, notwithstanding the impact of political and economic issues. It should continue to do so, given a favourable wind and a continuing appetite for investment in an industry which is increasingly embracing technological innovation and environmental awareness as a means to increase efficiency and improve cost-efficiency. Whilst there remains the need to fund the costs of technological improvements, over time that investment should lead to improved profitability.”

The BDO (formerly Moore Stephens LLP) Shipping & Transport team has extensive experience delivering accountancy, tax and advisory services to the sector worldwide.

BDO delivers key information and insights to the shipping community, including the annual OpCost report, the quarterly Shipping Confidence Survey and a host of thought leadership on topical issues, such as regulatory developments and market conditions.

https://www.bdo.co.uk/en-gb/industries/shipping-and-transport


BDO LLP
BDO LLP operates in 17 locations across the UK, employing nearly 5,000 people offering tax, audit and assurance, and a range of advisory services. BDO LLP is the UK member firm of the BDO international network.

BDO’s global network
The BDO global network provides business advisory services in 162 countries, with 80,000 people working out of 1,600 offices worldwide. It has revenues of $9bn.
Press office:
+44(0)20 7893 3000
media@bdo.co.uk

http://www.bdo.uk.com/news.html
http://twitter.com/BDOaccountant

Ship operating costs expected to rise in 2018 and 2019

International accountant and shipping consultant Moore Stephens says total vessel operating costs in the shipping industry are expected to rise by 2.7% in 2018 and by 3.1% in 2019, according to our latest survey.

Responses to the firm’s latest annual Future Operating Costs Survey revealed that drydocking is the cost category likely to increase most significantly in both 2018 and 2019, accompanied in the latter case by repairs and maintenance. The cost of drydocking is expected to increase by 2.1% in 2018 and by 2.3% in 2019, while expenditure on repairs and maintenance is predicted to rise by 2.0% in 2018 and by 2.3% in 2019.

The increase in expenditure for lubricants is expected to be 1.9% in 2018 and 2.1% in 2019. Meanwhile, projected increases in spares are 1.9% and 2.2% in the two years under review, while those for stores are 1.6% and 1.9% respectively. The survey also revealed that the outlay on crew wages is expected to increase by 1.3% in 2018 and by 1.9% in 2019, with other crew costs thought likely to go up by 1.5% in 2018 and by 1.8% in 2019.

The cost of hull and machinery insurance is predicted to rise by 1.3% and 1.6% in 2018 and 2019 respectively, while for protection and indemnity insurance the projected increases are 1.2% and 1.4% respectively. Management fees, meanwhile, are expected to increase by1.0% in 2018, and by 1.2% in 2019.

The predicted overall cost increases were once again highest in the offshore sector, where they averaged 4.1% and 4.2% respectively for 2018 and 2019. By way of contrast, predicted cost increases in the bulk carrier sector were 1.8% and 2.6% for the corresponding years. Operating costs for tankers, meanwhile, are expected to rise by 2.4% in 2018, and by 2.9% the following year, while the corresponding figures for container ships are 4.2% and 3.8%.

Respondents to the survey highlighted various areas of concern likely to result in increased operating costs over the next two years. Regulation was high on the list, with one respondent noting: “New regulations will lead to extra costs for all owners, for example the Ballast Water Management Convention and IMO’s 0.50% global limit on the sulphur content of fuel oil used on board ships.”

On the subject of crew costs, one respondent said, “We do not expect any major variations in 2019. Basic crew wages for Filipino seafarers, however, will come under review in this period, and we may see some increase there.”

Fuel costs were referenced by a number of respondents. “The cost of fuel treatment equipment will increase in the next two years,” said one, while another remarked, “The Sulphur 2020 Rules will have a significant impact.”

One respondent noted, “Maintenance in general has been somewhat on hold, and we will see a correction in that in 2018 and 2019,” while another said, “We will see an increase in costs for automation and communications, not least because electronics have a shelf life.”

On a more general level, respondents voiced concerns about environmental issues, trade wars, the cost of securing finance, and the global economic recession, all of which were perceived to have the potential to result in increased operating costs.

Overall, the cost of new regulation was identified as the most influential factor likely to affect operating costs over the next 12 months, at 23%, up from equal third place at 15% last year. 18% of respondents identified finance costs in second place, down from 20% and first place last year. Competition ranked in third place at 15% as it had last year. Meanwhile crew supply fell to 12% compared to 19% and second place in last year’s survey.

Richard Greiner, Moore Stephens partner, Shipping and Transport, says, “The predicted 2.7% and 3.1% increases in operating costs for 2018 and 2019 respectively compare to an average fall in actual operating costs in 2017 of 1.3% across all main ship types recorded in the recent Moore Stephens OpCost study.

“One year ago, expectations of operating cost increases in 2018 averaged 2.4%, so the increase now in that expectation to 2.7% must be regarded as sobering – if not unexpected –news. Projected increases in operating expenditure are part and parcel of the workings of any industry, and must be factored into budget projections. But these latest predicted increases, whilst a cause for concern, should not unduly surprise or concern shipping, an industry which has seen – and in many cases endured – much larger increases during the past decade.

“New regulations were included this year for only the second time in the life of the survey among the list of factors which respondents could cite as most likely to influence the level of operating costs over the next 12 months. This has proved to be a timely addition, with 23% of respondents citing new regulation as an influential factor, ranking it in first place. The Ballast Water Management Convention (BWM) and Sulphur 2020 are the major items on the list of incipient shipping legislation, but the industry is becoming more tightly regulated generally in terms of both safety and environmental responsibility, so compliance with evolving national and international regulation is likely to remain a significant item in operating cost analyses and projections for the foreseeable future.

“The fact that drydocking emerged as the cost category likely to increase most significantly in both 2018 and 2019 is unsurprising, given the need to comply with the existing and emerging regulatory framework within which the industry is being obliged to operate. The same may be said of repairs and maintenance, where any previous delay in attending to items of a non-critical nature will need to be addressed.
Estimates relating to the likely increase in the cost of lubricants over the two-year period, meanwhile, are towards the higher end of the survey scale, which is in line with a predicted rise in oil prices this year and next.

“Expected increases in the price of hull and machinery insurance are up on estimates made 12 months ago but, due to the highly competitive nature of the market, cannot be regarded as an entirely reliable bellwether. Estimates of protection and indemnity cost increases are also up, perhaps reflecting increased management costs and the possibility that the market’s recent benign large claims experience may not be repeated over the next couple of years.

“Elsewhere, there were some interesting predicted cost increases in the individual market sectors. The offshore industry, for example, is predicted to be facing increases of 3.1% in repairs and maintenance for 2019, compared to the 1.9% predicted for tankers. Indeed, the offshore sector is expected to face the biggest increases in operating costs in 2019 in every category of expenditure covered by the survey.

“One could argue that the level of predicted operating cost increases for 2018 and 2019 ought to be manageable in a competitive, viable industry environment. Nobody doubts shipping’s essentially competitive nature, but the issue over viability is less clear-cut.

“Shipping has held up well during a ten-year economic downturn, and investors continue to express confidence in the industry’s potential for profit. Sadly, some good companies have gone to the wall over the past decade but, overall, the industry has become leaner by virtue of having let market forces function as they should. Yet market intelligence and common sense suggest that freight rates still need to improve significantly in order for shipping to start making the sort of money it should command in light of the vital role it plays in international trade and commerce.

“The more money that shipping makes, the more comfortably it can meet its operating expenses. Increases in operating costs must be expected, and budgeted for. Those costs may change in nature, because new technology is already helping to reduce outgoings in some areas, while on the other side of the coin there is the evident need for technological investment to combat the likes of cyber-crime.

“There are more Ifs involved in the shipping industry than there are in Kipling’s poem. If freight rates go up, if world trade increases, if political tensions and trade wars allow, if China continues to flourish, if oil prices rise, if stock markets hold their nerve, if Brexit means Brexit, if Brexit means something else, then shipping will be in a position to reap the benefits. It will require good management, good judgement, good research, good advice and good luck. And it will require good husbandry. As Benjamin Franklin said, “Beware little expenses; a small leak will sink a great ship.”

Moore Stephens LLP is noted for a number of industry specialisations and is widely acknowledged as a leading shipping, offshore maritime and transport & logistics adviser. Moore Stephens LLP is a member firm of Moore Stephens International Limited, one of the world's leading accounting and consulting associations, with 614 offices of independent member firms in 112 countries, employing 30,168 people and generating revenues in 2017 of $2.9 billion. www.moorestephens.co.uk/shipping-transport

For more information:
Richard Greiner
Moore Stephens LLP
Tel: +44 (0)20 7334 9191
richard.greiner@moorestephens.com

Moore Stephens reports fifth successive year of decline in operating costs

International accountant and shipping consultant Moore Stephens says total annual operating costs in the shipping industry fell by an average of 1.1% in 2016. This compares with the 2.4% average fall in costs recorded for 2015. For the second successive year, all categories of expenditure were down on those for the previous 12-month period, most notably for insurance costs and stores.

The findings are set out in OpCost 2017 (www.opcostonline.com), Moore Stephens’ unique ship operating costs benchmarking tool, which reveals that total operating costs for the tanker, bulker and container ship sectors were all down in 2016, the financial year covered by the study. On a year-on-year basis, the tanker index was down by 3 points, or 1.7%, while the bulker index also fell by 3 points, or 1.9%. The container ship index, meanwhile, was down by 1 point, or 0.6%. The corresponding figures in last year’s OpCost study showed falls of 6 points in both the bulker and container ship index, and of 4 points in the tanker index.

There was a 0.4% overall average fall in 2016 crew costs, compared to the 2015 figure, which itself was 1.2% down on 2015. By way of comparison, the 2008 report revealed a 21% increase in this category. Tankers overall experienced a fall in crew costs of 1.8% on average, compared to the 1.3% fall recorded in 2015. All categories of tankers reported a reduction in crew costs for 2016 with the exception of Aframax Tankers and Suezmax Tankers, which recorded increases of 0.8% and 0.2% respectively, compared to reductions for 2015 of 1.9% and 2.6%. The most significant reductions in tanker crew costs for 2016 were the 2.8% and 2.7% recorded by Tankers 5,000 to 10,000 dwt and by Handysize Product Tankers respectively.

For bulkers, meanwhile, the overall average fall in crew costs in 2016 was 0.6%, compared to 1.1% recorded 12 months ago. All categories of bulkers reported a reduction in crew costs, the biggest fall being the 1.2% reduction in spending by the owners of Capesize Bulkers.

Expenditure on crew costs in the container ship sector, meanwhile, was up by 1.1% compared to the fall of 3.3% recorded for 2015. The biggest increase in this category was the 2.1% recorded for ships of between 2,000 and 6,000 teu, which in 2015 led the reductions in the container ship crew costs category with a fall in expenditure of 3.6%.

Expenditure on stores was down by 2.9% overall, compared to the fall of 4.3% in 2015. The biggest fall in such costs was the 5.1% recorded by owners of container ships of between 100 and 1,000 teu. In the same tonnage category, the fall in stores costs for owners of container ships of between 1,000 and 2,000 teu was 4.9%, the same figure as that recorded in the tanker sector for Aframax Tankers. Other significant reductions included Handysize Bulkers (4.8%) and Panamax Bulkers (4.4%).

For bulk carriers overall, stores costs fell by an average of 4.2%, compared to a fall of 7.7% in 2015, while in the tanker and container ship sectors the overall reductions in stores costs were 2.2% and 5.2% respectively, compared to the corresponding figures of 4.3% and 5.5% for 2015. The only rise in stores expenditure by any category of vessel was the 0.3% increase recorded by Coastal Tankers.

There was an overall fall in repairs and maintenance costs of 0.8% in 2016, compared to the 4.3% reduction recorded for 2015. The biggest fall in such costs was that recorded by Panamax Bulkers (3.2%), closely followed by Capesize Bulkers (3.1%). All vessels in the bulker category recorded reduced repairs and maintenance expenditure, but there were increases in the tanker sector, most notably the 2.4% additional outlay by Panamax Tankers compared to 2015. There were examples of small increases in repairs and maintenance expenditure in the container ship sector, while for Ro-Ros the increase amounted to 2.2%.

The overall drop in costs of 3.0% recorded for insurance compares to the 3.2% fall recorded for 2015. No vessel types in any of the tonnage and size categories included in OpCost paid more for their insurance in 2016 than in 2015.The biggest reduction in such costs was the 5.2% recorded by container ships of between 2,000 and 6,000 teu. Not far behind were Handysize Bulkers and Panamax Bulkers (4.7% and 4.6% respectively), while in the tanker category it was Aframax Tankers which led the way in terms of reduced insurance expenditure (4.6%). Ro-Ro owners, meanwhile, paid 4.0% less for their insurance in 2016 than in 2015, in which year they spent an additional 2.4% in premiums compared to the previous year.

Richard Greiner, Moore Stephens Partner, Shipping & Transports, says: “This is the fifth successive year-on-year reduction in overall ship operating costs, although the reduction this time is less than half the figure recorded 12 months ago for 2015.

“The biggest cost reductions were those in the Insurance category. Insurance is a major item of expenditure for all owners and operators, without which most would not be able to operate on an international basis. The fact that such costs continue to fall may be due in part to a reduction in the incidence of major casualties. Most of the larger reductions in insurance costs tracked by OpCost, however, were recorded by bulk carriers, which are no strangers to the pages of the casualty reports. So cheaper insurance must also say much about the fierce competition for business which exists throughout marine underwriting markets worldwide.

“The next biggest cost reduction was in the Stores category, where the slower than anticipated improvement in world oil prices doubtless had a continuing beneficial knock-on effect on lube oil costs in 2016.

“The reduction in Repairs and Maintenance costs in 2016 was 3.5% down on the figure for the previous year. This confirms that maintenance can only be postponed for so long by owners and operators who accept the need to invest in their ability to compete for business in a highly competitive market which is more tightly regulated than ever before. Strategic short-term lay-up is a waypoint rather than a destination.

“Over the years, the OpCost study has recorded annual average crew cost increases of more than 20%, but there was a reduction in such costs this time of less than half of one percent compared to the figure for 2015. The continuing challenging shipping markets are doubtless a significant factor.

“Although 2016 was another difficult period for shipping, the year closed on a note of rising confidence, according to the Moore Stephens Shipping Confidence Survey. Owners and charterers were more confident, than for some time previously, of making new investments, and there were improved expectations of higher freight rates in all three main tonnage categories. The expectation, too, was that oil prices and the Baltic Dry Index could only go up.

“That increased confidence, which has carried over into 2017, should logically lead to greater activity, which will mean higher operating costs. When freight rates allow owners to absorb such increased costs, the numbers start to look healthy. At present, however, owners and operators are not earning what they should be, or would like to be, from most of the markets in which they operate. Positive net sentiment is good, but it is not enough. Something has to change.

“It is also true that in shipping – as elsewhere – what goes down must come up. For example, OpCost records that, at year-end 2008, the average daily operating cost for a Capesize Bulker was US$ 7,512. In 2016, it was US$ 6,691. For a VLCC, the comparable figures are US$ 10,812 and US$ 9,950 respectively.

“Future OpCost studies are likely to reflect the start of spending – or planning for – the introduction of the likes of the Ballast Water Management Convention, the new global limit on SOx emissions from 2020 and initiatives to contain cyber-crime, which are assuming increasing importance in the industry. The results will also reflect, albeit subtly, the effect of geopolitical developments, which can seldom have been in a greater state of flux than they are today.

“Shipping can certainly find encouragement in a fifth successive annual fall in operating costs. But nothing is for ever, and nothing is more certain than that the shipping industry will continue to be characterised by uncertainty, which can be both its strength and its weakness.”

Moore Stephens LLP is noted for a number of industry specialisations and is widely acknowledged as a leading shipping, offshore maritime and transport & logistics adviser. Moore Stephens LLP is a member firm of Moore Stephens International Limited, one of the world's leading accounting and consulting associations, with 626 offices of independent member firms in 108 countries, employing 27,997 people and generating revenues in 2016 of $2.7 billion. www.moorestephens.co.uk


For more information:
Richard Greiner
Moore Stephens LLP
Tel: +44 (0)20 7334 9191
richard.greiner@moorestephens.com

Moore Stephens says ship operating costs are set to increase for 2015 and 2016

Vessel operating costs are expected to rise in both 2015 and 2016, according to the latest survey by international accountant and shipping consultant Moore Stephens. Crew wages, repairs and maintenance, and drydocking are the cost categories likely to increase most significantly over that period.

                                              

The survey is based on responses from key players in the international shipping industry, predominantly shipowners and managers in Europe and Asia. Those responses revealed that vessel operating costs are expected to rise by 2.8% in 2015 and by 3.1% in 2016.

Crew wages are expected to increase by 2.4% in 2015 and by 2.3% in 2016, with other crew costs thought likely to go up by 2.0% and 1.9% respectively for the years under review. The cost of repairs and maintenance is expected to escalate by 2.3% in 2015 and by 2.4% in 2016, while drydocking expenditure is predicted to increase by 2.6% and 2.3% in 2015 and 2016 respectively.

The cost of hull and machinery insurance is predicted to rise by 1.8% and by 1.9% in 2015 and 2016 respectively, while for P&I insurance the projected increases are slightly lower – 1.7% and 1.8% respectively.

Expenditure on spares is expected to rise by 2.3% in 2015 and by 2.2% in 2016, while for stores the corresponding projected increases are 1.8% and 1.9%. The increase in outlay for lubricants, meanwhile, is predicted to be 1.1% and 1.7% in 2015 and 2016 respectively, and that for management fees 1.7% in each of the two years under review.

 

The predicted overall cost increases for 2015 were highest in the offshore sector, where they averaged 3.4% against the overall survey increase of 2.8%. For 2016, it was the tanker sector which was predicted to experience the highest level of increases – 3.4% compared to the overall survey average of 3.1%. The container ship sector, meanwhile, was not far behind at 3.3%.

One respondent said, “We expect costs generally to increase as charter rates creep up, although they will probably lag behind the latter. With charter rates generally low at present, the provision of services to the shipping industry needs to remain competitive, with suppliers reluctant to put up charges too soon for fear of losing business.”

Elsewhere it was noted, “Future operating costs will increase exponentially due to innumerable new regulations, the low competence of seafarers, the high bargaining power of the oil majors, stricter rules regarding maintenance and repairs carried out in ports, the advent of more sophisticated onboard machinery, and increasing consolidation in the marine equipment and services sector, resulting in more bargaining power for fewer, larger companies.”

Another respondent highlighted the fact that ship managers are under increasing pressure, pointing out, “Overcapacity within the markets is driving charter rates down, owners are facing higher costs to finance vessels, and operators are fighting much harder for cargo. Ship managers are now required to look after much more for the same management fees.”

Another still emphasised, “Due to the high financial costs involved in operating a newer world fleet, and to an over-supply of tonnage and depressed freight markets, there will be increasing pressure to maintain or freeze operating cost levels in order for owners to remain competitive. This is likely to change between 2017 and 2020, however, with significant capital expenditure required for regulatory compliance.”

One respondent predicted, “Crew costs will continue to be the main area of increased operating expenditure,” a sentiment echoed by another, who referenced the effect of the Maritime Labour Convention 2006 in this regard to support this supposition. Elsewhere, however, it was noted, “Crew costs will remain stable because the workforce will always be recruited from cheap countries.”

‘Staggering’ cost increases due to redundancy in electronic navigation and communication equipment, and increased port dues, were among other issues deemed by respondents in the survey to be likely to result in an increase in operating costs.

Moore Stephens also asked respondents to identify the three factors that were most likely to influence the level of vessel operating costs over the next 12 months. Overall, the most significant factors identified by respondents were finance costs at 22% (compared to 21% in last year’s survey) and competition also at 22% (up from 18% last time). Crew supply was in third place with 17% (down 3 percentage points on last time), followed by demand trends (down by one percentage point to 16%) and labour costs, unchanged at 13%. The cost of raw materials was cited by 8% of respondents (compared to 10% in last year’s survey) as a factor that would account for an increase in operating costs.

Moore Stephens shipping partner Richard Greiner says, “The predicted increases in ship operating costs for this year and next compare to an average fall in 2014 of 0.8% in operating costs across all main ship types recorded in the recent Moore Stephens OpCost report. Nevertheless, the level of increases anticipated for 2015 and 2016 are low in comparison with many we have witnessed in recent years. Shipping has seen much worse, and prevailed. For example, many of the companies which endured a 16% rise in operating costs in 2008 are still operating successfully today.

“It is no surprise that crew wages feature near the top of the predicted operating cost increases for both 2015 and 2016, not least because of the entry into force of the Maritime Labour Convention 2006, which mandates the manner in which seafarers must be paid. For shipping, as for every industry, investment in good people will always be money well spent.

“Expenditure on repairs and maintenance, meanwhile, is expected to increase over the two-year period by the same aggregate amount as crew wages. Again, this is not a surprise. According to OpCost, repairs and maintenance expenditure was marginally down in 2014 on the previous year, attributable in part to world steel prices dropping to their lowest level in a decade during 2014/2015 and to disappointing freight rates. But things are likely to change. Steel prices are predicted to rise steadily over the next four years, there are realistic prospects of an improvement in the freight markets, and regulatory requirements are set to bite even harder. All these developments are likely to increase the industry’s repair and maintenance bill and will doubtless impact, also, on drydocking costs, which are predicted to be the subject of some of the biggest increases in 2015 and 2016. Lube costs are also set to increase in 2016 on the back of recovering oil prices.

"In addition to traditional operating costs, the level of which can generally be predicted to a certain degree, shipping has other potential costs hanging over its head which are more difficult to budget . For example, ratification of the Ballast Water Management Convention has seemingly stalled at the finish line. It has more than enough signatories, but still needs slightly more than an additional 2% in terms of tonnage to get itself on the books. Whilst  the  ratification is tardy, nobody doubts that it will cost owners and operators a lot of money once the convention enters into force.

"Meanwhile, a government spokesman for the Marshall Islands recently characterised the IMO secretary-general as a ‘danger to the planet’ for his alleged failure to endorse more stringent curbs on the shipping industry’s CO2 emissions. This is what Sherlock Holmes might have described as a ‘three-pipe problem’ – politics, gas and competition. It is not an unusual combination in shipping. In the end, however, it is likely to have an impact on the industry’s operating costs, and there is no accounting for that.”

Bone fide journalists can request an electronic copy of the Future Operating Costs Report by emailing chris@merlinco.com

Moore Stephens LLP is noted for a number of industry specialisations and is widely acknowledged as a leading shipping, offshore maritime and insurance adviser. Moore Stephens LLP is a member firm of Moore Stephens International Limited, one of the world's leading accounting and consulting associations, with 626 offices of independent member firms in 103 countries, employing 26,290 people and generating revenues in 2014 of $2.7 billion.      

For more information:                                                                        

Richard Greiner                                                               

Moore Stephens LLP                                                                 

Tel: +44 (0)20 7334 9191                                                           

richard.greiner@moorestephens.com      

Moore Stephens expects vessel operating costs to rise over the next two years

Vessel operating costs are expected to rise by almost three per cent in both 2014 and 2015, according to a new survey by international accountant and shipping consultant Moore Stephens.

The survey is based on responses from key players in the international shipping industry, predominantly shipowners and managers in Europe and Asia. Those responses revealed that vessel operating costs are expected to increase by 2.9 per cent in both 2014 and 2015, with crew wages and repairs & maintenance the cost categories likely to increase most significantly.

Crew wages are expected to increase by 2.4 per cent in 2014 and by 2.6 per cent in 2015, with other crew costs thought likely to go up by 1.9 per cent and 2.1 per cent respectively for the years under review. The cost of repairs & maintenance, meanwhile, is expected to escalate by 2.3 per cent in 2014 and by 2.4 per cent in 2015

P&I insurance costs are expected to go up by 2.0 per cent in 2014 and by 2.2 per cent in 2015, this compared to the increases of 1.6 and 1.8 per cent respectively predicted in respect of the cost of hull & machinery insurance.

Drydocking costs are expected to rise by 2.1 per cent in 2014 and by 2.2 per cent in 2015, while expenditure on spares is expected to increase by 2.1 per cent and by 2.2 per cent over the same period. Meanwhile, respondents anticipate increases of 1.7 per cent and 2.0 per cent respectively in the cost of lubricants in the two years under review. The cost of stores is expected to increase by 1.7 per cent and 1.9 per cent respectively for 2014 and 2015.

As was the case in last year’s survey, management fees are deemed likely to produce the lowest level of increases in both 2014 and 2015, at 1.2 per cent and 1.5 per cent respectively.

A number of respondents commented on the impact of increased crew wages and costs. “Crew costs remain a critical factor,” said one. “There will continue to be a high level of demand for trained crew, especially for top-end ships.” Another predicted, “There will be further rises in crew costs, especially for officers and engineers, with a shortage of the latter in all sectors of the shipping industry.” Elsewhere it was noted, “The full implementation of the Maritime Labour Convention 2006 is likely to be a significant factor in higher labour and crewing costs.” Another respondent said, “Crew and labour costs will continue to increase due to the strong presence of labour unions in the shipping industry.”

The cost of regulatory and legislative compliance was a recurring topic in responses to the survey. “Most of the costs we have experienced are based on legislation and more and more government interference with doing business,” said one respondent. Another remarked on the cost of “the entry into force of new regulations such as the US ballast water treatment rules,” while another still emphasised, “The need for existing vessels to comply with new regulations will be a significant factor to consider.” Other comments included, “Recent legislation in Europe will push costs up dramatically, especially in the UK,” and, “SECAs will have a serious impact on ships’ equipment maintenance costs.”

The combination of low freight rates and increased operating costs dominated the thinking of a number of respondents, one of whom noted, “Owners are hard-pressed to cut costs and lower operating expenses because of poor freight markets. There is a particularly severe impact on running costs for ships bought prior to 2009.” In similar vein, another said, “Operators are keeping any increases in operating expenses to a minimum due to low freight rates.” Another still observed, “There is no light at the end of the tunnel. At present, earnings are negligible, and operating costs keep going up.” In slightly more optimistic mood, it was noted elsewhere, “Although operating costs are going up, the advent of bigger ships and the projected opening of the enlarged Panama Canal in 2016 should mean that profits will go up, too.”

A number of respondents to the survey felt that a surfeit of tonnage on the market would inevitably have the effect of increasing operating costs. “The recent increase in tonnage supply will add pressure to operating costs,” said one, while another observed, “Only those owners and managers who can trim their vessel operating costs will come out ahead.” Another still predicted that owners and operators “will look at possibilities to reduce their cost base by looking at alternative ship management options, or whatever else will result in cost reductions, in order to remain competitive.” Several respondents, meanwhile, noted that reductions in oil prices were likely to result in reduced operating and voyage expenses, respectively, in terms of lubes and fuel.

Moore Stephens also asked respondents to identify the three factors that were most likely to influence the level of vessel operating costs over the next 12 months. Overall, 20 per cent of respondents (compared to 21 per cent in last year’s survey) identified finance costs as the most significant factor, followed closely by competition (19 per cent). Crew supply was in third place, with 18 per cent, followed by demand trends (17 per cent) and labour costs (13 per cent). The cost of raw materials was also cited by 11 per cent of respondents as a factor that would account for an increase in operating costs.

Moore Stephens shipping partner Richard Greiner says, “The predicted increases in ship operating costs for this year and next follow the findings in our recent OpCost report that ship operating costs fell by an average of 0.3 per cent across all the main ship types in 2013. But the level of increases anticipated for 2014 and 2015 are, at just under 3 per cent, still way below many of those we have seen in recent years. In 2008, for example, operating costs rose by 16 per cent. But there are a number of factors which are likely to drive up costs both this year and next.

“Firstly, the gradual global economic recovery now under way, notwithstanding the challenges placed in its way by political and social unrest in certain parts of the world, should result not only in improved earnings for shipping but also in increased costs. More ships in the water, and more cargo on board, entails more handling, transportation and other costs.

“Crew costs are once again the category of operating expenses predicted to rise most significantly. The only surprise would be if this were not the case. The bill for regulatory and legislative compliance, meanwhile, remains difficult to assess with any great accuracy. While the cost of complying with ECAs and other environmental initiatives can be gauged with reasonable accuracy, and business plans accordingly amended if deemed necessary, the cost of - and timeline for - complying with the BWM Convention continues to be the elephant in the room. Everybody knows it’s coming, and everybody knows it is going to be expensive, but until the discussions over different routes to compliance are concluded, and until the final signature bringing the convention into force is lodged at IMO, the item can remain, albeit uneasily, a little way down the list of priorities.

“Sensible owners with adequate funding are planning for the future by investing in eco-friendly ships and by weighing up the advantages of LNG propulsion. Such initiatives will bring long-term benefits but are likely to increase costs in the short term because new technology and associated research and development costs do not come cheap. On the plus side, oil and gas prices are falling, which should translate into savings for owners and operators, and shipping continues to attract new money from both internal and external investors.

“The projected increases in vessel operating costs for the next two years will be difficult for owners, operators and managers to absorb. History shows, however, that good husbandry, sound business planning, experience, patience and the right amount of entrepreneurialism are likely to carry the day.”

Bone fide journalists can request an electronic copy of the Future Operating Costs survey by emailing chris@merlinco.com

Moore Stephens LLP is noted for a number of industry specialisations and is widely acknowledged as a leading shipping and insurance adviser. Moore Stephens LLP is a member firm of Moore Stephens International Limited, one of the world's leading accounting and consulting associations, with 667 offices of independent member firms in 105 countries, employing 27,081 people and generating revenues in 2013 of $2.7 billion. www.moorestephens.co.uk


For more information:
Richard Greiner
Moore Stephens LLP
Tel: +44 (0)20 7334 9191
richard.greiner@moorestephens.com

Moore Stephens reports small decline in 2013 ship operating costs

International accountant and shipping consultant Moore Stephens says total annual operating costs in the shipping industry fell by an average of 0.3 per cent in 2013. This compares with the 1.8 per cent average fall in costs recorded for the previous year. Crew costs was the only category this time to show an increase over the 12 month period, indicating that ship owners continued to focus on managing costs and conserving cash in 2013.

The findings are set out in OpCost 2014 (www.opcostonline.com), Moore Stephens’ unique ship operating costs benchmarking tool, which reveals that total operating costs for the tanker sector were up in 2013, the financial year covered by the study, but down in the bulker and container ship sectors. The tanker index was up by 2 points, or 1.1 per cent, while both the bulker index and the container ship index were down by 2 points, or 1.2 per cent, on a year-on-year basis. The corresponding figures in last year’s OpCost study showed falls of 5 points, 7 points and 3 points respectively in the tanker, bulker and container ship indices.

There was a 0.2 per cent overall average rise in 2013 crew costs compared to the 2012 figure, which itself was 0.2 per cent down on 2011. (By way of comparison, the 2008 report revealed a 21 per cent increase in this category.) Tankers overall experienced an increase in crew costs of 1.8 per cent on average, compared to the 2.3 per cent fall recorded in 2012. Within the tanker sector, Handysize product tankers reported an overall increase of 3.3 per cent in crew costs, while for operators of Suezmaxes and product tankers the increases were 2.5 per cent and 1.9 per cent respectively. The only tanker category to show a fall in crew costs was VLCCs, down by 0.9 per cent.

For bulkers, meanwhile, the overall average fall in crew costs was 0.5 per cent, the same as in the previous year. The operators of Panamax bulkers paid 2.3 per cent less in crew costs than in 2012, but there was a 1.2 per cent increase in this respect for Handysize bulkers, this following a 4.8 per cent reduction for 2012. Expenditure on crew costs remained unchanged over the 12 month period in the container ship sector, although operators of vessels of between 100 and 1,000 teu did record a 1.7 per cent increase in such costs for 2013.

Expenditure on stores was down this time by 1.9 per cent overall, compared to the fall of 2.1 per cent in 2012. The biggest fall in such costs was the 5.5 per cent recorded by VLCCs. For bulk carriers overall, stores costs fell by an average of 4.1 per cent, while in the tanker and container ship sectors the overall reductions in costs were 2.1 per cent and 3.4 per cent respectively. The most significant increase in stores expenditure was that recorded by the operators of tankers in the 5,000-to-10,000 dwt range (6.0 per cent).

There was an overall fall in repair and maintenance costs of 0.4 per cent, compared to the 1.9 per cent reduction recorded for 2012. The most significant cost reduction here was that recorded for bulkers of between 10,000 and 20,000 dwt (7.2 per cent), while the highest recorded increase was that for 40,000-to-50,000 cbm chemical tankers (3.6 per cent).

The overall drop in costs of 0.3 per cent recorded in respect of insurance compares to the 6.2 per cent fall recorded for 2012, and was the lowest in this category for a number of years. The operators of all categories of bulkers paid less for their insurance in 2013 than they did in 2012, in the case of Handysize bulkers to the tune of 4.1 per cent. In the tanker category, all but two types of vessel – 5,000-to-10,000 dwt tankers and Handysize product tankers – paid less than in 2012, while operators of 100-to-1,000 teu container ships paid 2.7 per cent more in 2013 than in 2012.

Moore Stephens partner Richard Greiner says: “This is the second successive year-on-year reduction in operating costs. The fall in costs for 2013, however, is 1.5 per cent below that recorded for 2012, and coincides with a period of slowly returning confidence in the shipping industry, according to the Moore Stephens Shipping Confidence Survey.

“Crew costs were the only category of expenditure to show an increase over the 12-month period covered by the survey. This time it was a comparatively small rise for an industry which had seen increases of more than 20 per cent at their peak. The fact that crew costs were the only category to show an increase for 2013 is perhaps a reflection of a diminution in the number of owners and operators exiting the industry and a reminder that investment in good people is a must.

“Expenditure on repairs and maintenance and on stores was down in 2013, but by a smaller margin than in 2012, so it is to be hoped that owners and operators are continuing to pursue the sort of sound husbandry which competition and regulation demand. Meanwhile, the fall in insurance costs this time of 0.3 per cent is significantly down on the 6.2 per cent decrease for 2012, suggesting that underwriters in the hull market are taking a harder line.

“Overall, the fall in operating costs recorded in OpCost 2014 must be good news for owners and operators. So, too, must the gradual and continuing improvement in the global economic climate, if not the current political unrest. Shipping operates on a global stage and must inevitably be affected by international events.

“Shipping is an expensive business in which to operate, and revenues earned in the freight markets must ultimately be sufficient not only to cover operating costs but also to generate a reasonable return. While slowly emerging from an extended global economic downturn, the industry remains under pressure to manage and reduce operating costs wherever possible, whilst making suitable budgetary provision for achieving forthcoming regulatory compliance, which is likely to be significant.”

Bone fide journalists can request an electronic copy of OpCost 2014 by emailing chris@merlinco.com

OpCost, the Moore Stephens vessel operating cost benchmarking study, is now in its 14th year of publication. The 2014 edition is available online, providing optimum reporting functionality for users, wherever they may be. Running cost information is obtained on a confidential basis from clients of Moore Stephens, and from other shipowners and ship managers who submit data for inclusion. OpCost is widely used for benchmarking running costs, the preparation and ongoing monitoring of business plans and in forensic accounting. Access to OpCost 2014 is available free to owners who submit their data for inclusion, or can be purchased by contacting Richard Greiner at Moore Stephens.

Moore Stephens LLP is noted for a number of industry specialisations and is widely acknowledged as a leading shipping and insurance adviser. Moore Stephens LLP is a member firm of Moore Stephens International Limited, one of the world's leading accounting and consulting associations, with 667 offices of independent member firms in 105 countries, employing 27,081 people and generating revenues in 2013 of $2.7 billion. www.moorestephens.co.uk


For more information:
Richard Greiner
Moore Stephens LLP
Tel: +44 (0)20 7334 9191
richard.greiner@moorestephens.com