Vessel operating costs expected to rise in 2019 and 2020

International accountant and shipping adviser BDO says total operating costs in the shipping industry are expected to rise by 2.5% in 2019 and by 2.7% in 2020.

Responses to the firm’s latest annual Future Operating Costs Survey revealed that insurance is the cost category likely to increase most significantly in both 2019 and 2020. In the case of protection and indemnity insurance, the predicted increase is 2.0% for each of the years under review, while hull and machinery insurance costs are expected to rise by 1.9% in both 2019 and 2020.

The cost of both dry docking and of repairs and maintenance is expected to increase by 1.8% in 2019 and by 1.9% in 2020, while expenditure on crew wages is predicted to rise by 1.9% in 2019 and by 1.8% in 2020. Other crew costs are expected to increase by 1.8% and 1.7% respectively.

The increase in expenditure for spares is expected to be 1.6% in 2019 and 1.8% in 2020. Meanwhile, projected increases in lubricants are 1.6% in each of the two years under review, while those for stores ae 1.3% and 1.4% respectively.

The predicted overall cost increases for 2019 were highest in the container ship sector, where they averaged 3.7%. These are heavily influenced by expected increases in both protection and indemnity and hull and machinery insurance costs. Predicted cost increases in the bulk carrier market in 2019, meanwhile, were 2.3%, as opposed to 2.5% in the tanker market and 2.6% in the offshore sector.

A slightly different pictured emerges in respect of 2020, where the highest operating cost increases are those amounting to 3.8% which are expected in the offshore sector. Operating costs for container ships, meanwhile, are expected to rise by 3.0% in 2020, and for bulk carriers and tankers by 2.7% and 2.1% respectively.

The cost of regulatory compliance was high on the list of concerns cited by respondents to the survey. One respondent said 2020 is “all about environmental regulations and the demand for - and cost of – fuel.” Elsewhere it was noted, the shipping market “will be dominated by the cost of new regulations, not least that relating to compliance with the IMO Sulphur 2020 regulation”.

Crew costs were the other factor uppermost in the minds of respondents. “Manning will continue to be a painful area for ship operators,” said one commentator. Another respondent observed that rising wage costs now represent a real threat to business models, while another anticipates a stronger dollar in 2019/2020, which will affect the main cost of paying seafarer wages.

The cost and availability of finance was another issue raised by a number of respondents, one of whom said, “finance – or a lack thereof – is driving consolidation as part of a trend towards creating mega-companies”. They added: “The market is being eroded by capital providers and hedge fund managers who shun efficiency in favour of scale.”

Overall, 25% of respondents (up from the figure of 23% recorded in last year’s survey) identified the cost of new regulation as the most influential factor likely to affect operating costs over the next 12 months. Finance costs featured in second place at15%, compared to 18% last year. In third place was crew supply at 14% up from 12% last year. Next came competition, down from 15% to 13%, followed by demand trends (12%) and labour costs, (11%), compared to last year’s figures of 10% and 8% respectively. Raw material costs, meanwhile, were up by one percentage point to 8%.

Richard Greiner, Partner, Shipping & Transport at BDO, says: “The predicted 2.5% and 2.7% increases in operating costs for 2019 and 2020 respectively compare to an average fall in actual operating costs in 2018 of 1.8% across all main ship types recorded in the recent BDO OpCost study.

“There were some interesting predicted cost increases in the individual market sectors. The increases in the container ship sector for 2019, for example, were the highest in every single individual category of expenditure with the exception of dry docking and management fees. The cost of hull and machinery insurance for container ships is predicted to increase by 4.8% in 2019 and by 3.3% in 2020. For protection and indemnity insurance, the comparable predicted increases are 4.1% and 3.3% respectively. By way of comparison, increases in protection and indemnity and hull and machinery insurance costs in the tanker sector for 2020 are predicated at 1.3% and 1.2% respectively.

“One year ago, overall expectations of operating cost increases for 2019 averaged 3.1%. The fall now to an estimated 2.5% must be regarded at first blush as good news. But this must be tempered by the knowledge that some significant items of big-ticket expenditure – notably those relating to the cost of complying with new regulations - are waiting in the wings.

“It is clear that shipping is well aware of the need to achieve regulatory compliance on a scale not previously envisaged or encountered by previous generations of the industry. This is only the third time that the cost of new regulations has been included in our Future Operating Costs Report, but for the second successive year it has emerged as the factor deemed most likely to have a significant influence on operating costs.

“This is not surprising, given that the immediacy of IMO‘s Sulphur 2020 regulation is enshrined in the name of the regulation itself, while the time is fast approaching for owners to make a decision on the respective merits of Ballast Water Management Convention compliance solutions.

“Shipping and its regulators have demonstrated their ongoing commitment to improving the industry’s carbon footprint, but it is clear that this will come at a price, as will the continuing drive towards greater innovation and technical excellence. A cleaner, greener and more efficient shipping industry will ultimately impact favourably on both operating costs and investor appetite. But, perversely, the process of attaining environmental and technical proficiency will add to such costs in the shorter term.

“Experienced owners and managers are well-used to optimising operating cost efficiencies, with one respondent in the survey noting how for some years now the combination of a soft insurance market, cheaper finance and a decline in crew costs had helped to keep operating cost increases below 2% over the past eight years. Current indications are that the influence of such factors is declining and on their own they are unlikely to be enough to stay ahead of the game in the coming years.

“Finance is available for viable projects, but will not come cheap. Crew costs are likely to go up rather than down in the short term. And, perhaps most significantly of all, insurance outgoings are predicted to rise over the next two years at a rate not seen for some time. There have certainly been a number of recent indications that the prolonged soft insurance market conditions in both the commercial and mutual sector may soon start to change. The reasons for this are not entirely clear, but may involve the recent deterioration in technical performance by both the protection and indemnity clubs and hull and machinery underwriters, which could in turn lead to a firming of the rates which owners are required to pay. Then again, we have seen before how difficult it can be to make premium increases stick, particularly in the commercial market.

“Shipping faces some major challenges over the next two years as it seeks to position itself as an environmentally-aware, technically-savvy industry. It must expect fluctuations in the level of operating costs caused by a variety of factors ranging from movements in oil prices to shifts in levels of manpower, from fluctuations in the value of the dollar to the ramifications of geopolitical developments around the world. The movement in some costs is easier to map and predict than in others. The movement in others still, such as the cost of regulation, is becoming easier to predict as implementation deadlines draw ever closer. The movement in yet others, such as the cost of fighting cyber-crime, can only be guessed at for the moment.

“One thing is clear. The cost of operating effectively and profitably in the modern shipping industry must be met chiefly by revenues generated from day-to-day operations. Shipping remains an optimistic industry but, if the evidence of the freight markets is to be believed, it may not be charging enough for the unique service that it provides.”


Note to editors

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.
Contacts
media@bdo.co.uk

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 says ship operating costs are set to increase for 2017 and 2018

Vessel operating costs are expected to rise in both 2017 and 2018, according to the latest survey by international account and shipping consultant Moore Stephens. Repairs & maintenance and spares are the cost categories which are likely to increase most significantly in each of the two years.

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 likely to rise by 2.1% in 2017 and by 2.4% in 2018.

The cost of repairs & maintenance is expected to increase by 2.0% in both 2017 and 2018, while expenditure on spares is predicted to rise by 2.0% in 2017 and by 1.9% in 2018. Drydocking expenditure, meanwhile, is expected to increase by 1.7% and 1.8% in 2017 and 2018 respectively.

The survey revealed that the outlay on crew wages is expected to increase by 1.7% in each of the years under review, with other crew costs thought likely to go up by 1.6% in 2017 and 1.5% in 2018.

The increase in expenditure for lubricants is expected to be 1.6% in both 2017 and 2018. Meanwhile, projected increases in stores are 1.5% and 1.7% in the two years under review, while management fees are expected to rise by 0.7% and 1.0% in 2017 and 2018 respectively.

The cost of hull and machinery insurance is predicted to rise by 0.5% and 1.0% in 2017 and 2018 respectively, while for P&I insurance the projected increases are 0.7% and 1.1% respectively.

The predicted overall cost increases were highest in the offshore sector, where they averaged 4.8% and 3.8% respectively for 2017 and 2018. By way of contrast, predicted cost increases in the container ship sector were just 1.1% and 0.8% for the corresponding years.

Operating costs for bulk carriers, meanwhile, are expected to rise by 1.9% in 2017, and by 2.4% the following year, while the corresponding figures for tankers are 2.1% and 2.7%.

Respondents to the survey highlighted various areas of concern likely to result in increased operating costs over the next two years. Crew costs were high on the list, with one respondent noting, “Crew costs are 60% of our operating expenditure, and weigh heavily when there is high demand for – but a limited supply of – manpower and when employers are required to meet increasingly onerous requirements.” Another noted, “Crew and insurance related expenses are the two major factors in our operating expenses but, while we expect insurance costs to fall over the next two years, we anticipate that crew costs will remain the same.” Another still said, “Most shipping companies, but especially those operating tankers and chemical and gas carries, are facing the prospect of increases in costs through 2018 for hiring qualified crew.”

The increasing cost of regulatory compliance was referenced by a number of respondents, one of whom said, “New regulations are certainly going to have a major impact on our operating costs.” Elsewhere it was noted, “Retrofitting vessels with technology which has not been fully vetted for compliance with existing and new regulation can destroy cashflow.”

One respondent in the offshore sector, meanwhile, emphasised, “There is a constant trend in terms of charter hire, whereby earnings are gradually going down while expenses under different heads are following an upward trend.”

Another respondent commented, “We do not expect income to increase significantly over the next 12 months, which in turn will limit the available budget for operating expenses.” Other respondents, too, expressed doubts about factors which are likely to constrain their earning capacity at a time when operating costs are increasing. Areas of concern included such familiar items as continued tonnage overcapacity in some trades and the cost of finance.

One respondent said, “Excess capacity, and the amalgamation and acquisition of existing operators and assets, could lead to a market which is shared by a small number of operators.” Another complained, “Over-supply of tonnage, most notably that built in China, has caused a significant fall in charter hire.” Other, more general, comments, included, “Markets across the board will be nervous, with sharp ups and downs,” and: “Prospects look gloomy, with no clear horizon in sight.”

Respondents were asked to identify the three factors that would most affect operating costs over the next 12 months., Overall, 21% of respondents (similar to last year’s survey) identified finance costs as the most significant factor, followed by crew supply, which stood at 19% and displaced competition in second place. Competition itself was down from 19% to 15% and from second to equal third place, which it shared with the cost of new regulations, which was included in the survey for the first time. Demand trends and raw material costs, meanwhile, shared fourth place at 10%, with labour costs fifth at 9%, all significantly down on the figures in last year’s survey, which were respectively 17%, 11% and 13%.

Richard Greiner, Moore Stephens Partner, Shipping & Transport, says, “The predicted 2.1% and 2.4% increases in operating costs for 2017 and 2018 respectively compare to an average fall in actual operating costs in 2016 of 1.1% across all main ship types recorded in the recent Moore Stephens OpCost study.

“One year ago, expectations of operating cost increases in 2017 averaged 2.5%, so the fall now in that expectation to 2.1% must be regarded as good news. Predicted increases in operating expenditure are a matter of concern for any industry, and particularly one such as shipping in which a range of factors have conjoined in recent years to inhibit (and, in some cases, eradicate) profit margins. But shipping has seen a lot worse. If it does transpire that operating costs rise by 2.4% in 2018, for example, that will still be less than one-sixth of the actual operating cost increases absorbed by the industry ten years previously.

“It is significant that, for the first time, new regulations were included in the list of factors which respondents could cite as most likely to influence the level of operating costs over the next 12 months. It was even more significant, perhaps, that 15% of respondents did indeed identify the cost of regulatory compliance as a major consideration when weighing future operating cost increases. The Ballast Water Management convention, now with an extended implementation window, is still potentially the most expensive item on the menu, but by no means the only one. Tellingly, one respondent referred to new regulations which ‘most of the time are unclear and indefinite.’

“The fact that repairs & maintenance and spares emerged as the items with the largest projected cost increases in both 2017 and 2018 was perhaps unsurprising in that they are two items of expenditure on which owners and operators might conceivably have economised or delayed in previous years, and such economies cannot be sustained over longer periods without impacting safety.

“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 3.5% in crew wages for 2018, compared to the 1.4% predicted for bulkers and the 0.7% for container ships. Indeed, the offshore sector is facing the biggest increases in operating costs in the next two years in every category of expenditure covered by the survey.

“Offshore is going to be a challenging sector for operators and investors alike for some time to come, and the survey reveals exactly why a year can be a long time in shipping. In last year’s Future Operating Costs report, the container ship sector led the way in terms of the highest predicted overall cost increases for 2016 and 2017, with the offshore sector returning the lowest figures. Now, the position is completely reversed, with container ships expected to have to bear increased costs in 2017 which are little more than one-fifth of those expected to be encountered by offshore operators.

“It was evident from the responses to our survey that the shipping sector is concerned about the conflation of higher operating costs and the potential reduction in revenue earning opportunities which it faces over the next two years. As one respondent succinctly observed: “The problem with shipping is not so much costs, but income.” There is certainly some truth in that. Shipping has gone through – and is still navigating – a prolonged downturn. It is a cyclical industry, but cycles imply movement both up and down, and there has not been enough of the former in recent years. The cyclical nature of the industry also increases volatility in the likes of charter rates and vessel values which may adversely affect earnings.

“There is however, evidence to support the view that an appetite still exists for ongoing investment from both traditional and external investors, supported by a number of recent indicators of positive sentiment. This is in an industry whose attractions currently include low prices and comparatively limited ordering of new tonnage. That is good news, because it is such investment that shipping will need if it is to meet the rising cost of operating in the industry.”

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 2016 and 2017

Vessel operating costs are expected to rise in both 2016 and 2017, according to the latest survey by international accountant and shipping consultant Moore Stephens. Repairs and maintenance and spares are the cost categories which are likely to increase most significantly in each of the two years.

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 1.9% in 2016 and by 2.5% in 2017.

The cost of repairs and maintenance is expected to increase by 1.7% in 2016 and by 1.9% in 2017, while expenditure on spares is predicted to rise by 1.7% in 2016 and by 1.8% in 2017. The cost of drydocking expenditure, meanwhile, is predicted to increase by 1.5% and 1.8% in 2016 and 2017 respectively.

The survey revealed that the outlay on crew wages is expected to increase by 1.3% in 2016, rising to 1.8% in 2017, with other crew costs thought likely to go up by 1.2% and 1.4% respectively for the years under review.

The increase in outlay for lubricants is predicted to be 0.8% and 1.4% in 2016 and 2017 respectively, and that for stores 1.3% and 1.7%. Meanwhile, projected increases in management fees are 1.0% and 1.2% in the two years under review.

The cost of hull and machinery insurance is predicted to rise by 0.9% and 1.1% in 2016 and 2017 respectively, while for P&I insurance the projected increases are 1.1% and 1.2%.

The predicted overall cost increases for 2016 were highest in the container ship sector, where they averaged 3.3% against the overall survey increase of 1.9%. By way of contrast, predicted cost increases for 2016 in the offshore sector were just 0.2%. Container ships also headed the expected cost increases for 2017, at 3.4% compared to the overall survey average of 2.5%. Tankers featured in second place for both years at 2.5% for 2016 and 2.9% for 2017.

The mood of respondents generally was quite pragmatic, with many referencing the need to address such familiar problem areas as over-tonnaging, excessive competition, a paucity of finance, rising fuel costs and burgeoning regulation and legislation. “An even greater discrepancy is expected between operating costs and freight rates,” said one respondent. “Owners will manage to make ends meet, but barely.”

Despite the expectation of increased crew costs, one respondent predicted, “Crew wages will drop as owners look for cheaper nationalities or mixed crewing,” while another said, “Reduced global trade demand will offset pressure for higher crew salaries.” Elsewhere it was noted, “Crew costs are very much dependent on the employment of ships. The whole management process will undergo substantial restructuring, with flags and other stakeholders needing to be more pragmatic regarding MLC compliance and vessel operation.” Another respondent, meanwhile, said that sourcing good quality crew could be a problem as “many have changed profession.”

The cost of meeting regulatory requirements was high on the list of concerns cited by respondents, one of whom noted, “Operating costs will rise for technical expenses such as maintenance and repair held over from previous years, while the cost of ballast water treatment plant will have to be taken into consideration in 2017 drydocking budgets.” Another respondent pointed out, “With the Ballast Water Management (BWM) convention coming into force in 2017, drydocking costs will increase significantly, depending on the type and size of ship involved.” And yet another warned, “As the quality and reliability of machinery and equipment in general deteriorates, then so the cost of maintenance increases.” Elsewhere it was noted, “The new international standards for limiting NOx, SOx and PM emissions from vessels will substantially increase operating costs.”

More than one respondent emphasised the need to keep down labour and management costs without sacrificing quality. One said, “Operating budgets have been pushed further and further south, with numerous managers willing to ‘low-ball’ operating budgets to catch the eye of new and existing owners. This can cause severe risk to the operating condition of vessels, but it appears that owners are willing – or have no choice but – to accept operating budgets which include unattainable assumptions and to fund additional cash call requirements where they become necessary.”

Respondents were also asked to identify the three factors that would most affect operating costs over the next 12 months. Overall, 20% of respondents (compared to 22% in last year’s survey) identified finance costs as the most significant factor, followed by competition at 19% (down from 22% last time). Crew supply was in third place with 18% (up one percentage point on last time), followed by demand trends (up by one percentage point to 17%) and labour costs, unchanged at 13%. The cost of raw materials was cited by 11% of respondents (compared to 8% in last year’s survey) as a factor that would account for an increase in operating costs.

Richard Greiner, Moore Stephens Partner, Shipping & Transport, says, “The predicted increases in ship operating costs for 2016 and 2017 compare to an average fall in operating costs in 2015 of 2.4% across all main ship types recorded in the recent Moore Stephens OpCost study. And whilst the level of predicted increases for this year and next will undoubtedly be of concern to owners and operators, seasoned market operators and observers alike will not need particularly long memories to call to mind increases of more than eight times the levels predicated for 2016. In 2008, for example, the average operating cost increase absorbed by the industry was no less than 16%. Meanwhile, one year ago, expectations of operating cost increases in 2016 were 2.8% on average, so the fall in that expectation to 1.9% is of note.

“It is some time since crew wages failed to register the highest level of predicted cost increases in our survey, but such was the case with the forecasts for 2016, where repairs and maintenance costs headed the list, together with spares. This may be due to a number of factors, including the need to commit to repairs and maintenance deferred in earlier years, and the opportunity to do so at a time when the alternative may be to struggle to compete in a difficult economic and industry climate.

“Repairs and maintenance also topped the predicted operating cost increases for 2017, at 1.9%, ahead of crew wages, drydocking and spares, all at 1.8%. This is not a surprise given predicted increases in global steel prices and the fact that regulation and legislation, mandated and enforced mainly by IMO and Port State Control respectively, are now so tight in terms of both safety and environmental preparedness and responsibility. Above all, shipping needs safe ships and safety-minded crews to stay afloat, and both come with a heavy price-tag.

“One highly influential factor behind the anticipated rise in drydocking costs, most notably in 2017, is the entry into force of the Ballast Water Management Convention in September 2017, before which date some owners may choose to put their ships into drydock to ready them for the new legislation.

“The anticipated rise in crew wages and other crew costs, meanwhile, is arguably lower than anticipated, and there was indeed a feeling on the part of some respondents that, despite the entry into force of the Maritime Labour Convention 2006, wages could stabilise this year or even go down, due largely to the combination of a reduction in global trade and wider recourse to cheaper, less experienced manning alternatives.

“Shipping faces a number of potentially costly compliance responsibilities, including the imposition of an 0.5% global cap on sulphur emissions with effect from 2020. Other operating issues include predicted increases in the price of fuel, albeit from comparatively low levels, as OPEC looks to reduce oil production levels. This will have a knock-on effect on lube oil costs.

“Shipping is an industry suffering from an imbalance in supply and demand, illustrated by the chronic overcapacity in many trades, never mind that BIMCO recently reported that the shipbuilding sector faces its lowest level of newbuildings for 20 years. But it is an industry with a guaranteed future, witness the recent decision of lMO to select ‘Shipping: Indispensable to the World’ as its theme for World Maritime Day 2016. Just how healthy that future will be depends on the ability to generate sustainable profits after operating costs have been met.”

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 657 offices of independent member firms in 106 countries, employing 27,613 people and generating revenues in 2015 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 fourth 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 2.4% in 2015. This compares with the 0.8% average fall in costs recorded for 2014, and is the fourth successive overall year-on-year reduction in such costs. All categories of expenditure were down on those for the previous 12-month period. This suggests continued pragmatic management of costs by ship owners and operators, as well as a reduction in active trading for some owners as a result of the prolonged worldwide economic downturn.

The findings are set out in OpCost 2016 (www.opcostonline.com), Moore Stephens’ unique ship operating costs benchmarking tool, which reveals that that total operating costs for the tanker, bulker and container ship sectors were all down in 2015, the financial year covered by the study. On a year-on-year basis, the tanker index was down by 4 points, or 2.2%, while the bulker index fell by 6 points, or 3.6%. The container ship index, meanwhile, was also down by 6 points, or 3.7%. The corresponding figures in last year’s OpCost study showed falls of 2 points in both the tanker and container ship index, and of 1 point in the bulker index.

There was a 1.2% overall average fall in 2015 crew costs, compared to the 2014 figure, which itself was 0.1% down on 2013. By way of comparison, the 2008 report revealed a 21% increase in this category. Tankers overall experienced a fall in crew costs of 1.3% on average, compared to the 0.4% fall recorded in 2014. All categories of tankers reported a reduction in crew costs for 2015 with the exception of Panamaxes and VLCCs, which recorded increases of 1.4% and 1.2% respectively, compared to reductions for 2014 of 2.2% and 0.6%. The most significant reduction in tanker crew costs for 2015 was the 3.6% recorded by Product Tankers.

For bulkers, meanwhile, the overall average fall in crew costs in 2015 was 1.1%, having stabilised 12 months ago at 2013 levels. The operators of Handysize Bulkers paid 2.3% more on crew costs than in 2014, but the operators of other categories of bulker paid less, in the case of Panamax Bulkers to the tune of 3.2%.

Expenditure on crew costs was down 3.3% in the container ship sector, having stabilised in 2014 at the previous year’s level. The biggest fall in crew costs in this category was the 3.6% reduction recorded for vessels of between 2,000 and 6,000 teu.

Expenditure on stores was down by 4.3% overall, compared to the fall of 2.4% in 2014. The biggest fall in such costs was the 8.5% recorded by operators of Capesize Bulkers, with Panamax Bulkers (8.2%) not far behind. Other significant reductions included 2,000-6,000 teu Container Ships (8.0%) and Handymax Bulkers (7.5%). For bulk carriers overall, stores costs fell by an average of 7.7%, compared to a fall of 3.7% in 2014, while in the tanker and container ship sectors the overall reductions in stores costs were 4.3% and 5.5% respectively, compared to the corresponding figures of 0.7% and 3.0% for 2014. The only rise in stores expenditure by any category of vessel was the 1.5% increase recorded by Tankers 5,000 to 10,000 dwt.

There was an overall fall in repairs and maintenance costs of 4.3%, compared to the 0.6% reduction recorded for 2014. Only VLCCs and Container Ships of between 1,000 and 2,000 teu recorded increased expenditure on repairs and maintenance, of 0.1% and 1.3% respectively. Otherwise it was a case of reduced spending everywhere, the most significant example being the 7.9% fall recorded for Coastal Dry Cargo ships.

The overall drop in costs of 3.2% recorded for insurance compares to the 0.4% fall recorded for 2014. No vessels in the bulker category paid more for their insurance in 2015 than in 2014. Handysize Bulkers paid considerably less (5.7%) as did Panamax Bulkers (5.3%). Product Tankers and Tankers 5,000 to10,000 dwt were the only vessels in the tanker category to pay more for their insurance in 2015 than in the previous year, to the tune of 1.3% and 0.6% respectively. The biggest increase in insurance costs, however, was the 2.6% recorded by LPG carriers in the 10,000 to 40,000 cbm range. Perversely, gas carriers are historically regarded as among the safest vessels afloat, perhaps reflecting the effect on premium levels of the cost of potential claims rather than the legacy of claims records.

Richard Greiner, Moore Stephens Partner, Shipping & Transport, says: “This is the fourth successive year-on-year reduction in overall ship operating costs. The reduction is three times that recorded 12 months ago, and a reduction at this level had not been widely anticipated. The fall in operating costs is likely to be due in part to continuing good husbandry in a difficult operating environment for many, and partly to an extremely difficult market and wider economic climate.

“The biggest cost reductions were predictably those in the Stores and Repairs and Maintenance categories. Falling world oil prices continued to have a knock-on effect on lube oil costs in 2015, while increasing numbers of owners were looking to strategic short-term lay-up rather than spending on maintenance and repair.

“The fall in crew costs arguably came as more of a surprise to an industry which has over the years absorbed increases of this type in excess of 20% and lived to tell the tale, but it was doubtless largely a consequence of reduced levels of trading. The fall in insurance costs, meanwhile, will come as no surprise to anybody in the light of warnings from the London market that hull rates for many major fleets continue to reach new lows.

“Last year was a particularly difficult one for shipping. Confidence reached its lowest level for seven years, according to the Moore Shipping Confidence Survey. Operators were not overly optimistic about making new investments in the short-term, while finance costs were predicted to rise. Nobody was expecting good news on dry bulk freight rates, and the outlook for tanker and container ship earnings was little better. The Baltic Dry Index, meanwhile, was getting ready to plumb the depths. It was not an auspicious time to be planning new ventures; rather, it was a time for taking stock. In short, for many, it was a time for keeping operating costs to a minimum.

“Against a background of declining confidence in 2015, oil prices were on a steady downward trend, and the slowdown in the Chinese economy was becoming increasingly evident. Neither of these factors was wholly good news for shipping and both, in different ways, served as a brake on 2015 operating costs.

“A fall in operating costs is good news for shipping, particularly at a time when earnings from the freight market, for many, are so disappointing. But the portents are not so encouraging. Oil prices are predicted to start recovering significantly in the second half of 2017, while the price of steel, the bedrock of the shipbuilding industry, could increase much sooner. The cost of manpower, meanwhile, is only likely to move in an upward direction under the terms of the Maritime Labour Convention 2006.

“While the Ballast Water Management Convention still seemed a long way away from entering into force in 2015, it wasn’t! Now the convention has been ratified, the cost of trying to achieve compliance should become clearer over the next 12 months, as should the cost of making shipping safer and more secure against threats from the likes of cyber-attacks and fraud.

“In conclusion, shipping can draw some comfort from a fourth successive annual fall in operating costs. But it should remember that costs can move both ways. OpCost records that, at year-end 2001, for example, the average daily operating cost for a Handymax Bulk Carrier was US$3,578. In 2015, it was US$ 5,604. For a Suezmax Tanker, the comparable figures are US$4,916 and US$9,170.

“The indications from the freight markets are that shipping is still selling itself too cheaply. Inflationary pressures on operating costs will remain, so maintaining the status quo will not be a viable option. For many, the freight markets will remain challenging and so to remain competitive, shipowners need to continue to improve efficiency, innovate with new technology and harness the considerable benefits of ‘big’ data without delay.”

Bone fide journalists can request an electronic copy of OpCost 2016 by emailing chris@merlinco.com

OpCost, the Moore Stephens vessel operating cost benchmarking study, is now in its 16th year of publication. The 2016 edition is available online, on a new website, providing optimum reporting functionality and tools, creating an easier experience 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 2016 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, 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 657 offices of independent member firms in 106 countries, employing 27,613 people and generating revenues in 2015 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