Ship operating costs set to rise

updollarVessel operating costs are expected to rise by 3.8 percent in 2011 and by 3.7 percent in 2012. Lube expenditure and crew costs are the categories most likely to produce the highest levels of increase. Those are some of the findings in 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. And those responses identified lubricants as the cost category likely to increase most significantly over the two-year period – by 3.6 percent in 2011, and by 3.1 percent in 2012.

Crew wages, meanwhile, are expected to increase by 3.1 percent in both 2011 and 2012, while the cost of spares is expected to escalate by 2.7 percent and 2.6 percent, respectively, in the two years covered by the survey. Expenditure on stores, meanwhile, is expected to increase by 2.5 percent in each of the two years. The cost of repairs and maintenance is expected to increase by 2.8 percent and 2.6 percent in 2011 and 2012 respectively, while the increase in P&I costs for those two years was estimated by respondents at 2.4 percent and 2.3 percent respectively. As was the case in the previous survey, in 2010, management fees was identified as the category likely to produce the lowest level of increase in both 2011 and 2012, at 1.8 percent and 2.0 percent respectively.

"Bunkers and lubes are our biggest cost," said one respondent, while another said that "the cost of bunkers is unrealistically high. There is no reason for that. If the price of bunkers remained at a reasonable level, shipowners would not be struggling in the way they are at the moment."  Another comment was: "There will be an inevitable cost consequence of implementing fuel efficiency measures at the request of charterers, while the benefits of such measures will not be seen in terms of operating costs".

One respondent expected dry cargo crewing costs to increase more than tanker crewing costs, while another noted, "The Manila amendments to STCW will result in significant increases for 'other' crew costs, especially in respect of training."

A number of respondents expressed concern about overtonnaging and the weakness of rates in the freight and charter markets, "Overcapacity and newbuilding deliveries involving larger tonnage on the main routes will maintain downward pressure on rates," said one. Another maintained that there was "no sign of resolving the overtonnaging problems in the dry bulk sector", arguing that this, together with unpredictable trade volumes, would lead to pressure for cost increases and for reflagging as a means of driving operating costs down. Another respondent pointed out, "Depressed charter rates will lead owners to seek in vain to minimise operating costs."

Worldwide economic and political problems were uppermost in the thoughts of some respondents, with one commenting, "World financial conditions will depress shipping revenues, and this will impact on ship requirements and charter rates."

Another respondent said: "China's effective control of the market, together with inflation, will make shipping markets difficult for most people involved in the business." Yet another said, "It all depends on whether the global economy – and particularly that of the US – can recover, and whether the US dollar continues to be the only currency for oil trading."

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, 26 percent of respondents identified finance costs as the most significant factor, followed closely by crew supply (25 percent). Demand trends were in third place, with 14 percent. In last year's survey, 30 percent of respondents identified crew supply as the most significant factor, followed by finance costs, at 28 percent, and demand trends at 16 percent. "Finance costs and potential interest rate hikes will be key factors for the market," said one respondent.

Labor costs, competition and raw materials costs were other significant influencing factors which featured in the responses to the survey. One respondent said: "Raw materials will increase in cost, so there will be upward pressure on stores, spares and repairs."

Moore Stephens shipping partner Richard Greiner says: "Ship operating costs increased by an average of 2.2 percent across all the main ship types in 2010. And it is no surprise that our latest survey anticipates that costs will rise in both 2011 and 2012.

"These projected increases are nowhere near the increases we saw in the 2000s. They point to a less volatile period for operating costs. But any increase in costs is going to be a problem for a shipping industry struggling with overtonnaging, declining freight rates, and the cost of regulatory compliance and environmental accountability. Add to that the continuing economic and political problems which form the background to shipping's operating arena, and you can see that the industry is not going to be for either the faint-hearted or the short-termist."

October 31, 2011

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