Ship operating costs rise on higher R&M and insurance spending

Drewry ship operating cost index — annual % change (Source: Drewry’s Ship Operating Costs Annual Review and Forecast 2019/20)

Underlying vessel operating cost inflation accelerated moderately in 2019 as a result of higher spending on repair & maintenance and insurance. Costs are expected to continue rising at a similar pace in 2020 as a result of a hardening insurance market before receding in subsequent years. These are some of the trends examined in the latest Ship Operating Costs Annual Review and Forecast 2019/20 report published by London-headquartered shipping consultancy Drewry.

Costs rose for a third consecutive year following marked declines in 2015-16. Drewry notes that Opex (operating expenditure) costs are heavily linked to developments in the wider shipping market as some, such as insurance, are connected to asset values and others impacted by the ability of shipowners to pay.

Drewry estimates that average daily operating costs across the 46 different ship types and sizes covered in this report increased 2.2% in 2019, compared to underlying increases of 1.1% and 0.7% respectively in the previous two years. This followed a period in which spending contracted over two consecutive years by almost 9% in 2015-16 (see chart).

Spending rose across all six of the main Opex cost categories for the second consecutive year in 2019, indicating how broad-based inflation continues to be.

“While cost pressures remain, this trend confirms the end of the deflationary era that prevailed mid-decade, as the depressed state of shipping markets forced operators to slash costs in order to survive,” said Drewry’s director of research products Martin Dixon. “There are limits to cost cutting, beyond which the safety of the vessel and crew are put at risk, and as freight markets have recovered so pressure to reduce spend has lifted, leading to modest acceleration in cost inflation.”

Manning costs rose for a second successive year, up 1.3% in 2019, despite the easing officer shortage, while insurance costs increased 3.4% having flatlined the previous year.

Spending on stores, spares and lubricants rose for the third year in succession, though, with the exception of lubes, cost inflation remained very moderate. But expenditure on repair and maintenance and dry docking accelerated to 3.1% in 2019 on tighter repair yard capacity as a result of a spike in retrofit activity, while costs relating to management and administration increased just 1%.

The rise in costs was broad-based across all the main cargo carrying sectors for the second consecutive year, as continued recovery across most cargo shipping markets and rising regulatory compliance requirements lifted cost inflation. The latest assessments include vessels in the container, chemical, dry bulk, oil tanker, LNG, LPG, general cargo, reefer, RO/RO and car carriers sectors.

Drewry cautions that market conditions are expected to be challenging for many shipowners as the trade outlook remains uncertain and benign capacity conditions prove temporary when the current round of retrofits recedes.

“We expect the pressure on costs to remain which will dampen any likely inflation, particularly in areas where owners have greater control, such as manning, stores, spares and management and administration,” said Dixon. “Other cost heads, beyond the direct control of shipowners, will prove tougher to manage, particularly insurance where we expect costs to rise sharply in 2020. Continued attempts to clean up and decarbonize shipping will add to owner cost burdens, affecting management & administration, repair and maintenance and dry docking costs in particular, as retrofitted equipment adds to maintenance costs.”

However, any such increases will remain below the prevailing level of general price inflation and so represent cost stagnation in real terms.