Ex-Im Bank cargo preference rules help American carriers, but raise competitive concerns for shippers.
By Chris Dupin
Rising U.S. exports and support from some federal agencies, such as the Export-Import Bank, have been accompanied by an increase in the fleet of U.S.-flag breakbulk or multipurpose vessels capable of carrying project cargoes.
Carriers recently adding U.S.-flag ships specifically targeted at this freight include:
- Maersk Line Ltd. (MLL) and Rickmers-Linie (America), which last fall formed the joint venture Maersk-Rickmers that has begun operating two new multipurpose ships, the Maersk Illinois and Maersk Texas.
- Intermarine, which has operated U.S. flag breakbulk ships for a decade, and added a fifth multipurpose ship, Ocean Freedom.
- Teras BBC, a joint venture created in 2010 between BBC Chartering & Logistics of Germany and Teras Cargo Transport (America), operates the U.S.-flag multipurpose ship BBC Houston. (Teras Cargo Transport is a unit of the Singapore company Ezion.)
The Maritime Administration said Intermarine and Teras BBC each have a pending request to reflag another heavy-lift ship to the U.S. flag.
“More exports mean more cargo opportunities for the U.S. flag,” said Maritime Administrator David Matsuda. “The president’s push to double exports has already led to a near doubling in the fleet of U.S.-flag heavy-lift vessels.
“And the U.S. Maritime Administration’s work with the U.S. Export-Import Bank has meant better collaboration to create win-win opportunities for exporters and the U.S. flag alike,” he added.
Tom Harrelson, a consultant at Alexandria, Va.-based Maritime-Strategy and former director of MarAd’s Office of Cargo Preference, said the two primary markets for U.S.-flag multipurpose ships are the Ex-Im Bank and Defense Department, though he says the military prefers to use roll-on/roll-off ships wherever possible. Ro/ro carriers that compete in the market include companies like American Roll-on Roll-off Carrier, an affiliate of Wallenius Wilhelmsen Logistics, and Alliance Navigation, an affiliate of Hoegh Autoliners.
When civilian cargo is being shipped, ro/ro carriers are particularly competitive for vehicles such as roadbuilding and mining equipment, or fire engines. Roy Winograd, president of Alliance, said the ships also transport large non-wheeled equipment using special trailers.
Multipurpose ships, which have their own cranes, tend to be smaller than ro/ro vessels and have shallow drafts and heavy-lift capabilities that “allow us to go into remote, difficult-to-reach locations, where there is not a lot of developed infrastructure, and we can get cargo on and off because of our self-sustaining nature,” said Will Terrill, vice president of U.S.-flag services at Intermarine.
Ex-Im Bank Growth. In the fiscal year ending Sept. 30, 2011, Ex-Im Bank authorized $32.7 billion in support of exports, including loans, loan guarantees, and export credit insurance. It was the third year of record-breaking activity by the export credit agency, and an increase of 127 percent from its activity in fiscal year 2008.
The bank said those transactions supported an estimated $41 billion worth of American exports and about 290,000 American jobs at more than 3,600 U.S. companies. It estimates projects it supported represented about 2.9 percent of the United States’ $1.44 trillion in exports in fiscal year 2011.
The Ex-Im Bank said Public Resolution No. 17 (PR-17), which dates to the 73rd Congress of 1933-1935, requires certain ocean-borne cargo supported by U.S. government credit entities to be transported on U.S.-flag vessels, unless waived on a case-by-case basis by MarAd.
Today, Ex-Im Bank interprets that resolution as requiring all exports financed through loans from the bank, and guarantees with a financed amount of more than $20 million, and a repayment period of more than seven years as subject to the U.S.-flag vessel requirement.
In 2009, MarAd said U.S.-flag ships carried 54,985 metric tons of cargo under the PR-17 program, even after the bank provided waivers.
|Source: 2011 Ex-Im Bank annual report.|
According to Ex-Im Bank’s “competiveness report” to Congress last June, it granted 44 waivers during 2008-2010. The report said the bank’s PR-17 program was $34.8 million in 2010, compared to $35.2 million in 2009, and that on average about 95 percent of these revenues go to U.S.-flag vessels.
Former Maritime Administrator William Schubert, who frequently represents borrowers using Ex-Im Bank, calls it “a very effective program. I don’t believe any major project will be undertaken without the involvement of some export credit agency. If not the Ex-Im Bank, then some similar agency based in Asia or Europe, and in some cases, export credit agencies from multiple countries.”
While there may be other industry attractions to Ex-Im Bank, such as low interest rates, Schubert believes the prime driver of interest in Ex-Im Bank financing is the “world liquidity crisis.”
The bank’s mandate from Congress is to make loans with a reasonable expectation of repayment, and Schubert said its track record has been good, bringing in more money than it spends and supports U.S. jobs.
Government agencies other than the Ex-Im Bank and Defense Department are also generators of cargo for U.S.-flag carriers. For example, cargo funded by the Energy and Transportation departments is subject to a requirement that half of it must be moved on U.S.-flag vessels, though enforcement of this rule has been spotty.
Case in point: Terrill told a hearing convened by MarAd last October that application of those requirements was apparently not enforced at the Record Hill Wind project in Roxbury, Maine, a wind farm with 22 electric-generating wind turbines that received a $102 million loan guarantee from the Energy Department.
He pointed to press reports that components for the project were shipped on foreign-flag ships and offloaded in Searsport, Maine. Record Hill did not respond to an American Shipper request to discuss its project logistics.
The windmill parts were shipped just months after MarAd said last March it had reached an agreement on the application of cargo preference requirements for the Energy Department loan guarantee program. MarAd said its cargo preference requirements allow for U.S.-flag carriers to bid on at least 50 percent of cargoes shipped as part of a federally-financed project.
Ex-Im Bank said the waivers it has granted “have been consistently kept to a minimum” since MarAd only allows exporters to apply for waivers and after the agency has determined it could not accommodate these companies with a U.S.-flag vessel.
“Any cargo that is U.S.-flag impelled or required is important,” Terrill said. “The U.S.-flag vessels are crewed by U.S. mariners… Those merchant mariners, while sailing on civilian ships, are what we need in the event that this country ever goes to war.
“For the past 10 years there has been a lot of military cargo that has been out there and that has been able to sustain a lot, but with the drawdown in Iraq that channel is just not there as it used to be,” he said.
More Competiton. In its annual report to Congress last year, Ex-Im Bank said it recognized the “broader public benefit” of cargo preference, but said “U.S. exporters have alleged to experiencing competitive implications resulting from being required to ship on U.S.-flag vessels in light of the fact that such requirements are not imposed on foreign exporters and typically result in increased costs and delays.”
According to a February 2012 report by the General Accountability Office, export credit agencies in other G-7 nations do not have shipping rules, though France treats the cost of shipping on non-EU vessels as foreign content.
“Cargo preference requirements can make U.S. goods less competitive relative to foreign goods because most foreign exporters have no shipping requirements and U.S.-flagged shippers generally charge higher rates,” Ex-Im Bank said.
The bank said in its report that lenders and exporters complained “higher shipping costs and route scheduling challenges associated with shipping via U.S.-flagged vessels is a prohibitive aspect of using Ex-Im Bank support” and “in some cases U.S. shipping requirements may be the sole reason why a U.S. exporter may lose business to a foreign competitor.”
The entry of new tonnage by Maersk-Rickmers, Intermarine, and Teras BBC seems to directly address a concern raised in the report which said “the implications of PR-17 are especially acute if the cargo requires a specialized vessel such as a heavy-lift vessel (e.g., power turbines) as there are fewer such vessels in the U.S.- flagged fleet.”
U.S. Maritime Administration
|“The president’s push to double exports has already led to a near doubling in the fleet of U.S. flag heavy-lift vessels.”|
John Amos, president of Amos Logistics in Pleasant Hill, Calif., and former global head of transportation and logistics at Bechtel, said reflagging multipurpose ships “has been met very happily by exporters such as Bechtel, Fluor and KBR because they are scrambling to get the ships.”
“It’s becoming a true marketplace with competition and that is going to be helpful to customers,” said Sean Carney, the president and chief executive officer of Rickmers-Linie (America). “And not just pricing – I don’t think pricing is the bottom line discriminator. There are other attributes that are being assessed. The equipment, the customer service, the schedule, the commitment you make to customers and your track record on those. I think those are measurable attributes.”
Amos did not expect the additional U.S.-flag ships will necessarily bring down costs for shippers, noting that these vessels are inherently more expensive to crew. A report released by MarAd last September found the average cost of operating a U.S.-flag ship was $20,053 per day, compared to $7,454 for foreign-flag ships (that figure does not include fuel, port charges and capital costs). Crew costs represent 68 percent of total U.S.-flag ship costs, compared to 35 percent for foreign-flag ships, where most seafarers come from developing countries with standards of living much lower than those in the United States.
Amos said the addition of U.S.-flag ships from Intermarine, Maersk-Rickmers and Teras BBC will give shippers “more options” and make it easier for them to schedule shipments. Another attraction was that “every one of these companies is a quality carrier,” he said.
Heavy-Lift Specialists. Several of the ships have enhanced capabilities when compared to the existing heavy-lift vessels in the U.S. fleet.
Intermarine’s 2010-built Ocean Freedom is bigger and has more lifting capacity than its other four U.S.-flag vessels. The ship has a 14,100-deadweight-ton capacity and two 400-metric-ton cranes that can be combined to lift pieces weighing up to 800 tons. Intermarine’s other four U.S.-flag vessels, built between 2000 and 2002, each have capacities of 8,000 deadweight tons, and two 200-ton cranes combining for lifts of 400 tons.
The Maersk Illinois and Maersk Texas are even larger, with capacities of 19,600 deadweight tons each. Built last year at the Tongfang shipyard in China, each Maersk vessel has two cranes that can combine to lift 480 metric tons.
“We feel that adds a different dynamic relative to all the other vessels in the U.S.- flag fleet and we see that as a competitive advantage,” Carney said. The ships will carry “different cargo mixes overall than has been presented in the past.”
Adding the ships makes good sense at this time, said Dave Harriss, director of ship management and chartering at Maersk Line Ltd., the U.S.-flag carrier operation of A.P.-Moller Maersk.
“We project a growth trajectory in large-scale commercial cargo and there is a growth trajectory in those projects being funded by the U.S. Export-Import Bank, and as such a piece of that is flag impelled,” he added.
Harriss also said with the world population reaching 7 billion, there are “4.5 billion (people) who want to live like we do and that requires air conditioning and power and light and running water and that is what is driving a lot of these projects – civil engineering, power projects, and some oil and gas.”
And many of these products are something that American companies are good at manufacturing and exporting. “As long as the economy stabilizes and there is regional growth in these emerging markets, this is going to be a place for U.S.-flag vessels to operate in,” Harriss said.
While project cargo gets shipped around the world, Harriss said the “centers of gravity” are the Middle East, South America, and Southeast Asia. That said, the first voyage of the Maersk Illinois carried utility poles, wire and transformers for a power project in Ghana.
He said when Maersk sought to add the multipurpose ships and expand its customer base, it decided to partner with Rickmers – what he called a “learned partner” that has experience with “technical lifts” and wide experience in the global heavy-lift business.
Rickmers operates 22 multipurpose ships, with Intermarine at about 30 and BBC’s Website stating it operates “more than 140 modern, multipurpose heavy-lift vessels which comprise one of the largest breakbulk fleets afloat.”
Carney said Rickmers has been frequently asked over the years if it had U.S.-flag service, queries that have picked up with increased Ex-Im Bank activity. By partnering, Maersk Line Ltd. and Rickmers will have more opportunity to find cargo, he said.
Carney and other executives noted that while most Ex-Im project cargo is outbound from the United States, carriers must be able to compete in the international marketplace for loads to round out their voyages and reposition.