Leaving a safer, greener industry

   Chris Koch is retiring as chief executive officer of the World Shipping Council in July, 15 years after he was hired to set up what has become the principal trade organization for liner shipping.
   WSC provided a voice for the industry in Washington following the sale of several U.S.-based container companies to foreign interests: Sea-Land Services to Denmark’s Maersk in 1999, APL to Singapore’s Neptune Orient Line, Lykes Lines to CP Ships in 1997, and Farrell Lines to P&O Nedlloyd in 2000.
   Liner shipping is “a huge industry with huge impacts on the economy and on a lot of issues that people care about,” and WSC members felt they needed an organization to effectively represent it in Washington, Koch said.
   Koch knows the Capitol well. Senior vice president and general counsel for Sea-Land before joining WSC, he was chairman of the Federal Maritime Commission from 1990 to 1993 and spent a decade on Capitol Hill as counsel to the Senate Commerce Committee, and chief of staff to Sens. Slade Gorton and John McCain. He took a leave of absence in 2008 from WSC to work on McCain’s presidential campaign.
   While based in Washington, WSC has evolved into an organization that represents its 28 members in many arenas: the European Commission, International Maritime Organization (IMO), World Customs Organization, and International Organization for Standardization (ISO).
   While WSC has been involved in many issues, two that came to the fore since 2000 were security and the environment.
   Both industry and governments have much greater visibility into what is coming into and leaving the country, Koch said. The fact that WSC was in place prior to the terrorist attacks on Sept. 11, 2001 was fortuitous, “because it allowed us to pull together in fairly short order the expertise of the industry and act as an interface with the government on dealing with the challenges that resulted,” he said. 
   WSC worked closely with Robert Bonner, commissioner of Customs and Border Protection from 2001 to 2005, to support the 24 hour rule, and was a strong supporter of the 10+2 initiative.
   “If you remember, there was the drumbeat that we have to do 100-percent container inspection. Which had far more good politics than good policy built into it. But it required us to address: Okay, if you’re not going to do that what is it that you’re going to do that will give people, including the U.S. government, confidence that its risk assessment program has real value, has real meaning?”
   The additional data elements from importers before vessel loading provided more specificity into the origins and destinations of shipments, as well as vessel stow plans and container status messages from the carriers that gave CBP “great insight into what was coming into the country.”
   WSC has also played a role in helping shipping become a greener industry.
   IMO first developed air pollution standards in Annex VI to the International Convention for the Prevention of Pollution from Ships (MARPOL) in 1997, but by 2000 there was a lack of consensus about how to move forward.
   The U.S. government was pushing hard to have an Emission Control Area (ECA) around its shores, similar to the one for the Baltic and North Sea, and to restrict sulfur content of fuel that could be burned in the ECA to 0.1 percent, similar to what California regulators wanted.
   “Other governments had different ideas, and a lot of industry groups were doing what is easy to do which is to basically resist new regulations. What WSC did, with the full support and participation of the board members, is to publicly come out and endorse the U.S. position at the IMO negotiations to establish ECAs with 0.1 percent sulfur fuel. We recognized that what the industry really needed is an internationally accepted and implementable regime. We did not want different governments around the world coming up with different requirements,” Koch said.
   The changes to MARPOL Annex VI, adopted in 2008, resulted in a global sulfur cap in bunker fuel initially being reduced to 3.5 percent from 4.5 percent on Jan. 1, 2012, and then to 0.5 percent on Jan. 1, 2020, subject to a feasibility review. The sulfur limit in ECAs was lowered from 1.5 percent to 1 percent on July 1, 2010, and to 0.1 percent at the beginning of this year.
   While the costs and benefits of lowering the cap on sulfur that can be burned in ECAs has been thoroughly analyzed and “makes a lot of sense,” Koch believes the case for lowering the global limit to 0.5 percent is not as clear. Enforcing the law on the high seas where cheaters could have an unfair cost advantage will be challenging.
   “The global cap wasn’t part of the WSC-endorsed agenda nor was it part of the U.S. proposal to the IMO back in 2007,” Koch said. Still to come is a study on whether there will be sufficient supplies of low-sulfur fuel for ships. The IMO rules allow the 0.5 percent cap to be kicked down the road, but only until 2025.
   In a November 2013 speech, Koch noted “the estimated cost impact of switching from heavy fuel oil to a 0.5 percent sulfur fuel on a global basis could be $75-$100 billion annually,” based on an estimate of $300-$400 per ton premium for low-sulfur fuel versus regular bunkers.
   The recent drop in oil may dampen that effect somewhat, but he said the differential is still going to be substantial.
   One constant during the past 15 years? The liner industry’s struggle to be profitable. 
   “It’s an industry whose structure makes it exceedingly difficult to make profits on a consistent basis,” Koch said. The industry is cyclical, with no barriers to entry other than the need for capital, and with “all this capacity chasing these goods you have pricing behavior that is just at times quite destructive.
    “There are no regulatory barriers. It’s not like aviation, you don’t need landing rights. It’s not like the Jones Act—there are no ownership requirements or build requirements. Anybody with a set of ships can start a business,” he added. Interestingly, the industry’s pricing challenges exist in trades that both have and don’t have antitrust immunity for carriers.

This column was published in the February 2015 issue of American Shipper.