Christopher Koch, senior advisor to the World Shipping Council, says container shipping faces a cost-control crusade and “green storm” of environmental regulations.
The liner shipping industry faces challenges in 2016 and years ahead with freight rates under pressure and higher costs involved in meeting a “green storm” of environmental regulations, said Christopher Koch, a senior advisor to the World Shipping Council.
Koch, who stepped down as chief executive officer of the WSC earlier this year, made his remarks in Oakland before the Pacific Transportation Association on Wednesday.
“Carriers generally obtain financial returns that can please few owners,” he said. “Most carrier-shipper commercial relationships are price driven, and the nature of the business makes it difficult for a carrier to offer anything but a service the customer sees largely as a fungible commodity.”
With higher cost, premium services struggling to attract enough cargo, carriers have “little choice but to focus on cost-savings and increased efficiency,” he said, adding “Carriers’ operating costs and capital investment will be managed frugally by necessity.”
The drive to contain costs has driven carriers to use larger ships, adopt “slow steaming,” enter into vessel-sharing agreements, and get out of the chassis business.
“A continued crusade by carriers for cost control will exist for the foreseeable future,” he predicted.
Koch said if “larger ships are going to require significant landside changes or investment at the ports they call, it is of course necessary that the carriers have such discussions in advance with the terminal operators. If those dialogues are inadequate, that should be remedied.”
He also said measures such as the implementation of appointment systems for drayage drivers should be supported by shippers, and shipper criticisms of the cost of the PierPass program in the ports of Los Angeles and Long Beach to subsidize night operations “have not been accompanied by proposed alternative solutions.”
With higher volumes, ports may need to operate for extended hours and in those ports, he said “shippers are going to need to deliver and pick up cargo over those extended hours.”
Expensive known and potential environmental regulations for shipping loom, Koch said. He specifically highlighted:
- “The single most expensive environmental regulation the shipping industry has ever faced,” estimated at $75-$100 billion annually, will be the requirement under MARPOL Annex VI for the global shipping industry to end its current use of heavy fuel oil and to use fuel with a maximum sulfur content of 0.5 percent by 2020, as opposed to the 3.5 percent limit globally today. (He noted the International Maritime Organization may postpone the effective date of the regulation to 2025.)
- Shipowners operating in so-called “emission control areas” (ECAs) adjacent to North America, the North Sea and the Baltics already require marine fuel to have no more than 0.1 percent sulfur. However, Koch said “One should logically expect that these will not be the last ECAs. For example, with China’s horrendous air quality problems, ECAs are an obvious potential environmental response in that part of the world.”
- Ships are subject to low-sulfur fuel requirements at berth in Europe, California and Hong Kong.
- Starting next year, vessels that operate in the North American ECA will need to be equipped with Tier III NOx technology (i.e., selective catalytic reduction (SCR) technology or exhaust gas recirculation), increasing the costs of new ships.
- “A decision from the Coast Guard on ballast water treatment technology seems probable in 2016, likely triggering massive technology retrofitting requirements,” he said.
In addition, Koch noted “various governments at the International Maritime Organization (IMO) and within the European Union are looking at a range of possible additional regulatory concepts, ranging from more fuel taxes or emissions trading (euphemistically called “market based measures”), to the establishment of ship operational efficiency standards.”
“WSC and its member shipping lines have supported the development and application of mandatory ship efficiency design standards, which the IMO has established for new-builds. WSC, jointly with Japan, even went further and recommended the application of mandatory efficiency design standards for existing vessels – a step further than the IMO and much of the industry was willing to go.”
But Koch said “regulations governing a vessel’s operational efficiency would present a host of complexities since operations are “influenced by a host of factors ranging from weather, to the particular trade the ship is deployed in, to the number of reefers on board, to outrunning pirates, to fluctuations in trade volumes, to maintaining vessel schedule integrity when there is a slow-down in an operating network. “
He also noted the OECD’s International Transport Forum recently proposed that the IMO should create a new $20 billion per year tax on marine fuel.
“There is no explanation why the existing 2020 SOLAS requirement — which will raise the industry’s fuel costs by more than three times this amount — will not more than accomplish carbon emission reductions from price increases via taxes,” he said. “Thankfully, most governments have not endorsed this concept of trying to milk shipping as a cash cow” for an international green climate fund proposed for the U.N.’s Framework Convention on Climate Change.
He said “time’s a-wasting” for shippers and the industry to prepare for the new safety requirement adopted by the IMO requiring shippers to provide ocean carriers a certified weight of every loaded export container. The rule goes into effect on July 1, 2016.
“It is my impression that many shippers are not preparing adequately for this requirement, and that ocean carriers and marine terminals need to provide clear explanations of how this new requirement will be implemented well in advance,” he said. “It is not that the IMO has not given the industry adequate time to prepare for the implementation of this requirement. But, clear implementation plans are not yet in evidence. The next six months require serious preparation and communication if cargo is to move efficiently, and if port congestion is not to be exacerbated by poor implementation of this requirement.”
The Transpacific Stabilization Agreement and Agriculture Transportation Coalition recently formed a committee to create best practices and address concerns surrounding the rule which is part of the International Convention for the Safety of Life at Sea (SOLAS).