November 2016 Newsletter

Nov 8, 2016 | Member Newsletters


NZSC Strategy Day Postponed

Given the current disruption in Wellington as a result of the recent earthquake and ongoing aftershocks NZSC have postponed the upcoming Strategy Day until the New Year. We expect that it will be rescheduled in early February to coincide with the parliamentary calendar and hope to advise the new date in early December.

Major disruption to supply chain as a result of Monday’s 7.8 quake

The recent earthquake have caused significant disruption to the upper half of the South Island and Wellington. With the combination of major land movements and slips State Highway 1 and the main rail trunk line are impassable and inaccessible, and will be for months. There are alternative routes in place but we are aware some shippers have significant access issues.

The NZ Shippers’ Council is working direct with Ministers and officials to keep them fully informed of constraints and concerns that shippers face. If you are having issues that you cannot solve directly please get in touch with Megan Campbell or the NZSC Executive so that we can help you find a solution.

The shipping lines, transporters, logistics companies and shippers have worked collaboratively to consider ways to overcome the very significant disruption to the supply chain. There are many challenges ahead and we hope this collaborative mindset continues over the coming months.

Big Ship milestone for NZ Shipping

Early October saw the arrival in Tauranga of the largest container ship to have ever visited New Zealand. Part of Maersk Lines’ service between South America and North East Asia, the vessel has the nominal capacity to carry almost twice as much cargo as any other container ship that has previously visited New Zealand and its arrival represents a milestone for New Zealand shipping.

The Aotea Maersk is one of 11 vessels in the service rotation, offering a weekly direct service to markets such as China, Korea, Japan and Taiwan. We look forward to any potential expanded economic opportunities created by the new service and hope that this is just the first of many new initiatives offering more services and more choice for shippers.

News from the IMO – Sulphur emissions to be curbed

The IMO has agreed a 0.5% global sulphur cap on ship emissions from 2020 – rather than the potential later date of 2025. This represents a significant reduction in the maximum sulphur content permissable, down from 3.5% (outside existing emission control areas), and comes against warnings from the sector that the new rules will extract a high cost on the already beleaguered container shipping industry.

The rules are aimed at reducing the air pollution from burning high sulphur fuel oil, which is linked to negative impacts on health and on the environment. The date of implementation was dependent on the results of a study to determine whether enough fuel below the 0.5% sulphur content would be available by 2020. In reaching its decision last week the IMO were satisfied of sufficient availability of compliant fuel however industry response has been less confident. There is concern also for the potential for the new regulation to catapult the price of cleaner burning marine diesel fuel and that operating costs are likely to increase significantly.

Shipping owners have three options for complying with the new rules: switch from sulphur heavy fuel oil to a compliant fuel, invest in new engines to burn alternative fuels (LNG) or install exhaust gas cleaning systems (scrubbers) to existing ships to filter out sulphur. All three options are likely to add expense.

Commentators have been quick to note that there is much to do now to ensure that sufficient quantities of compliant fuel of the right quality will be available, and that the new regulation will be implemented smoothly, including ensuring adequate enforcement measures are in place to ensure a global level playing field.

While the IMO moved ahead with stringent sulphur emission regulations last week it took a softer line with CO2 emissions. It ruled only that vessels of 5,000gt and above will be obliged to measure their fuel consumption and CO2 emissions, and to declare the results to the IMO and the ships’ countries of registration. Data collection will run from 2017 to 2023.

A statement from the IMO said: “The new mandatory data collection system is intended to be the first in a three-step approach, in which analysis of the data collected would provide the basis for an objective, transparent and inclusive policy debate in the MEPC.

“This would allow a decision to be made on whether any further measures are needed to enhance energy efficiency and address greenhouse gas emissions from international shipping. If so, proposed policy options would then be considered.”

The requirements were adopted by the IMO’s Marine Environment Protection Committee, (MEPC) meeting in London for its 70th session (24-28 October). The IMO Secretary-General said the new requirements sent a clear signal that IMO was ready to build on the existing technical and operational measures for ship energy efficiency.

The MEPC also approved a roadmap (2017 through to 2023) for developing a “Comprehensive IMO strategy on reduction of GHG emissions from ships”, which foresees an initial GHG strategy to be adopted in 2018.

Global Shippers report underlines issues associated with shipping line consolidation and alliances

The Global Shippers Forum (GSF) report into the economic implications of mega ships and alliances for competition and supply chain efficiency is extremely timely given the significant change taking place in the sector.

The GSF report has been prepared in light of the gathering pace of consolidation and alliances, and the likely impacts this will have on shippers and other stakeholders in the global supply chain.

A key finding of the report is that mega ships have been the catalyst for the development of strategic alliances and consolidation in the shipping sector, which are seen as having the potential to reduce supply chain efficiency and rivalry on important parameters of competition, including capacity, sailing frequency, transit times, ports of call and associated service quality.

It also notes that the higher economies of scale associated with mega ships, raises barriers to entry, reinforcing the trend towards fewer independent operators, with smaller operators being driven out of the major trades into niche markets, and increasing the risk that the sector will be dominated by a handful of big players with limited competition.

The report makes for interesting reading alongside the Big Ships report prepared by NZSC in 2011.

It is important to note that the NZSC report was concerned with ships in the 6500-7500  TEUs class, not mega ships of the scale that are the focus of the GSF report. Our 2011 report concluded that the ability to accommodate bigger ships – in the 6500 – 7500 TEU range, is an insurance policy for New Zealand shippers to minimise the risk that services become ‘boutique’ in nature, with relatively small, older vessels imposing higher operating costs.

The GSF report raises several questions around the impact of industry consolidation and alliances on competition and the extent to which the current approach of competition authorities and regulators is adequate  to  deal  with  the  new  competition  issues  emerging. The report concludes that likely trends, will, in concentrated markets (such as New Zealand) lead to the sharing of information on a regular and frequent basis between shipping lines, and that this might reveal commercially sensitive elements of competitors strategies in the market, including price, capacity or cost information.

This raises serious competition concerns and the NZSC backs the GSF call for competition authorities and regulators to remove, where possible, shipping line exemptions for price agreements and other forms of agreement that facilitate exchanges of information on costs and rates, including general rate increase guidelines.

However, given the relative isolation of New Zealand and the importance of trade to our economy, our exporters and importers are best served through having access to a broad range of shipping lines and services – which are often provided through vessel sharing agreements (VSAs). The Council therefore has a specific interest in ensuring that the possibility of maintaining or negotiating VSA’s is not constrained.

NZSC has shared the GSF report with Minister Goldsmith, and officials from MBIE and the Commerce Commission and looks forward to further discussion about this topic at the upcoming NZSC Strategy day at the end of November.

Hanjiin bankruptcy – Lessons for Shippers

The bankruptcy filing by Hanjin Shipping on August 31st saw 66 ships with cargo worth US$14.5bn denied access to ports around the world due to concerns about whether docking costs would be paid.

Hanjin was the world’s seventh biggest container line with a fleet of more than 90 vessels. Its collapse is the largest shipping bankruptcy in history – and commentators believe that in the current shipping climate the risk that there will be another bankruptcy cannot be discounted.

The number one lesson to be learned is that “too big to fail” thinking is no longer valid; Hanjin should be a wake-up call for all shippers that even the largest carriers are not immune to failure.

The Hanjin collapse has exposed the high level of financial risks that exist in today’s shipping world, and the prolonged fallout has exposed the fragility and deeply interwoven connections of the supply chain. These characteristics make it extremely difficult for a shipper to protect against the risk of a carrier failure.

Alongside ensuring adequate insurance cover, shippers need to pay attention not just to the financial health of the carriers they contract with, but also to their partners. A shipper can unwittingly end up with significant exposure to higher risk carriers through the alliance structure that now prevails.

The fact is the shipping world is moving in the direction of being dependent on a relatively small number of container lines. This year we have already seen three major container lines merge, get acquired or collapse – some commentators believe that when the shakeout is over, there will only be six to 10 major carriers left.

The recent announcement that Japan’s big three shipping groups – K-Line, MOL, and NYK will merge their liner shipping businesses is a further case in point. The Japanese lines will merge their container units and launch a new joint venture carrier from April 1, 2018.

It’s the latest example of industry measures to create scale in an effort to adapt to a world in which freight rates have been under pressure for many years.

With tough market conditions continuing, more consolidation is on the cards.

Fewer carriers mean less competition and more stable players. From a risk standpoint this is a good thing – but shippers need to be aware that the price of lower risk is likely to be higher rates.

Political Update

We live in interesting political times. According to Chinese folklore that is not always a good thing. Charles Finny reports on the latest political and trade news.

It is looking as though we are in for a bigger Cabinet re-shuffle than might have been expected. The announced retirement of Hekia Parata is the reason for this. The Prime Minister is already signaling in public that he will need a Minister of Education to serve right through 2017 so he will need to replace Minister Parata at the start of the year. There is also talk that he is contemplating an election earlier than November.

Meanwhile the Mt Roskill by-election is going to be important. A win by National would give the National Party the ability to pass legislation with just the support of ACT.  While Phil Goff won the electorate 18,637 to 10,546 at the last General Election National won the party vote 14,275 to Labour’s 12,086.

TPP is in effect on life support. The Obama Administration was preparing a Bill on ratification for introduction during the “lame duck” period. Given the decisive Trump victory, attempts to pass a Bill ratifying an Agreement that Trump so strongly opposes is both inappropriate and unlikely to garner any support from the Republican Party. Why buy a fight with the new President?

European trade policy credibility also took a hit over the past two weeks with Belgium almost being unable to support the FTA with Canada. This support came through at last minute but shows how vulnerable these agreements are to opposition in member state parliaments. This is not good news for the proposed New Zealand – EU FTA negotiation.

Deputy Prime Minister English has obviously been approached by the Australians about the possibility of a joint negotiation with the UK on a post-Brexit FTA. Some would argue strongly that this may not be a good idea given Australia’s track record of accepting poor FTA outcomes. The good news is that the UK seems keen on a negotiation with New Zealand.

The PM held hopeful discussions with his Indian counterpart on the India-New Zealand FTA. A new round of negotiations has been agreed. But can Prime Minister Modi change his officials? Indian Prime Ministers have tried but failed in the past.

Resource Management Reform

The Government has had a breakthrough in its negotiations with the Maori Party and has decided to press ahead with Nick Smith’s RMA Reform Bill – the Resource Legislation Amendment Bill. It has now been referred back to Select Committee and we expect a report back early next year.

The Government, probably with wide support in Parliament, will almost certainly be introducing special legislation overriding the RMA, for the restoration of road and rail links along the east coast of the South Island. Ministers Bridges and Joyce have visited Centreport and are of the view that the Centreport response will also need to be encompassed within this legislation.

Welcome to new member – Miraka

Miraka is a unique New Zealand dairy-processing company. Located in Mokai, 30km northwest of Taupo, the company is owned by a group of Maori trusts and incorporations and is founded on strong cultural values of environmental protection and sustainability for future generations.

Miraka (Maori for milk) processes some 250,000,000 litres of milk into powders and UHT products every year. All supply is sourced from local farms within an 85km radius of the factory, where renewable geothermal energy is used to run the processing operations and biological waste is composted at a nearby worm farm for subsequent recycling to support plants used for riparian waterway planting.

Miraka’s product range has a global reach of more than 23 countries, with exports to North America, Central America, South America, the Caribbean, North Africa, East Africa, West Africa, the Middle East, North Asia, South Asia, South East Asia, Australia and the Pacific.

Miraka is represented on the NZ Shippers Council by Lucy McLeod, General Manager Supply Chain.

Download the Post