October 2018 Newsletter

REVIEW OF SAFETY ISSUES AROUND CRANE AND LIFTING EQUIPMENT ON VISITING SHIPS

Martime NZ has identified cranes and other lifting equipment on board visiting ships as a serious safety risk. An industry wide workshop was held earlier in the year to address concerns, with the subsequent formation of working groups looking at 6 areas: a Code of Practice for lifting equipment use on foreign ships, lifting equipment surveyor standard and licensing, industry wide access to a central information portal, vessel charterer vetting, industry technical standard for lifting equipment, and standardised stevedore training on lifting equipment.
NZSC is represented on the working group by executive committee member Cecil Grant.

Developments at Port of Napier

We watch with interest the discussion taking place around ownership of the Port of Napier – recognising that the outcome may have a significant impact on shippers.

Hawke’s Bay Regional Council is recommending to its 70,000 ratepayers that the Council sell up to 45 percent of the Port of Napier in order to free up capital and diversify the council’s investment base. Chairman Rex Graham has said the port is too vital to the region to have its growth constrained. While we don’t have an official position on ownership options NZSC agrees that investment in port infrastructure, underpinned by a sound business case, is vital to handle increasing freight volumes efficiently.

The port has documented that it needs to expand to cope with massive growth in apple and log exports from the region and the increasing demands of the cruise ship industry; recording a 25% increase in cargo volumes over the last two years.

Earlier this year NZSC submitted in support of the port’s resource consent application for a $142 million berth extension to reduce congestion and respond to this growth. The port wants the berth extension commissioned by 2022.

According to the port this is just the start of an investment programme needed to cater for a projected 57 percent increase in export volumes by 2028, driven by more logs and fruit. Total investment in the coming decade is estimated at up to $350 million, including the berth extension, other asset replacement, and growth projects.

NZSC’s view is that fundamentally shippers’ require ports that are reliable and efficient so that we can get our goods to market in a timely fashion. Equally we don’t want to see the cost of port expansion detrimentally impacting shippers; undermining our international competitiveness. Any port investment must be sustainable and able to stand on its merits.

Biofouling Requirements for Vessels Arriving into New Zealand – Update

BIOFOULING REQUIREMENTS FOR VESSELS ARRIVING INTO NEW ZEALAND

We have received the following update from MPI on the biofouling requirements introduced in May this year.

On 15th May, the Craft Risk Management Standard for Biofouling on vessels arriving into New Zealand (the CRMS), came into force. The CRMS aims to reduce the biosecurity risks associated with vessel biofouling, by requiring vessels to take preventative measures and maintain a clean hull before they arrive into NZ.

The enforcement date marks a transition over the last four years, where vessels were encouraged to comply voluntarily, to one where arriving vessels must carry documentation showing one of the three measures in the standard has been applied.

These measures are:

1. Cleaning the hull within 30 days prior to arriving in NZ and providing MPI with documentation of that clean; or
2. Conducting continual hull maintenance using best practise, such as IMO biofouling guidelines, and providing MPI with documentation of that management; or
3. Conducting hull treatment using a MPI-approved provider within 24 hours of arriving in NZ and providing MPI with documentation of the scheduled treatment.

MPI advises all owners, operators and charterers of vessels arriving into New Zealand to familiarise themselves with the Guidance Document accompanying the CRMS, and the Frequently Asked Questions fact sheet, available on the MPI website. (Read More here) BIOFOULING REQUIREMENTS FOR VESSELS ARRIVING INTO NEW ZEALAND

Trade Update

Activity in New Zealand and globally is intense on the trade policy front. In New Zealand we have the second Round of the FTA negotiations with the EU underway. Last week New Zealand hosted the latest round of negotiations with the Pacific Alliance (Chile, Peru, Colombia and Mexico plus Australia, New Zealand, Canada and Singapore). And we are due to be hosting a round of negotiations on the Regional Comprehensive Economic Partnership (ASEAN plus India, China, Korea, Japan, Australia and New Zealand in a couple of weeks.  Globally the US has achieved a deal with Canada on what is to replace NAFTA. A deal with Mexico had already been reached some weeks ago. In the WTO the EU and UK have faced stiff opposition to their proposal to carve up existing quotas. And in the UK Brexit is as confusing as ever.

EU – NZ FTA

As expected agriculture, geographic indications and intellectual property have been identified as “potential rub points” in the second round of negotiations. Good progress appears to have been made on other issues.

Pacific Alliance

Alarm bells are ringing. Why did Colombia not attend the latest round of negotiations in Auckland? Is this just because the new Government in Bogota is finding its feet or is something else afoot? Given that all other parties to this negotiation already have FTAs with New Zealand (assuming CPTPP is ratified) Colombia is the big prize in this negotiation for New Zealand.

NAFTA 2.0

The master negotiator has delivered a revised North American Free Trade Agreement but with a new name USMCA (US Mexico Canada Agreement). Unfortunately it is not as good as CPTPP and in some areas it is not as good as the old NAFTA. Don’t believe the hype.

RCEP

We haven’t seen any publicity on the forthcoming RCEP negotiations in Auckland but we might have missed this. Hopefully this negotiation is coming to a conclusion so we hope that the transparency implied in the “Trade for All” agenda is applied to this negotiation.

WTO

20 WTO members have formerly objected to the EU and UK proposals to reallocate import quotas post Brexit (should Brexit occur). The list includes New Zealand and the US, China, Japan, India, Russia, Canada, Mexico, Brazil and Australia. Some useful allies in that list.

Brexit

Who knows what will happen here – but if we have a no deal Brexit expect potential chaos at the border. The timing could not be worse for our chilled sheep meat exports given the coincidence with Easter. Companies should start contingency planning (see European Shippers Council article below).

EUROPEAN SHIPPERS’ COUNCIL CONCERN RE MOVEMENT OF CARGO POST BREXIT

The European Shippers’ Council is concerned about a lack of progress on Brexit negotiations and is supporting the UK’s Freight Transport Association (FTA) in their call for EU and UK leaders to prioritise urgent mitigation measures.

The FTA has noted that “in the event of No Deal – a scenario identified as a serious possibility by both sides – new agreements would be needed to allow trucks, planes and trains to cross the borders with the EU, keep goods flowing and shops and factories supplied. Border delays and disruptions, as well as additional costs and red tape are serious worries for FTA members, but the biggest showstopper of them all would be drastic reductions to the international movement of freight vehicles and planes.”

The FTA is pleading for both sides to start working on contingency plans and mitigating measures for transport as an urgent priority, so that businesses can rely on a co-ordinated plan and legal certainties, even in the event of a No Deal outcome. “The logistics sector is a problem solver, but there is only so much we can do if we are forced to approach this blindfolded and with our hands tied”.

The 2020 Sulphur Cap

With just over a year until the 2020 sulphur cap comes into force, international commentary continues to reveal much uncertainty and increasing anxiety across the sector.

The IMO-imposed rule will reduce permissible sulphur emissions from vessels to 0.5 percent from 3.5 percent beginning on Jan. 1, 2020. In order to comply vessels will have to use low sulphur fuel (LSFO), alternate fuels such as LNG or have scrubber technology fitted.

There is no doubt that this represents a very significant, industry-wide, change event which will likely have far reaching effects on the global shipping industry for many years to come. Much of the current commentary focuses on which of the various options for compliance will prevail, the potential cost impacts of compliance and sector readiness.

–     LSFO, scrubbers or alternate fuels

While LNG fuelling has potential and carriers are giving scrubbers another look because of rising oil prices, analysts still expect that the majority of ships will meet the mandate by burning low-sulphur fuel.

In a report on the low-sulphur fuel challenge facing shipping, UK-based financial research company Marex Spectron has said the main limiting factor behind the installation of a scrubber is its huge capital cost, with prices typically ranging from USD3 million to USD8 million. Installation times, generally around six months, are also rising because of increasing demand. In addition to these concerns there is talk of the reduced cargo capacity due to the added weight, and the prospect that scrubbers are likely to become superfluous over time due to increased production of low sulphur fuels.

Despite this the industry appears to be warming up to scrubber adoption, with Maersk changing its position recently to announce limited installation. MSC is taking the scrubber approach, while CMA CGM has said it will burn low- sulphur fuel and power nine of its mega-ships, which are on order, via LNG.

Alternate fuels such as LNG are seen as a long-term solution rather than immediate prospect, due largely to the underdeveloped global infrastructure, slow global investment, and inefficient fuel transfer technology.

–     Dilemmas for both ship owners and the fuel industry

Because there remains no clear indication of which way the shipping industry is heading, refiners are unsure of how much low-sulphur fuel to produce.

The conundrum in the shipping industry is that refiners and ships are depending on each other. Refiners are waiting to see what route shipowners take, while the latter are keen to see what actions the refiners will take.

If refiners choose to commit to low-sulphur fuel production, ships installed with scrubbers could face a shortage in heavy fuel oil supply, but if there are a majority of scrubber installations, refiners may cut back on producing low- sulphur fuel.

The expectation is that the price of HSFO will decline after the implementation of IMO regulations, as most existing demand will shift to LSFO. At the same time, the tight availability of LSFO will ensure high premiums for LSFO. The price differential between LSFO and HSFO then becomes a key determinant in the attractiveness of fitting a scrubber. To complicate matters, the premium for LSFO is expected to gradually decline from 2020 as supply increases and accordingly, the savings on bunker cost will decrease.

In addition to the premium of LSFO over HSO, the age of the ship will also be a crucial factor, as younger vessels will have more time to recover the investment in a scrubber. Newbuild ships will also have an advantage, as they will not only have a longer trading life to recover the cost of the scrubber, but also the cost of fitting a scrubber to a newbuild will be less than an existing ship, as customisation is required to retrofit a scrubber in existing deck space.

–     Cost of compliance

Whichever option is implemented to comply with the new rules it will clearly come at a cost. Although estimates vary, many analysts project costs in the vicinity of USD 15 Billion. Maersk Line anticipates it will have to pay over USD 2 billion more for fuel on annual basis. Hapag-Lloyd is the latest carrier to place a billion dollar price tag on compliance estimating its additional costs will be around USD1 billion in the first years. CMA CGM expects bunker costs to rise by USD1.5 billion, and MSC is predicting an additional cost of more than USD2 billion a year.

Bunker fuel costs are expected to rise even before 2020 and continue rising afterwards until a balance is found between demand and refinery bunker fuel output.

Based on independent “futures” prices, global shipping consultancy Drewry predicts LSFO prices per tonne will be 55% higher than current HSFO’s although the premium is expected to gradually decline as supply increases.

–     Bunker fuel surcharges

In response to the projected costs, lines are introducing new bunker adjustment factor surcharge (BAFs). So far, five global container lines (Maersk Line, Mediterranean Shipping Co., CMA CGM, and most recently Hapag-Lloyd and OOCL) have announced these cost recovery mechanisms.

The mechanisms announced by carriers to date are broadly similar. For example, Hapag-Lloyd’s Marine Fuel Recovery (MFR) formula uses a typical representative service in the market on a specific trade and takes into account parameters such as the vessel consumption per day, fuel type and price, sea and port days, and carried TEU.

Maersk’s fuel calculation is based on the formula: BAF = fuel price x trade factor. The fuel price to be used will be based on high-sulphur fuel (IFO 380) in 2019 and will be switched to 0.5 percent low-sulphur fuel oil (LSFO) from Jan. 1, 2020. The Maersk BAF tariff will be reviewed on a quarterly basis and will be adjusted only when fuel prices change by more than USD10/ton.

However, the tariffs could also be adjusted monthly if the fuel price changes by more than USD50/ton.

For a summary of the shipping line announcements see the links below:

Maersk Line- IMO Regulations 2020: New BAF to replace SBF MSC- IMO Sulphur Cap Surcharges

CMA CGM- Low Sulphur  Regulation 2020 Hapag Lloyd- Marine Fuel Recovery Mechanism OOCL Fleet moves to meet IMO 2020 Regulation

While the lines have described their BAFs as intended to provide clarity for customers in planning their supply chains, internationally there remains widespread distrust of the fuel surcharge mechanism. Analysts such as Alphaliner say carriers need to incorporate all of the component factors that would affect their bunker fuel costs in order to dispel shippers’ concerns about transparency and concern that they are paying too much for fuel. Some are of the view that the lines will use the new regulation as a revenue opportunity rather than a cost recovery programme. Adding fuel to the fire is the timing of the introduction of some of the BAFs – Maersk and MSC will be introducing their cost recovery programme from 1 January 2019, one year earlier than the introduction of the IMO’s regulation.

–     Uncertainty for shippers and freight forwarders

This all adds up to considerable uncertainty for shippers. A recent Drewry survey found that four in every five shippers participating in the survey had yet to receive clarity from their providers as to how the anticipated future fuel cost increases would be met – and only one in ten shippers have performed a real analysis of the impact the impending sulphur cap will have on their costs.

In Drewry’s view, the level of uncertainty today as to the total cost impact is so large that nobody is able to provide a confident forecast of the cost of compliance; the only certainty is that the extra cost will run into billions of dollars globally come 2020.

What is clear is that shippers will be expected to shoulder the additional costs – and shippers must therefore start planning for the likelihood of freight rate increases – very likely from 2019.

IPCC Climate Report Raises Pressure for Shipping CO2 Cuts

With the much-anticipated release of the Intergovernmental Panel on Climate Change (IPCC) Special Report on limiting warming to 1.5°C, comes further pressure on shipping to decrease shipping emissions.

The report finds the best path to limit warming to 1.5C is by reducing carbon pollution by about 45 percent from 2010 levels by 2030 and reaching to net zero by 2050. This would require “rapid and far-reaching” transitions in all transport sectors.

The steep reduction pathway raises international pressure on IMO delegates to deliver substantial short-term reductions in shipping emissions, when they gather in London to build out its greenhouse gas strategy next week (Intersessional Working Group), before MEPC73 begins on Oct 22.

One of the key questions to be discussed is which short-term measures (i.e. before 2023) would best cut GHG emissions from the sector, with operational efficiency metrics and speed regulation (i.e. slow steaming) seen by analysts as the most effective.

The 1.5°C report was initiated in response to a request by world governments included in the Paris Agreement for a report on the impacts of global warming of 1.5°C, and how best to limit warming. The report assessed more than 6000 scientific papers, with input from 91 authors and editors from 40 countries. It will be a key scientific input into COP24 in Poland in December, when governments will finalize the rulebook for the Paris Agreement.