Ship operating costs expected to rise over the next two years

Our latest survey reveals vessel operating costs are expected to rise by almost three per cent in both 2014 and 2015.

The survey is based on responses from key players in the international shipping industry, predominantly shipowners and managers in Europe and Asia. Those responses revealed that vessel operating costs are expected to increase by 2.9 per cent in both 2014 and 2015, with crew wages and repairs & maintenance the cost categories likely to increase most significantly.

Crew wages are expected to increase by 2.4 per cent in 2014 and by 2.6 per cent in 2015, with other crew costs thought likely to go up by 1.9 per cent and 2.1 per cent respectively for the years under review. The cost of repairs & maintenance, meanwhile, is expected to escalate by 2.3 per cent in 2014 and by 2.4 per cent in 2015

P&I insurance costs are expected to go up by 2.0 per cent in 2014 and by 2.2 per cent in 2015, this compared to the increases of 1.6 and 1.8 per cent respectively predicted in respect of the cost of hull & machinery insurance.

Drydocking costs are expected to rise by 2.1 per cent in 2014 and by 2.2 per cent in 2015, while expenditure on spares is expected to increase by 2.1 per cent and by 2.2 per cent over the same period. Meanwhile, respondents anticipate increases of 1.7 per cent and 2.0 per cent respectively in the cost of lubricants in the two years under review.  The cost of stores is expected to increase by 1.7 per cent and 1.9 per cent respectively for 2014 and 2015.

As was the case in last year’s survey, management fees are deemed likely to produce the lowest level of increases in both 2014 and 2015, at 1.2 per cent and 1.5 per cent respectively.

A number of respondents commented on the impact of increased crew wages and costs. “Crew costs remain a critical factor,” said one. “There will continue to be a high level of demand for trained crew, especially for top-end ships.” Another predicted, “There will be further rises in crew costs, especially for officers and engineers, with a shortage of the latter in all sectors of the shipping industry.” Elsewhere it was noted, “The full implementation of the Maritime Labour Convention 2006 is likely to be a significant factor in higher labour and crewing costs.” Another respondent said, “Crew and labour costs will continue to increase due to the strong presence of labour unions in the shipping industry.”

The cost of regulatory and legislative compliance was a recurring topic in responses to the survey. “Most of the costs we have experienced are based on legislation and more and more government interference with doing business,” said one respondent. Another remarked on the cost of “the entry into force of new regulations such as the US ballast water treatment rules,” while another still emphasised, “The need for existing vessels to comply with new regulations will be a significant factor to consider.” Other comments included, “Recent legislation in Europe will push costs up dramatically, especially in the UK,” and, “SECAs will have a serious impact on ships’ equipment maintenance costs.”

The combination of low freight rates and increased operating costs dominated the thinking of a number of respondents, one of whom noted, “Owners are hard-pressed to cut costs and lower operating expenses because of poor freight markets. There is a particularly severe impact on running costs for ships bought prior to 2009.” In similar vein, another said, “Operators are keeping any increases in operating expenses to a minimum due to low freight rates.” Another still observed, “There is no light at the end of the tunnel. At present, earnings are negligible, and operating costs keep going up.” In slightly more optimistic mood, it was noted elsewhere, “Although operating costs are going up, the advent of bigger ships and the projected opening of the enlarged Panama Canal in 2016 should mean that profits will go up, too.”

A number of respondents to the survey felt that a surfeit of tonnage on the market would inevitably have the effect of increasing operating costs. “The recent increase in tonnage supply will add pressure to operating costs,” said one, while another observed, “Only those owners and managers who can trim their vessel operating costs will come out ahead.” Another still predicted that owners and operators “will look at possibilities to reduce their cost base by looking at alternative ship management options, or whatever else will result in cost reductions, in order to remain competitive.” Several respondents, meanwhile, noted that reductions in oil prices were likely to result in reduced operating and voyage expenses, respectively, in terms of lubes and fuel.

Respondents were asked to identify the three factors that were most likely to influence the level of vessel operating costs over the next 12 months. Overall, 20 per cent of respondents (compared to 21 per cent in last year’s survey) identified finance costs as the most significant factor, followed closely by competition (19 per cent). Crew supply was in third place, with 18 per cent, followed by demand trends (17 per cent) and labour costs (13 per cent). The cost of raw materials was also cited by 11 per cent of respondents as a factor that would account for an increase in operating costs.

Shipping partner Richard Greiner says, “The predicted increases in ship operating costs for this year and next follow the findings in our recent OpCost report that ship operating costs fell by an average of 0.3 per cent across all the main ship types in 2013. But the level of increases anticipated for 2014 and 2015 are, at just under 3 per cent, still way below many of those we have seen in recent years. In 2008, for example, operating costs rose by 16 per cent. But there are a number of factors which are likely to drive up costs both this year and next.

“Firstly, the gradual global economic recovery now under way, notwithstanding the challenges placed in its way by political and social unrest in certain parts of the world, should result not only in improved earnings for shipping but also in increased costs. More ships in the water, and more cargo on board, entails more handling, transportation and other costs.

“Crew costs are once again the category of operating expenses predicted to rise most significantly. The only surprise would be if this were not the case. The bill for regulatory and legislative compliance, meanwhile, remains difficult to assess with any great accuracy. While the cost of complying with ECAs and other environmental initiatives can be gauged with reasonable accuracy, and business plans accordingly amended if deemed necessary, the cost of - and timeline for - complying with the BWM Convention continues to be the elephant in the room. Everybody knows it’s coming, and everybody knows it is going to be expensive, but until the discussions over different routes to compliance are concluded, and until the final signature bringing the convention into force is lodged at IMO, the item can remain, albeit uneasily, a little way down the list of priorities.

“Sensible owners with adequate funding are planning for the future by investing in eco-friendly ships and by weighing up the advantages of LNG propulsion. Such initiatives will bring long-term benefits but are likely to increase costs in the short term because new technology and associated research and development costs do not come cheap. On the plus side, oil and gas prices are falling, which should translate into savings for owners and operators, and shipping continues to attract new money from both internal and external investors.

“The projected increases in vessel operating costs for the next two years will be difficult for owners, operators and managers to absorb. History shows, however, that good husbandry, sound business planning, experience, patience and the right amount of entrepreneurialism are likely to carry the day.”

Contacts

Richard Greiner

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