It seems that every country with a coastline typically exerts some sort of jurisdictional protection on their shipping industry within their territorial waters. Such special treatment, which at prima facae may seem in direct defiance of international laws of free trade and non-subsidized industry competitiveness, may seem justified based on several layers of argumentation about sovereign integrity and safety in territorial waterways, national security and interest, and, of course, 'protection' of domestic jobs and strategic industries.
One may surmise that such 'protected' strategies are implemented and 'behave' uniformally along different countries in terms of qualification, documentation and regulatory burden, as well as in terms of market economics and investment returns.
This however is not always the case.
The domestic shipping industry in the US, usually known as the 'Jones Act' but officially defined as the Merchant Marine Act of 1920, is based on a three-legged qualification stool: a) vessels have to being built substantially in the US, b) owners have to be demonstrably US-citizens by a 75% majority, and c) vessels have to fly the US flag and be crewed by US-citizens. Given that vessels built in the US are expensive (high labor cost combined with limited strong economic efficiencies as US-shipyards lack world competitive shipbuilding expertise for ocean-going, commercial vessels), Jones Act vessels have a prohibitively high capital cost basis. To that, one has to add a high crewing cost as officers and ratings have to be US-citizens (or permanent residents) and such labor force is typically unionized.
As a matter of illustration, a Medium Range (MR) Products tanker (capable of transporting gasoline and similarly refined crude oil products) can be built at a top-tiered S Korean shipyard today at approximately $37 million; the last such vessels to be built in the US a couple of years ago (on a S Korean design, nevertheless) cost $110 million (in NASSCO Shipyard at Dan Diego). For such tonnage, the vessel daily operating expense in the international market is about $7,000 per diem while the cost for similar vessel under the US cabotage law is in excess of $20,000 per diem. A different but equally comparative example, the shipping arm of the oil company ExxonMobil, SeaRiver Maritime Inc., recently ordered 150,000 dwt crude oil tankers at the Aker Philadelphia Shipyard, in association with Samsung Heavy Industries of South Korea, for the transport of Alaskan crude oil to the Continental US at newbuilding cost of $220 million per vessel while similar tonnage from competitive yards in S Korea or Japan would have been ordered at around $70-80 million range. As a rule of thumb, the Jones Act market requires a numerical multiple of three as compared to the open registry shipping market. Surprisingly, investment returns in this market usually hover at high single-digit levels or best at very low double-digit numbers for the ocean-going Jones Act market over a substantial period of time.
At a recent trip to Thailand and Indonesia, exotic port calls have always been a fascination of the Captain, there have been business discussions on the domestic sabotage business in those countries. After all, both these nations have tremendous coastlines in terms of length (and beauty!), abundant plethora of islands and trade, and substantial drilling and mining interests, and therefore, a legitimate claim to a cabotage industry. However, there have been substantial differences in their cabotage law as compared to the Jones Act, as vessels in those markets do not necessarily have to be built locally, ownership citizenship can be diluted down to 51% formally, and most importantly, crewing expenses with domestic crew can be, surprisingly, lower than that in the international market. In short, it's less expensive to operate in the cabotage business than in the foreign flag business in those countries. And, again, given their robust drilling and mining business and exorbitant demand for raw material, it's no surprise that there are cabotage projects in shipping in those countries that can generate returns of more than 40%. Clear and majestic as a summer's day on the coast of Bali...
National considerations aside, it seems that when it comes to cabotage business, as cumbersome as it might be compared to open registries, the Joneses seem to have some catching to do up when it comes to economics!
© Basil M Karatzas, 2011. No parts of this blog can be reproduced in any way by any means under any circumstances without the prior written approval of the owner of the blog. Copyright strictly enforced.
This blog is only intended for entertainment and discussion purposes; no responsibility can be assumed for taking or failing to take any action upon information contained in any part of this blog.
Should you desire to discuss the content of the blog or obtain commercial advise or opinion, please feel free to contact us at info@bmkaratzas.com.
