U.S. Merchant Marine and Maritime Industry in Review

110 PROCEEDINGS • May 2004 www.navalinstitute.org

The cyclical nature of the maritime sec-tor is well recognized in academic lit-

erature and professional journals. His-t o r i c a l l y, these cycles of shipping boomand bust have remained short, often be-cause of the proclivity of shipowners toove r build capacity at the slightest indica-tion of market optimism. In a remarkablecontrast, the rate recovery that began in2002 became only stronger in 2003. T h ehead of R. S. Platou, a renowned Nor-w egian shipbroke r, in the company ’s an-nual rev i ew noted “shipping markets haven ever been stronger than they are now.”Indeed, 2003 was a stellar year for theglobal maritime industry in general, andfor the shipping community in particular.Freight rates in all markets have been ona rising trend for almost two years now,despite the ongoing geopolitical uncer-tainties worldwide and the increasing con-cern with safety and security of globalsupply chains.

What is most unusual is the strong cor-relation between these developments andthe economic performance of one na-tion—an impact of much higher magni-tude than what we witnessed in the mid-1970s when the rapidly growing oil-exporting nations of the Arabian Gulfgave a major boost to the shipping in-d u s t r y ’s fortunes. The primary driver of

the current extraordinary boom is the Chi-nese economy and its ongoing spectacu-lar growth. In 2003, China’s exports grewby 31.7%, and its imports by 39.1%.While China has solidified its position asthe premier exporter of low - value con-sumer goods, its export items have startedm oving up the quality scale, as well asalong the value chain. The nation also im-ports a wide variety of raw materials tokeep its production engine on full steamahead and many finished goods to whetthe voracious appetite of its fa s t - g r ow-ing middle class. It has been reported intrade journals that the entire U.S. ex p o r tof waste paper, now the nation’s biggestexport commodity in terms of weight, isi n s u fficient to meet the Chinese demandand, hence, they are seeking new sourcesof waste paper imports.

C u r r e n t l y, the charter market for mod-ern ships of all types is experiencing un-precedented, premium daily hire rates.M a ny ship operators have announced ex-t e n s ive fleet expansion plans, and ship-yards in Korea, Japan, and China are fullyb o o ked for the next few years, bu i l d i n gships as dive rgent as giant containershipsand very large oil tankers to smaller feedervessels and handy-max dry bulk carriers.

While the global maritime sector wa sone of euphoric growth and aplomb, there

was nothing dramatically different forU.S.-based maritime interests. Indeed,t h ey might be tempted to term the pastyear lackadaisical at best and paranoidat worst! Perhaps the most telling deba-cle was that the nation could muster onlyone double-hull U.S.-flag product tanke r(out of the 26 chartered) to deliver jet fuelfor Operation Iraqi Freedom-related ac-t ivities. Gradual retrieval of traditionalU.S.-based shipping interests from mar-itime activities, most ostensibly in theliner market, has left us with a huge la-cuna that will remain hard to fill even dur-ing the best of times. The declining im-portance given to maritime activities inthe United States and their lack of appealin the corridors of power and policy m a k-ing have continued their slide, to the pointwhere they are almost nonissues today.

U. S . Trade vs. M e rchant MarineMaritime Administration (MarAd) sta-

tistics (based on Lloy d ’s Reg i s t e r / Fa i r p l a ydata) indicate that as of 1 July 2003, theU.S. fleet (ships owned by U.S. parentcompanies) consisted of 990 ships of1,000+ gross tons, totaling 46.9 milliondeadweight tons. This placed the UnitedStates fourth on the list of total dead-weight tonnage owned (after Greece,Japan, and Norwa y, in that order). How-

U.S. Merchant Marine and Maritime Industry in ReviewD r. Shashi Kumar

In 2004, China was the big name in the maritime industry. Its extraordinary economic boom grew Chinese exports and imports anddrove recovery in global shipping markets; the Chinese government announced plans to build the world’s largest shipyard nearShanghai; and a new bilateral agreement with the United States is expected to allow Chinese carriers to enhance their U.S. marketshare. This China Shipping Line containership is passing under Vincent Thomas Bridge in the Port of Los Angeles.

eve r, a better picture emerges if one looksat the U.S. fleet in relation to the nation’swaterborne commerce. Figure 1 shows them a r ket share of U.S.-flag operators from1981 through 2001. In every categ o r y, thepercentage share of U.S.-flag operatorshas dropped. As of 2001, slightly morethan 2% of the nation’s total wa t e r b o r n eforeign commerce was being transportedon U.S. flag vessels, an all-time low.

E ven more revealing is the maritimee n gagement of the nation. Per 2004 U.N.Conference on Trade and Deve l o p m e n t( U N C TAD) statistics, the United Statesgenerates 14.5% of the world trade invalue, but owns only 5% of the world fleetin terms of deadweight tonnage. Tr a d i-tional U.S. trading partners such as Ger-m a ny, the United Kingdom, Canada,France, and Italy are in the same predica-ment, but the case of our major A s i a ntrading partners is quite the contrary (seeTable 1). In terms of percentage share, thefour top Asian trading nations’ d e a d w e i g h ttonnage capacity is more than their wo r l dtrade generated in value. Japan, China,and Korea have a vast maritime presencet o d a y, are home to some of the fa s t e s tg r owing global maritime enterprises, andh ave built a significant broad-based ship-ping milieu, contributing to large foreignexchange ga i n s .

Institutional and RegulatoryD evelopments

This has been quite an active year interms of institutional invo l vement in mar-itime affairs and regulatory deve l o p m e n t s .S y n o nymous with what is going on in so-cieties the world over and in the UnitedStates in particular, regulatory initiative sto combat terrorism and enhance safetyand security on board ships and at mar-itime facilities and installations have beenparticularly prominent.

In the United States:• Security-Related Dev e l o p m e n t s. In theUnited States, the ongoing attention give nto maritime activities from a national se-curity perspective is unprecedented. Strictelectronic reporting requirements now arein place for the nation’s imports and ex-ports, part of the overall policy to preve n tn e farious groups or their cargoes fromreaching U.S. soil. Oceanborne cargo im-ports must be reported 24 hours prior toloading in a foreign port and outboundc a rgo must be reported 24 hours beforedeparting. Physical examination of in-coming cargo containers remains a thornyissue, with some advocating ex a m i n a-tion of 100% of incoming containers and

others seeing that as necessary only on aselected basis. The bottleneck that wo u l darise from a thorough physical ex a m i n a-tion of every import container and thechaos that would ensue in our well-tunedglobal supply chains are predictable. How-eve r, it is notewo r t hy that physical ex-amination of incoming sea containers byCustoms officials is at an all time high—more than 5% of all import containers.

A good number of the ships and portfacilities missed the 31 December dead-line to submit security plans to the U.S.Coast Guard, mandated by the MaritimeTransportation Security Act of 2002. A sof February 2004, 600-700 of the 8,500vessels and 200-300 of the 3,200 shorefacilities had not filed and were to befined $10,000. Two key cargo securityprograms recently were taken from theTransportation Safety Administration andg iven to the Department of Homeland Se-curity (DHS). The Border and Tr a n s-portation Security Directorate of the DHSn ow is responsible for the deve l o p m e n tof “container seal” standards and the “se-cure systems of transportation” initiative .

Operation Dry-dock, a 14-month jointi nve s t i gation by the U.S. Coast Guard andthe FBI to detect document fraud associ-ated with U.S. merchant mariner creden-tials resulted in some interesting fi n d i n g s .Examining the records of more than200,000 individuals, the agencies discov-ered many cases of potential fraud andabsconding criminals, in addition to ninei n d ividuals with terrorist links mas-querading as U.S. merchant mariners.

During the Iraq wa r, a number of mer-chant mariners who wanted to serve onMilitary Sealift Command (MSC) shipsdid not receive clearance from a jointscreening conducted by the U.S. CoastGuard, the FBI, and the U.S. Nav y. It isexpected that mariners will be issued newi d e n t i fication cards in 2004 using bio-metric technology as part of the Tr a n s p o r tWo r ker Identification Credential program,replacing the traditional Z-card issued bythe Coast Guard. Although biometric tech-nology has many advantages, it is fa i r l ycomplicated and ex p e n s ive to implement.

The use of Global Positioning Systemsatellites and radio frequency identifi c a-

www.navalinstitute.org May 2004 • PROCEEDINGS 111

Table 1: Maritime Engagement of the United States and Top Four Asian Trading Nations (as of end 2002)

% share of Ratio of world world trade % share of trade generated to

C o u n t r y generated in va l u e DWT ow n e d DWT share owned

United States 1 4 . 5 5 2 . 9J a p a n 5 . 7 1 2 . 4 0 . 4 6C h i n a 4 . 7 5 . 3 0 . 8 9Hong Kong SAR 3 . 1 4 . 5 0 . 6 9Rep. of Ko r e a 2 . 4 3 . 1 0 . 7 7S o u rc e : U N C TAD Maritime Rev i ew 2003 DWT = deadweight tonnage

Source: Calculations based on MarAd data

tion (RFID) technology to enhance portand container security has received con-siderable attention. A recent study foundthat the RFID technology would offer theadded benefit of financial sav i n g s — m o r ethan $220 per container—for the shipper.In addition to the federal initiatives, atleast one state has begun its own maritimesecurity program. New York has estab-lished the New York State Strategic Cen-ter for Port and Maritime Security with$1.5 million in startup funds from thestate. The project invo l ves SUNY Mar-itime College, Stony Brook Unive r s i t y,and Brookhaven National Laboratory. • Maritime Promotional Po l i c y. The Mar-itime Security Program (MSP) that re-placed the old operating differential sub-sidy program in 1996 (and is due to ex p i r eon 30 September 2005) has received itssecond lease on life. The original MSPfleet consisted of 47 militarily useful linervessels, e.g., containerships and roll-

o n / r o l l - o ff ships. The owners of these ve s-sels received $2.1 million per ship to off-set their higher operating cost as a quidpro quo for their governmental use intimes of need. Although this was less thanwhat those shipowners received under theold program, it was a welcome relief tothose who anticipated elimination of allsuch subsidies by Congress in the mid-1990s. Given today’s security-consciouse nvironment, the lobbying for reautho-rization of an expanded MSP by shipow n-ers and maritime labor unions has metwith at least partial success.

The newly approved MSP will include60 U.S.-flag ships for ten years. How eve r,rather than the $3.5 million per ship peryear subsidy that was proposed, a slidingscale has been established: $2.6 millionfor fiscal years 2006-8, $2.8 million forfiscal years 2009-11, and $3.1 million forfiscal years 2012-15. There will be fourc a t egories of eligibility based on ow n e r-

ship and also priorities for the award ofn ew agreements. A c c o r d i n g l y, the fi r s tfive slots of the new MSP program willbe for tankers owned by U.S. citizens,to rectify problems highlighted duringOperation Iraqi Freedom. Financial as-sistance for construction of these tanke r sin U.S. yards will be provided throughthe Defense Authorization Act for FiscalYear 2004 (H.R. 1588). The act estab-lishes a National Defense Tank Ve s s e lConstruction Assistance Program that willg ive U.S. citizen owners up to 75% of ac-tual construction costs, to a maximumof $50 million per ship.

The current MSP participants and theirfleets are listed in Table 2. It is worth not-ing that Maersk Line has received ap-p r oval from the Maritime A d m i n i s t r a t i o n(MarAd) to take direct control of the 15containerships previously owned by Sea-Land and presently operated by U.S. ShipManagement. This would make the Dan-ish firm the largest MSP benefi c i a r y. T h em ove was being challenged by U.S. ShipManagement. Also, the nine container-ships operated by American Ship Man-agement (and owned formerly by A P L )n ow are owned by Neptune Orient Lines,a Singapore-based company with signif-icant governmental stake .• U.S.–China Bilateral A g re e m e n t. T h e r eis now a successor to the old U.S.–Chinamaritime agreement that expired in 1998.After almost five years of negotiation, thet wo nations signed the new document inDecember 2003. It will allow greater free-doms for U.S. firms (which includes thirdparties such as non-vessel-operating com-mon carriers and freight forwarders) tocompete more eff e c t ively in the Chinese


The tanker sector had a good but volatile year, in part because of the war in Iraq. Here, the U.S. Navy guided-missile cruiser Chosin(CG-65) enforces an exclusionary perimeter around the Mina-Al-Bkar oil terminal as the tanker AbQaig takes on oil. The AbQaig isthe first commercial vessel to receive Iraqi oil as an offshore customer since 1991, outside the U.N. Oil-for-Food program.

Table 2: Maritime Security Program Participants and Fleet

Pa r t i c i p a n t F l e e t

American Ship Management, LLC 9 containershipsAmerican International Car Carriers 3 RO / RO sCentral Gulf Lines, Inc. 3 RO / RO sE-Ships, Inc. 3 containershipsFirst American Bulk Carrier Corp. 2 containershipsFirst Ocean Bulk Carrier I, LLC 1 containershipFirst Ocean Bulk Carrier II, LLC 1 containershipFirst Ocean Bulk Carrier III, LLC 1 containershipMaersk Line, Ltd. 4 containershipsOSG Car Carriers, Inc. 1 RO / ROU.S. Ship Management, Inc. 15 containershipsWaterman Steamship Corp. 3 LASH and 1 RO / ROS o u rc e : U.S. Maritime A d m i n i s t r a t i o n

m a r ket. In return, Chinese carriers are ex-pected to graduate from their “controlledcarrier” status with the Federal MaritimeCommission (FMC). Controlled carriersare required to post 30-days notice beforemaking rate reductions, unlike other car-riers. This precludes their ability to maketimely marke t - d r iven responses. The lift-ing of this status will free the rapidlyg r owing Chinese carriers to enhance theirU.S. market share tremendously. • Antitrust and Other Regulatory Dev e l-o p m e n t s. The ongoing saga of corporatescandals, abuse of pow e r, and erosion ofbusiness ethics also hit the maritime sec-t o r, albeit at a relatively modest level. T h eNational Customs Brokers and Fo r wa r d e r sAssociation of America and the Interna-tional Association of Non-Vessel Oper-ating Common Carriers filed a joint pe-tition alleging discriminatory practices bythe Tr a n s - Pa c i fic Stabilization A g r e e m e n t ,a discussion agreement that includes allmajor transpacific liner operators duringthe 2002-3 contracting season. The fa c t -finding inve s t i gation by the Federal Mar-itime Commission was settled in 2003,according to which the carriers invo l ve ddenied wrongdoing but agreed to refrainfrom certain practices in future. T h eTr a n s - Pa c i fic Stabilization Agreement wa sfined $1.35 million, or about $96,000 perm e m b e r.

The Federal Maritime Commission it-self came under severe criticism for thehigh civil penalties it imposed on Sea-Land and some of the intermediaries fort a r i ff violations. There is an industrywidev i ew that although the violations techni-cally were “prohibited acts,” by continu-ing to aggressively enforce tariffs in anage when market forces are expected toplay a bigger role in shipper-carrier rela-tions (such as through confidential ser-vice contracting provisions) the FMC isbeing overzealous and even out of syncwith the realities of the marketplace. Mosts t a keholders do not see the need for on-going tariff filing and the enforcement roleof the FMC.

This was a particularly bad year for theparcel tanker industry, a very specialized,niche-oriented sector that typically doesnot get embroiled in antitrust issues. Fo u rprestigious operators—Jo Ta n kers BV,Stolt Nielsen SA, Odfjell Seachem A S ,and To kyo Marine—were targeted for an-titrust violations by the U.S. Departmentof Justice. The allegations included col-lusion and cartel behavior such as riggingbids, setting prices, and dividing the mar-ket. Stolt Nielsen received conditional

amnesty from U.S. prosecutors and is nowunder rev i ew for subsequent violations,and its U.S.-based managing director wa sc h a rged for his role in the conspiracy. T h echairman and a vice president of OdfjellSeachem pleaded guilty in October 2003,f o l l owed by a former exe c u t ive of JoTa n kers in December 2003. These deci-sion make r s ’ desire to establish supra-m a r ket prices could be perceived ashuman frailty, but expecting to get awa ywith such illegal acts in this day and ageis totally irrational. In the case of StoltNielsen, it is believed its illegal activ i t i e swere spurred by huge losses sustained inunrelated corporate ventures, such as StoltO ffshore and Stolt Sea Farm.

Global deve l o p m e n t s :• Security-Related Dev e l o p m e n t s. The In-ternational Ship and Port Facility Secu-rity (ISPS) Code will become mandatoryon 1 July 2004 and the Safety of Life atSea Convention amended accordingly.H ow eve r, there is a concern on the partof the International Maritime Orga n i z a-tion (IMO) and other observers that thismight become yet another regulation thatexists solely on paper. Hastily preparedsecurity plans and their routine acceptanceby flag states will not promote the ob-j e c t ives of the ISPS Code. The EuropeanUnion (EU) has taken the ISPS Code toa higher level by expanding its prov i s i o n sto include the entire port and surroundingareas. The cargo reporting rules in the EUalso are different and mandate that carg omanifests be transmitted to EU Customs24 hours before the goods are presentedto Customs.

A new international Convention on Sea-fa r e r ’s Identity Documents will go intoe ffect in 2004 despite U.S. opposition.Possession of this document would allows e a farers to enter ports in other countrieswithout visas. The United States elimi-nated crew visas in December 2002 andwill not issue an entry visa for a crewmember other than through personal ap-pearance at a consular offi c e .• Maritime Pira c y. Ironically coincidingwith the huge financial success of Hol-l y wo o d ’s P i rates of the Caribbean, 2003was a record year for maritime piracy.There were 445 attacks on merchant shipsin 2003, a 20% increase from 2002. T h enumber of seamen killed in these attacksincreased to 21, a 110% jump. Other re-lated grim statistics include 71 missingand 88 injured crew and passengers, and359 hostages taken. One hundred twenty-one of the reported incidents occurred offIndonesia, 58 off Bangladesh, and 39 off

Nigeria, the three top areas of maritimep i r a cy activities. It is mind-boggling thatwhen it comes to protecting maritimecommerce, our initiative and ingenuity fa l lfar short of those of a handful of deter-mined petty criminals. A fully loaded oilt a n ker in restricted waters under piracy orterrorist attack is no less a weapon ofmass destruction than any other we mightbuild. This area needs the immediate at-tention of all nations interested in a globale c o n o m y, for left alone, it has the poten-tial to disrupt globalization as we knowit today. • N ew Ta n ker Reg u l a t i o n s. Last year wa sa landmark year for tanker shipping fora number of reasons, one being that forthe first time in history we now havemore double-hull tankers in operationthan single-hull tankers. The P re s t i ge i n-cident off the Spanish coast and pressurefrom the European Union led to rapidamendments to the MARPOL reg u l a t i o n s .As per the new IMO Amendments ap-p r oved in December 2003, the single-hullt a n kers that were to be phased out by2015 now face phase-out by 2010. T h i sdoes not preclude a flag state from ex-tending the deadline up to 2015 fort a n kers 25 years and younger on a case-by-case basis. How eve r, other nations willh ave the right to ban such ships from en-tering their ports.

A g g r e s s ive implementation of single-hull phase-out would create a capacitycrunch in the market. Ta n ker owners withgood modern tonnage are in for a returnof the golden years of tanker shipping (ex-perienced originally in the mid-1970s).

The amendments also include a newdouble-hull requirement for the trans-portation of heavy grade oil such as heav ycrude oil, fuel oil, bitumen, tar, and theiremulsions that will go into effect as earlyas 5 April 2005. In addition, the Condi-tion Assessment Scheme—enacted sub-sequent to the E r i k a disaster off the Brit-t a ny coast of France in 1999—wherebyflag-state administration rev i ews and con-firms the results of surveys on single-hullt a n kers conducted by a classification so-ciety to assess the condition of the shipsconcerned, has been expanded. The newrequirement would go into effect for sin-gle-hull tankers (5,000 deadweight ton-nage and above) when they are 15 yearsold, in contrast to the previous 25-yearage threshold.

There are a number of remarkable de-velopments to note here. The time be-tween a shipping catastrophe in a sensi-t ive region with political clout (such as


the EU) and the enactment of new leg i s-lation aimed at preventing such catastro-phe is becoming increasingly short. Ifsuch regulatory steps are adopted as ex-peditiously (as in the P re s t i ge case) re-gardless of where the next shipping dis-aster occurs, it would be true progresst oward safer sailing and cleaner oceans.Some would argue that, like the U.S. en-actment of the Oil Pollution Act of 1990,the European Union is pursuing an ag-g r e s s ively interventionist policy. The in-creasing clout of the EU in initiating newshipping legislation is beyond question. • Liner Shipping Regulation in Euro p e.In a major victory for members of theTrans-Atlantic Conference Agreement, therecord $300 million fine imposed aga i n s tthem by the European Commission in1998 was annulled by the Court of First

Instance of Luxe m b o u rg for proceduralreasons and lack of evidence. Despite this,liner conferences had little solace during2003, as the EU Competition Directorateis vigorously reexamining its Reg u l a t i o n4056/86 that grants exemption from EUcompetition law to liner conferences. T h i sis a drastic change in European attitudet oward liner conferences, especially asm a ny U.S. trading partners historicallyh ave viewed the Federal Maritime Com-m i s s i o n ’s regulation of liner shipping asextraterritorial application of U.S. ruleson a global business. • Other Regulatory Dev e l o p m e n t s. Inearly 2004, after ten years of neg o t i a t i o n s ,the IMO finally agreed to a new reg u l a-tion for ships’ ballast wa t e r. Once it is rat-i fied by the required number of nations,only ten organisms in every cubic meter

of ballast water will be allowed. The U.S.proposal was to limit this to 0.04 orga n-isms per cubic meter.

Market Dev e l o p m e n t s

F e a r n l eys, a Norwegian shipbroke r, es-timates world seaborne trade grew 4.4%in 2003, approximately three times theg r owth rate for 2002. This has aff e c t e devery shipping market substantially, al-though none could match the spectaculargains of the dry bulk market. • The Dry Bulk Marke t. Every categ o r yof dry bulk other than grain ex p e r i e n c e ds i g n i ficant increase in volumes trans-ported. It is believed that more than halfof these increases were related to the Chi-nese economic growth in general and itssteel trade in particular. The market va l u eof dry bulk carriers and their 12 monthstime charter rates exploded during thefourth quarter, with capacity utilizationestimated to be in the mid-90% range. T h eaverage daily hire rate in the spot mar-ket for all bulk carriers almost tripled in2003 compared to 2002. • The Ta n ker Marke t. The tanker sectoralso enjoyed one of its best years sincethe mid-1970s. Unlike in the dry bulk sec-t o r, freight rates in the tanker market werevery volatile, with market highs at theearly part of the year and toward the lastq u a r t e r. A number of reasons have beencited for the tanker market performance,including the war in Iraq, supply disrup-tions in Venezuela and Nigeria, conges-tion in the Bosporous and Dardanellesstraits, and severe winter weather in theNorthern Hemisphere, as well as the sig-n i ficant increase in oil consumption inChina and other fast growing Asian coun-tries. R. S. Platou estimates tanker ca-pacity utilization rates of close to 90%will continue in 2004. • The Liner Marke t. Liner operators ex-perienced a year of strong commercial re-sults. There are two remarkable deve l o p-ments to note. The first is the resurg e n c eof transpacific all-water routes to the EastCoast, a trade that was almost written offbarely a decade ago during the onslaughtof the intermodal/double-stack revo l u t i o n .There are 19 such routes today (18 for theEast Coast and 1 for the Gulf Coast). T h ePanama Canal and the East Coast con-tainer ports are the big winners here. T h esecond development is the evening out ofthe peaks and va l l eys typical in transpa-c i fic eastbound container shipping. T h eelimination of a distinct peak season andthe relative stability in volumes move dthroughout the year should provide a


Built in France at a cost of $800 million, the Queen Mary 2 completed her maidentransatlantic voyage early this year, departing Southhampton on 12 January for the 14-day cruise to Fort Lauderdale.

modicum of comfort for operators whoh ave been subject to the seasonality oftrade from the very beginning of linershipping services.

The U.S. liner trade, in particular thet r a n s p a c i fic trade, remains highly imbal-anced, with imports far exceeding ex p o r t s ,despite a weakening dollar. Waste paper,the largest U.S. export commodity in vo l-ume, reached a new high with 734,000containers (20-foot equivalent units, orTEUs). There is a move on the part of car-riers to raise the freight rate of this carg oin 2004.

As in other trades, China plays a majorrole in the liner sector, and shipped morethan half of the 9 million TEUs that cameto the United States from Asia. Most top-tier operators are reporting a return top r o fitability despite the problem of in-creasing empty container movements. Itis estimated that liner operators now spendabout $1 billion annually solely for po-sitioning their empty containers.

S t r u c t u r a l l y, the liner sector is ex p e r i-encing increased economic concentration,with the top 25 operators controlling 25%of the global capacity. Ten of the top 15carriers now are based in Korea, Ta i wa n ,China, Japan, and Singapore. A l t h o u g hcontainer carrying capacity is expected toincrease close to 10% for the next threeyears, rate levels are expected to remainp r o fitable and operators are likely to re-c e ive the increases they demand duringcontract negotiations (usually held in Mayeach year). Three top operators (CP Ships,H a p a g - L l oyd, and P&O Nedlloyd) haveannounced changes at the top exe c u t ivel evel. P&O Nedlloyd has announced itsimpending transformation to an indepen-dent, publicly listed company, not affi l i-ated to any large parent company — u n l i keother public liner companies in ex i s t e n c et o d a y. Royal Nedlloyd reportedly will bu yout the 50% P&O interest, ending a pres-tigious era in British liner shipping his-t o r y. The brand name P&O Nedlloyd isexpected to continue.• Cruise Shipping. The Queen Mary 2(150,000 gross tons), the wo r l d ’s new e s tand largest passenger liner, entered ser-vice in late 2003 and has replaced thevenerable QE 2 on the transatlantic run.

The U.S. cruise industry is growing be-cause of the increasing number of 45+y e a r-old baby-boomers, the demographicgroup most likely to take an ocean cruise.C a r n ival, the market leader, now controls13 brands, including P&O PrincessCruises, its latest acquisition. It also has17 new ships on order. Operators are cap-

italizing on passengers’ reluctance to flyin the post-9/11 era, and cruise ve s s e l sincreasingly are being placed in reg i o n a lhub locations within driving distancefrom major markets. How eve r, almostt wo-thirds of all direct expenses of theU.S. cruise industry still is spent inFlorida, California, New York, A l a s k a ,Washington, and Texas (in descendingorder). Mexico is now the most popularcruise destination for Americans. Figure2 shows the market share of major cruiseline operators in the United States for2003. • Short-Sea Shipping. There are many ef-forts under way to promote short-sea ship-ping in the United States, especially alongthe Atlantic seaboard. It appears the focusis on mitigating congestion by mov i n gcontainers using a hub-and-spoke sys-tem using small feeder ships off I-95 andits corridors. About 50 companies arei nvo l ved in a public-private partnershipcalled Short Sea Shipping CooperativeProgram under the auspices of MarAd.Captain Warren Leback, a former mar-itime administrator and shipping exe c u-t ive, has remarked that such short-seashipping initiatives based on import-ex-port containers are unlikely to reach fullpotential. He recommends involving do-mestic truckers using trailers and roll-o n / r o l l - o ff ships, and providing a com-p e t i t ively priced service for interior points.This is very insightful advice that hope-fully will receive the full attention of theparties invo l ved. • S h i p bu i l d i n g. The boom in freight ratesand shipping markets has had an obv i o u simpact on the shipbuilding sector. It is es-timated that about twice the amount of

n ew tonnage ordered in 2002 was orderedin 2003. All major Asian yards are fullyb o o ked for the next three years. South Ko-rean shipyards received almost one-halfof all new orders in 2003 and reportedrecord profits for the year. China is nowa strong player in new ship construction—ranking third after South Korea andJapan—and posted significant increasesin new orders. Given the tight market con-ditions in general and the increasing laborcost in South Korea, it is expected thatthe Chinese builders will carve an eve nbigger share in future years. The Chineseg overnment is facilitating this throughcareful planning, such as the recently an-nounced goal of building the wo r l d ’sl a rgest shipyard along Shanghai’s Changx-ign Island; operations are expected tob egin in 2007. By 2015, when the yard isexpected to be fully operational, it wille m p l oy more than 80,000 wo r kers andbuild highly sophisticated vessels, in-cluding liquefied natural gas tankers, su-p e r t a n kers, and cruise vessels.

An increase in shipbuilding prices wa sto be expected, given the ongoing tightm a r ket conditions. Add the decliningvalue of the U.S. dollar—the currencyused in quoting new - building prices—andthe newly mandated accelerated phase-outof single-hull tankers, and the ingredientsfor a “perfect storm” in the shipbu i l d i n gsector were set in motion. Predictably, thecost of building new ships rose close to20% in 2003. Interestingly, although them a r ket for scrap iron also is at an all-timehigh, the number of ships scrapped in2003 was far less than that in 2002.

Commercial shipbuilding continues tobe a high priority action item for MarAd.


The primary impediment is the cost dif-ferential, with Asian yards pricing simi-lar new - builds at about one-third the es-timated U.S. shipbuilding price. A l t h o u g hsome commercial construction is underway at a few U.S. yards, this primarilyis for Jones Act trade. The fiscal 2005budget does not include any increase forthe Title XI loan guarantee program. T h ei l l - fated Project America plan and the dis-repute it brought to the Title XI programare stark reminders of the consequencesof ex c e s s ive political interference in mer-chant shipping and shipbuilding policy.I r o n i c a l l y, the Pride of A m e r i c a, one oft wo ships under construction in Bremer-h aven for Norwegian Cruise Line andscheduled to enter the Hawaiian servicewith Jones Act exemption, was damagedin a severe winter storm at its fi t t i n g - o u tpier in early 2004. Delivery is now ex-pected to be several months past the pre-viously scheduled 4 July date.

Po rt and Terminal OperationsPort and terminal operators on the

West Coast are hoping to benefit fromthe new longshoremen’s contract, whichshould enhance effi c i e n cy through au-tomation and other streamlined proce-dures. It is estimated that terminal pro-d u c t ivity will improve by 50% throughbetter yard operations and handling effi-c i e n cy. Meanwhile, negotiations are underway on the East Coast between man-agement and the International Long-s h o r e m e n ’s Association (ILA). It has beenwidely reported that the negotiations willnot lead to a strike. The ILA also dealtwith a corruption controversy invo l v i n gthe union in 2003, which led to the adop-tion of a code of ethics and a telephonehotline to report and deal with unethicalpractices.

The nation’s ports also have been bu s ycomplying with the new port security re-quirements. The allocation of funds forsecurity-related expenses remains contro-versial, with the Bush administrationproposing $46 million for port security—far short of the $300 million recom-mended by the Senate Governmental A f-fairs Committee. An allocation of $40million in government funding is nowavailable to build a marine terminal inPhiladelphia as part of the Department ofD e f e n s e ’s Strategic Sealift Capability. T h i sis expected to boost the decade-old fa s t -ship project and create jobs in the Dela-ware Va l l ey reg i o n .

I n t e r n a t i o n a l l y, the top 20 global con-tainer operators have enhanced their mar-

ket shares, and according to Drewry Ship-ping Consultants, there is now a distincts t r a t i fication within that list of leaders.The global market share of the top 20 ter-minals operators is now 57%, of whicht wo-thirds is that of the top four—Hutchi-son Port Holdings of Hong Kong, PSA ofS i n gapore, APM Terminals of Denmark,and P&O Ports of the United Kingdom.Two U.S. firms are in the top 20, SSAMarine at number 10 and CSX World Te r-minals at 15. SSA Marine received a $4.8million one-year contract to assess andthen manage the port of Umm Qasr, Iraq,and is now six months into the contract.The Chinese ports of Shanghai and Shen-zhen crossed the 10 million TEU through-put mark in 2003, a distinction not en-j oyed by any U.S. or European port.Shanghai is expecting to handle as manyas 25 million TEUs by 2020 and is plan-ning a deepwater port at Yangshan thatwill accommodate 50 super- Panamax con-tainer ships.

O u t s o u rc i n gThe outsourcing of high-tech service-

sector jobs to developing countries hasgarnered a great deal of public attentionin the United States. In the maritime sec-t o r, outsourcing of some aspects such asdocumentation and manning has a longh i s t o r y. For example, A P L’s global doc-umentation, once handled through NorthAmerican and European offices, is nowhandled in Shanghai. And the concept ofopen registry is by all means one of theforemost examples of outsourcing inglobal business and shipping liberalism.

I n t e r e s t i n g l y, the world merchant fleetunder major open registries shrank in ton-nage by 4.7% in 2002 after years ofsteady growth. Although both Panama andLiberia recorded a reduction in their ton-nage, they still are the market leaders andaccount for two-thirds of the tonnageunder the top six open registries. Liberiain particular came under U.N. SecurityCouncil scrutiny, which led to a resolu-tion in 2002 to ensure that revenues fromthe registry are used for legitimate pur-poses. In early 2003, U.N. monitors weresent to Liberia to monitor its implemen-tation. The nation has responded with apilot project to provide secure identitycards for seafarers in collaboration withthe IMO. It is believed that the open reg-istry tonnage reduction is a direct resultof a general tightening of the fiscal rulesof developed nations. Currently, accord-ing to UNCTAD statistics, 64% of thetotal tonnage of the 35 most important

maritime countries and territories areunder foreign flag. Among the deve l o p e dnations, the share of foreign-reg i s t e r e dtonnage in 2002 was 70.2%.

Maritime EducationAll maritime academies in the United

States are reporting high enrollment num-bers in their traditional licensing programsthat prepare merchant marine and nava lr e s e r ve officers. This is rather ironic be-cause the declining fleet is bound to af-fect the academies’ ability to place thesemidshipmen in merchant shipping billets.In addition, the academies must considerthe impact of potential ove r s u p p l y, espe-cially as most U.S. merchant mariners areu n l i kely to sail on open registry fleets fora variety of reasons.

One new growth area in education issecurity training. In addition to traditionalmaritime institutions, private entrepreneursh ave a strong presence in this field. Fo rexample, SeaSecure, a Ft. Lauderdale-based company is now active in more than90 countries and 165 seaports, and re-cently was awarded a contract to prov i d emaritime security and antiterrorism train-ing to the Marine Department of HongKong, SAR.

O u t l o o kThe global merchant marine likely will

experience another year of growth and op-timism in 2004. Although some questionthe ability of the Chinese economic en-gine to continue driving the world econ-o m y, every indication is that it will con-tinue to do so for the near future. The fa s tg r owing Indian economy is another A s i a nm a r ket that will fuel significant growth intrade. The attention given to port and mar-itime security in major seaports the wo r l dover will increase. Although there will besome efforts to increase the attentiong iven to the maritime sector in this coun-t r y, given the dynamics of an electiony e a r, this is unlikely to make any signif-icant progress. So, here’s wishing ourmariners “safe seas and fair winds” untiln ext year.

D r. Kumar is a master mariner and associate dean andprofessor at the Loeb-Sullivan School of InternationalBusiness & Logistics, Maine Maritime A c a d e m y. A ninternationally recognized maritime economist andtransportation/logistics management educator with adistinguished record of scholarly publication, he hada successful decade-long operational career in themerchant marine. Dr. Kumar holds a Ph.D. in appliedeconomics from the University of Wales, a master’sin maritime business management from the MaineMaritime A c a d e m y, and a bachelor’s from the Uni-versity of Bombay. He is a naturalized U.S. citizen.
