May/June 2000
It’s no longer business-as-usual in the bulk-cargo shipping industry. Here’s how the Internet and other developments are changing the business.
By Barry Parker
Barry Parker is principal of bdp1 Consulting Ltd., a Bayville, N.Y., firm that consults to the shipping industry on freighting and Internet issues.
Ocean freighting is a worldwide industry that’s becoming increasingly regulated, competitive, and—mirroring the businesses it serves—more Internet-connected.
According to recent estimates, the size of the dry bulk-freight market—which includes ferrous scrap shipments—is around $30 billion to $40 billion annually. Cargoes of ferrous grades such as HMS, bundles, and shredded total an estimated 30 million tons a year internationally, reports Drewry Shipping Consultants Ltd. (London). In 1999, the United States alone exported about 5.2 million tons of ferrous scrap, according to the U.S. Department of Commerce, Bureau of the Census.
Shipments of ferrous scrap play an important role in the market dynamics for Handy-size vessels, which can generally carry 20,000 to 35,000 tons of cargo, and Handymax vessels, which can haul 40,000 to 45,000 tons.
Rates for such shipments are freely negotiated between the shipper and the vessel owner, almost always through a network of specialized shipbrokers. Freight rates in the main scrap metal trades began moving up in 1999 and continued to rise through early 2000, boosted by the economic rebound in Asia (except in Japan) and dramatic increases in the price of fuel oil for ships.
According to Mid-Ship Marine Inc. (Port Washington, N.Y.), a large dry-cargo broker, the rate on the standard U.S. Gulf Coast/East Coast-to-Japan cargo of some 40,000 tons began 1999 at $23 to $24 a ton and increased to $30 to $31 a ton this spring. Similarly, the daily value in the charter market for a Handy-size vessel, as evidenced by the demurrage cost negotiated between owners and charterers, moved up from approximately $7,000 a day to around $9,500 a day in the same period.
As noted, some of these price increases can be traced to higher energy costs. Intermediate fuel oil, a low-grade fuel used in the typical slow-speed marine diesel engine, rose from $55 a mt in
early 1999 to around $135 a mt this spring. For a vessel delivering 40,000 tons of cargo and consuming 35 tons of fuel daily on a voyage of 30 days at sea, the fuel increase alone would be $2.10 a mt of cargo, all else being equal.
Another ongoing challenge for ferrous scrap shippers is that they must compete for Handy-size and Handymax vessels with other raw material shippers. Scrap shipping rates are affected not only by rising steel industry demand in Europe and the Far East—principal destinations for U.S. ferrous scrap—but also by increased flows of other cargo moving in similarly sized vessels.
The estimated 30 million tons of annual ferrous scrap shipments worldwide should be put into the perspective of more than 1 billion tons of dry bulk raw materials and grains. Two big commodities—iron ore and metallurgical coal—also benefited as Asian steel production recovered in 1999 and early 2000. Strengthening currencies in the Far East have also added to the attractiveness of imported raw materials.
Adding to the tight competition for ship space between scrap and other bulk commodities, analysts note that in the Handy-size and Handymax ship categories, the number of new vessels under construction is very low—around 3 percent of the existing fleet—compared with other ship categories, leaving the sector vulnerable to tightness in available ship space and further freight increases.
Floating Into the Web
The volatility of freight rates, caused by worldwide demand for ships in the face of available supply, is old news. What’s not old news are the radical changes regarding ship chartering and the services available to cargo interests.
The business of physically moving cargo goes on, but new tools are changing the way traders and shipping companies can interact with the rest of the raw material supply chain.
For instance, a handful of shipbrokers in London are offering customized hedging contracts called forward freight agreements, modeled after commodity “swaps,” which are financial contracts that allow traders to hedge price risk by entering into an agreement with a counterparty with an opposing market view.
Some proactive shippers were able to protect themselves against the recent freight spike by using such instruments. Similar instruments are offered for buyers of marine fuels. These could be of interest to shippers who operate vessels under time charters and who are, therefore, buyers of fuel. (Time charters are a form of contract in which the charterer actually operates and directs the movement of the ship. The charterer leases the ship, with the crew aboard, and pays in dollars per day. Unlike the more typical voyage charters, in which the charterer pays per ton loaded, the time charterer also pays for fuel and port costs.)
Shipping, like many other industries, is also embracing the Internet revolution that’s sweeping through the business world. That’s not surprising, given that the freighting industry usually mirrors changes in the industries it serves.
As scrap recyclers came online with simplistic brochure-type Web sites in the mid-1990s, shipbrokers were doing the same. As online business-to-business commerce gained momentum, sites such as www.e-steel.com, www.materialnet.com, and www.metalsite.com emerged as exchanges for trading finished and raw materials.
MetalSite, partly owned by steel producers, announced in March the launch of a portal for the trading of ferrous scrap (www.scrapsite.net). E-Steel reportedly plans to offer similar scrap-trading features soon. And ferrous scrap shippers can expect freighting Web portals to inter-link within the year.
Already, i-Shipping.com, a site that provides an electronic shipping exchange for bulk shippers and vessel owners, is reportedly in discussions with a number of Web-based exchanges that deal with steel and scrap trading.
The digital revolution has followed other parts of the chartering business, beyond merely shipbrokering, onto the Web. One example is how cargo surveyors now routinely use digital photographs to accomplish their work. This gives them the ability to examine the cargo long before a vessel leaves the port of loading.
Another example: The United Kingdom Protection & Indemnity Club, a mutual insurance concern for cargo interests, has launched an online forum where cargo surveyors throughout the world compare notes on their experiences with particular cargoes and advise each other on techniques for better cargo stowage and a smoother loading and unloading process. This “Surveyor’s Forum” has “already led to a number of new loss-prevention initiatives,” says Karl Lumbers, a director of Thomas Miller P&I Ltd. (London), the organization that manages the club.
The club also now makes its Loss Prevention Bulletins available to registered users on its Web site (www.ukpandi.com). One recent issue included an article on “The Perils of Scrap Steel,” describing the contamination and commingling of a ferrous scrap load with plastics and rubber that led to a potentially hazardous condition. The article suggested that, as shipowners come under increased environmental scrutiny—a growing trend—the shippers or charterers will also be dragged into the limelight, with the potential for them to be targeted by regulators. Another recent issue described a situation in which live munitions were found in a scrap cargo originating in the Lithuanian seaport of Klaipeda.
A sister company, the Through Transport Club (TT Club), offers similar online resources—albeit more for equipment and terminal operators—on its Web site (www.ttclub.com). While not everyday reading for traders in the commodity, those moving scrap cargoes or operating terminals would be well-served if their insurance brokers logged onto these sites.
Interestingly, the TT Club is also a shareholder, along with a consortium of banks, in the Bolero project, which is now offering electronic document origination and presentment. Bolero members include some of the large Japanese trading houses that are regular buyers of U.S. scrap. Exporters should begin implementing in-house systems compatible with Bolero’s connectivity features.
Thanks to the Internet, it’s also possible now to apply for cargo insurance through CargoCover, a Web-based interface offered by leading insurer Marsh & McLennan Cos. through www.oceanwide.com. Likewise, Chubb, another insurer of materials in transit, has developed Web-enabled electronic interfaces, offered through electronic chartering sites such as Internet Shipbrokers (www.netshipbrokers.com).
Adding Value and Service
As business has become more electronic, shipbrokers have followed the charterers onto the Net and are continuing to add value, albeit with new tools.
In the shipbrokering sector, there are a number of good Web sites, some simply online brochures, others offering more. Examples of shipbrokers working to custom-deliver market news and research can be seen through the Web presence of London-based broker Clarksons (www.clarksons.co.uk) and Paris-based broker Barry Rogliano Salles (www.brs-paris.com). These brokers have enhanced their ability to serve clients and are in the early stages of allowing clients to review cargo information through their sites.
By the end of the year, many of the larger London- and Oslo-based shipbrokers will have “extranets” in place to enable secure document transfer, provide private areas to view cargo status, and even offer limited negotiation capabilities. Clarksons will also reportedly eventually offer forward freight agreement instruments to clients through its Web site.
Though industry pundits had warned that the Internet would take brokers out of the commercial loop, the opposite seems to be true. “Rather than be disintermediated, charter brokers who demonstrably provide their clients with value will assume an even greater role in managing shipments,” says Paul Gridley, CEO of i-Shipping.com. On the flip side, the Net will disadvantage brokers who aren’t justifying their role.
While the Internet will play an increasing role, some brokers are taking a full-service approach to providing service to customers. Mid-Ship Marine (www.midship. com) is offering full-service capability that combines traditional ship brokerage and inland logistics. Robert Diamond, a partner in the firm, says the Internet has benefited his company by aiding in the delivery of services and drastically lowering communications costs since a large chunk of Mid-Ship’s messaging has moved to Internet protocols instead of the more expensive telex network.
Dealing With the Changes
So how should shippers of traditional cargo respond to the rapidly evolving freighting market?
Paradoxically, in the electronic age, the personal role of shipbrokers is still of vital importance. But shippers must be confident that their shipbrokers and other intermediaries are Net-enabled. Shippers should demand market reports, at least on a weekly basis, that provide an overview of cargoes in the marketplace, a subjective assessment of what’s happening, and a listing—perhaps even graphs—of objective market barometers such as the Baltic Handy Index, produced by the Baltic Exchange (London).
As for freight rates, experts suggest that while some of the big increases have been in the larger sizes, the smaller vessels—including Handy-size and Handymax vessels—are vulnerable to upside movement as economic strength continues. In the last market cycle in the mid-1990s, when the shipping market was strong, Handy-size and Handymax vessel freights remained high because of the desirability of such vessels for hauling numerous raw and semifinished materials.
A good shipbroker will help shippers keep track of potential changes in the ocean-shipping business process, which has become increasingly complex. As the business has seen new regulatory initiatives in recent years, scrap shippers have been peripherally drawn in.
To explain, when a vessel is nominated for a shipment, cargo insurers now require the vessel to be in compliance with International Safety Management (ISM) code, which became mandatory in 1998. Vessel charter parties, the contract binding owner, and charterer now require the ship owner to warrant that the vessel has a valid ISM certificate and often require enumeration of the body that issued the certificate. In theory, the safety requirements, designed to weed out substandard vessels, will have a greater effect on some of the older vessels that have been the mainstay of the scrap trade. The result: It’ll be harder and harder to find a very old ship and secure a below-market rate on shipments.
A development in the world of oil tankers may create the need for even greater scrutiny of the brokering process as well as a thorough assessment of legal risks. Traditionally, in a voyage charter, where the rate is quoted per ton, the ship owner assumes the risks of vessel operation and the liabilities of running vessels. However, last December, a large French oil company—the deep-pocket charterer in a chain full of weak links and rusty metal—paid $75 million toward the cleanup of an oil spill.
Increasingly, there’s a feeling that charterers need to exercise greater diligence in the selection of vessels. The dry-cargo side of the business will follow the oil business’s lead here. Ferrous scrap shippers would be smart to ask their shipbrokers to use a methodical process for conducting due diligence of potential vessels to be chartered. This could include examination of databases on Web sites of classification societies (such as the American Bureau of Shipping, www.eagle.org), which inspect ships, as well as examination of databases hosted by Coast Guard-like agencies, which report detentions of ships due to safety considerations.
Look for other regulatory initiatives regarding pollution from vessel smokestacks and even ballast water discharge. Scrap shippers operating vessels under time charters will face direct liabilities for the failure to comply with applicable regulations, while voyage charterers may see additional clauses already added to lengthy charter documents in instances where owners must certify that they’re in compliance. •
Editor’s note: Barry Parker can be contacted at 201/330-0200, ext. 302; e-mail: bdp1@conconnect.com; or www.conconnect.com.
Other shipping resources on the Web include www.maritimemedia.com (for vessel fixtures and descriptions) and www. seatrends.com (for news updates and market reports).
It’s no longer business-as-usual in the bulk-cargo shipping industry. Here’s how the Internet and other developments are changing the business.