The number of individuals attempting to board vessels in South African ports is again reported to be on the increase.

According to our correspondents in Durban, the number of people trying to gain unlawful access to vessels in an attempt at stowing away has increased significantly over the last couple of months. With the current strict approach by the South African Department of Home Affairs to the definition of ‘trespasser’ as opposed to ‘stowaway’, the consequences for shipowners and operators can be serious. Stowaways create considerable operational problems for a vessel’s Master and crew and the repatriation costs for a vessel’s owner/operator can be significant.

Many of the persons attempting to board vessels are illegal immigrants working in South African ports as casual labour. As previously reported in our Gard Alert of 26 August 2015 and 19 March 2014, South African Port Authorities impose an obligation on the crew of the vessel to check the identity of everybody granted access to the ship. Should any unlawful person gain access onto a ship in a South African port, the person will automatically be deemed a stowaway and the shipowner will be liable for the cost of their repatriation, unless the vessel can provide photographic, video or third party evidence (terminal security) that the stowaway attempted to board the vessel in South Africa.

Members and clients with vessels calling at South African ports are urged to be vigilant and be on the alert to possible stowaways. The responsibility remains with the vessel to protect itself and to prevent unlawful visitors getting on board. If a person does get on board without documentation, the ship will be responsible to repatriate that person and local immigration will not enter into any discussion whatsoever. Proper security procedures to prevent unlawful access to the vessel while in South African ports should therefore be implemented and the following measures considered:

No one should be allowed access to the vessel whilst in a South African port unless they are in possession of a Transnet National Ports Authority (TNPA) permit. If an individual without such a permit is boarding as part of a stevedore gang, the stevedore foreman must explain why this person does not have a permit and the crew is advised to take a picture of the stevedore together with the stevedore foreman as evidence that the stevedore boarded the vessel in the actual port. The vessels’ security desk should, if possible, implement a pass system collecting all the TNPA permits from the stevedores upon their arrival and returning the permits to them upon disembarkation. Every visitor should have ISPS clearance as well as photographic identification paper.

Anybody trying to gain unlawful access to the vessel should be escorted to the bottom of the gangway without undue delay and port security called for assistance. Every effort should also be made to classify the person as a trespasser on port property.

Individuals have reportedly tried to run past the security at the top of the gangway and these have been classified as ‘stowaways’ by the local Authorities. To prevent this occurring, it may be advisable to raise the gangway when not in use, or to move the vessels’ security desk to the bottom of the gangway to increase control of access to the vessel. Some are also known to have successfully climbed up berthing ropes or have been found trying to hide in empty containers and log-ships. Although at an additional cost, the use of private security guards patrolling the quayside as well as the forward and aft mooring lines should be considered.

See also the Gard Guidance on Stowaways for an overview of various preventive measures that can be taken by Masters and crew before the ship enters port, during the stay in port and after departure, to prevent stowaways gaining access to the vessel. Sections 2.3 Vessels surroundings and port area and 2.4 On board own vessel of the Guidance maybe of particular interest in this respect.

(http://www.gard.no/web/updates/content/22207278/gard-alert-south-africa-increased-risk-of-stowaways)

Moderating vessel supply growth over the next few years together with a mild improvement in the outlook for seaborne trade will enable a reduction on chronic overcapacity and so mark a recovery in the dry bulk shipping market, according to the latest edition of the Dry Bulk Forecaster, published by global shipping consultancy Drewry.

Drewry forecasts that Capesize one-year time charter rates will double over the next five years from the lows of 2016. The reasons for a sharp contraction in the supply and demand gap are improving demand outlook coupled with a slowdown in vessel supply due to high scrapping and continued low deliveries along with scarce new-orders.

The impending additional cost of installing Ballast Water Treatment Systems (BWTS) will force owners to keep sending younger tonnages to scrapyards. Owners have hardly been able to cover their operating costs and the additional cost will mean increasing losses.

The continued scarcity of private equity has controlled new orders this year and investors are expected to keep shying away from the dry bulk market, thinning the orderbook even further over the next two years. This will ensure that deliveries remain low which in turn will limit supply growth.

By contrast, demand for dry bulk shipping is expected to grow strongly, as Brazil’s increasing share of Chinese iron ore imports drives higher tonne mile demand. Even if the Chinese iron ore trade does not rise as anticipated, a shift of sourcing towards Brazil will mean that the demand for ships will increase many fold.

Asian countries, including Vietnam, Korea and Taiwan are expected to ramp up coal imports as they open more coal-powered generating plants to support their growing demand for energy. Drewry is expecting coal demand to keep increasing over the next five years.

“Dry bulk shipping has bottomed out and a market recovery is underway, albeit a slow one. Rising demand for ships to cater for increasing raw material consumption, together with the effect of shifting trade routes will help increase tonne miles. With investment remaining out of reach from dry bulk owners, even a modest growth in demand will help support market recovery. Meanwhile, the increasing cost of running an old ship will mean more vessels go to scrapyards, tightening supply over the next five years,” commented Rahul Sharan, Drewry’s lead analyst for dry bulk shipping.

The shipping industry’s fear is that US president-elect Donald Trump’s protectionist and isolationist views will ignite trade wars, depress global economic growth and curtail shipping demand. That concern is misguided, an economic adviser to Trump, billionaire Wilbur Ross, insists.

At the Marine Money Ship Finance Forum in New York on 9 November, Ross provided insider details on Trump’s plans for trade, economic stimulus, and energy and argued the admittedly partisan case that shipping stands to reap significant upside.

“I know people in shipping have been very worried about the potential for trade wars. People say he’ll just lunge in and put on all kinds of tariffs, which will make for a World War III of trade and bring about a global depression. Fear not. That’s not at all what he has in mind,” said Ross.

“What got people thinking he was going to be brash and gun-slinging was the infamous quote, or I should say misquote, that he was going to just slam a 45% tariff on everything coming out of China and good luck to them. That’s not what he said or intended to say. What he actually said was that if it turns out that the Chinese currency is undervalued by as much as 45% and if it turns out that they won’t negotiate with us on improvements in our trade balance, then it may become necessary as a tactic to threaten them with as much as a 45% tariff.

“That’s simply an explanation of one potential negotiating strategy. They are not the words of a madman who is just going to throw big tariffs on everything willy-nilly. This is not going to be a blunderbuss,” claimed Ross.

“What I believe there will be instead are negotiations, product by product and country by country, in a very systematic way, with our country adopting something like the mentality of a large industrial customer. A large industrial customer does a number of things. One of them is to play off suppliers against each other. We’ve never tried playing off what I call our suppliers – namely our trading partners – against each other,” said Ross.

He cited the example of China’s huge share of footwear and apparel exports to the United States. “Think what it would be worth to other countries that are lesser trading partners for us to rejigger our tariff structure to help them gain market share from China and think what things China might be willing to do to help us if we are willing to protect or even enhance their share.”

Ross offered several examples of the kinds of concessions the US might look for from China. “They could redirect their purchases of LNG from where they’re buying it now to the US, which wouldn’t cost them anything, but it would help a lot with our trade deficit. Or they could relax their quota on the import of US cotton. It’s a little bit ludicrous that they’re this huge exporter to us of apparel but they have quotas on US cotton.

“There’s plenty of room for redirection of goods. This doesn’t involve a trade war. What it would involve is redistributing our trade deficit more appropriately and changing the surplus and deficit figures of a variety of other countries,” said Ross.

He noted that both houses of Congress are now Republican, the same party as Trump, and even if there is pushback on his trade plan due to the core Republican belief in free trade, the president has “a tremendous amount of power to put on tariffs, change tariffs, and drop tariffs without consultation with Congress, so I think major portions of the concept he has for trade will go through”.

To stimulate the US economy, Trump plans to institute a massive capital works programme to replace the country’s crumbling infrastructure, to be funded by private investors who would be awarded federal tax credits. “That could unleash huge amounts of capital for infrastructure,” said Ross, who noted that this would funnel a large amount of wages to construction workers “who will have more disposable income, which will build up demand for all kinds of products, some of which would be imported products” – a positive for container demand.

“We think the whole key is to stimulate the economy at the consumer level and create a stronger US economy that will help drive the global growth engine, including for trade, which is going to be a good thing for shipping. [Trump] is going to be more stimulative to the economy over the next several years than Hillary Clinton would have been, and when you think about it, what drives shipping is consumption, particularly consumption in the US.”

Ross said that energy policy will also be a major pillar of Trump’s agenda. He said that the president-elect could foster greater LNG shipping trade by granting more export licences. “There are a dozen or so [projects] that have applied for export permissions but those applications were sidelined under the Obama administration,” he said.

In the oil sector, Ross predicted that Trump would remove “very burdensome regulations on shale” that hamper US oil producers. Trump could further support the oil sector by “opening up more federal lands that could have been put out to private exploration but haven’t been” under Obama.

“Once OPEC gets its act together, which I think it will, then the swing factor in global production is very likely to be US shale,” he said. In other words, US production is currently being curtailed by lower oil prices, but if OPEC members co-operate and cut production to an extent that raises prices, US production – and exports – would rise to an equilibrium level that caps global oil pricing. The more Trump supports US producers, the more tanker operators serving US exports stand to gain.

As with the new trade strategy, Ross believes there is now little standing in the way of Trump’s implementation of his energy policy. “It has been the Democrats in Congress who have had the big problem with hydrocarbons. With the Republican Congress, I don’t think there will be much controversy over his energy policies.”

Ship delays, port penalties and frequent spells of off-hire are the price that ship operators will pay unless they choose ballast water treatment systems with great care.

This is the message from experts who reveal a number of cases where owners have taken short cuts to save money; where European treatment systems copied and reproduced in the Far East fail to perform; and where South Korean shipyards demand premiums running into millions of dollars if an owner chooses not to install the builder’s system of choice.

The IMO’s Ballast Water Convention is due to enter force on September 8, 2017. After that, ship operators will need to install type-approved ballast water treatment systems by the time that the International Oil Pollution Prevention (IOPP) certificate falls due for renewal, usually at Special Survey.

Estimates over the number of ships affected by the Convention vary, and the new regulation will certainly hasten the disposal of old ships for which the chunky capital outlay makes no sense. In recent analysis, Clarkson Research Services identified about 35,000 ships less than 20 years old which are likely to require installations.

The company’s database lists more than 250 shipyards and 520 drydocks with potential repair capacity. But various sources suggest that when demand for treatment systems peaks, shortages of dock capacity, hardware, engineering expertise and pre-installation planning could all lead pose problems.

Quite apart from these practical issues, however, there is growing dismay over the Convention itself, the type approval process itself and how it is carried out in different jurisdictions, and of course the lack of a global agreement which includes the US. Following its entry into force, there are also worries over a potential lack of uniform testing standards between port states.

However, the biggest challenge for ship operators is the choice of treatment technology. Most systems work on one or more of filtration, electro chlorination (EC), ultra violet (UV) or ozone. All have shortcomings and cannot be completely effective but the challenge for ship operators is to identify a system that is as fit for purpose as possible, to minimise the risk of operational disruption and financial penalties in the future.

Briefly, system disadvantages are as follows. Even with back-flushing, filters get blocked and ballast flow rates fall, causing delay and affecting power requirements. Meanwhile the size and shape of planktonic organisms varies widely and many smaller ones pass through filters, typically of 40 microns, into ships’ ballast tanks.

EC systems use sodium hypochlorite but regulations restrict the dosage level to less than 12 ppm to avoid damage to coatings and ultimately, the structure of the vessel. Lloyd’s Register recommends a limit of five ppm. The cleaning product Domestos contains 100,000 ppm of sodium hypochlorite but, for those who remember the advertisement, it still only kills “99% of all known germs”.

UV treatment relies on effective transmission through water and this is sharply reduced by sediment. In waters of high turbidity with many particles in suspension, UV efficacy can be reduced by more than a third. Coastal waters where ships often take on ballast often contain high levels of sediment.

Ozone can only be used in low concentrations and has been shown to be effective at killing microscopic organisms but not larger ones. It must be distributed evenly within ships’ ballast tanks to work effectively and its efficacy depends on the characteristics of the source water.

If a ship’s ballast water fails to meet discharge standards, her operator may be forced to sail for international waters, re-ballast and then return to port when space is available. Over time, such delays could cost millions of dollars.

If a ship continues to fail tests, both her and her operator are likely to be ‘named and shamed’, causing further possible operational disruption. Similarly, when port states identify treatment systems which don’t work properly, ships with those systems on board are more likely to attract attention.

However, one of the biggest concerns – not effectively addressed by either the IMO’s type approval process or the US Coast Guard’s regulations – is the issue of in-tank organism re-growth after treatment. In a letter to IMO Secretary General Kitack Lim earlier this year, Coldharbour Marine, a ballast water treatment system manufacturer with its own unique patented technology based on inert gas, pointed out that the IMO’s testing protocol for type approval only requires ballast water to be held for five days whilst the USCG’s process calls for a holding time of just one day.

Thousands of ships have ballast hauls lasting more than one week during which organisms not killed initially could thrive and multiply, feeding on an abundance of dead organisms. Therefore a treatment system which passed the IMO’s type approval process after five days might not pass again if the type approval test protocol had been set at 10 or 20 days.

Ship operators who opt to save a few dollars now by choosing a second-rate treatment system could pay a very high price later. Delays, deviation, extra time on the terminal and off-hire all mount up and ultimately, a poor choice now could even affect a ship’s value in the future.

© Copyright 2016 Seatrade (UBM (UK) Ltd). Replication or redistribution in whole or in part is expressly prohibited without the prior written consent of Seatrade.

Unless dry bulk operators step up ship scrapping in the fourth quarter, their oversupplied and struggling shipping sector will start 2017 badly, predicts Khalid Hashim, managing director of Precious Shipping.

Commenting on the scrapping levels reported during the third quarter, Hashim said the 3.24 million dwt demolished was “a truly disappointing number” that followed a slowdown in the scrapping rate in the second quarter.

“As a result of the slowdown in scrapping, quarter over quarter, there has been a positive increase in the net supply side of the equation of 1.77%, or 13.88 million dwt, in the first nine months of this year as against an expected negative fleet growth forecast based on first-quarter scrapping numbers,” he told IHS Fairplay.

Hashim said new orders were hovering near zero levels with all existing orders being delayed by financial pressure on the buyers or shipyards.

“All of this has helped reduce the pressure from the supply side of the equation, but if scrapping doesn’t pick up in the fourth quarter, we think that you may see the market dipping back sharply in first quarter of 2017 due to the January impact on the supply side, when more ships are delivered in this one month than any other month in the year, and the expected slowdown in demand due to the approaching Chinese New Year.”

International shipping association BIMCO said most of the scrapping this year took place during the first four months of the year, with 21.8 million dwt deletions, almost double the tonnage scrapped in the following five months.

“The poor global economic situation, as well as the depressing outlook for most of the seaborne shipping sector caused by excess supply of capacity, needs to be countered by a drastic increase in demolishing activity in order to lower merchant fleet growth,” said Peter Sand, BIMCO chief shipping analyst.

Hashim said for the dry bulk shipping sector, 2016 has not proceeded as planned. “Things have not gone as well as one had expected on the supply side. The forecast for the year was for a flat-to-negative growth rate for the world fleet, i.e. scrapping would be equal to or slightly greater than the expected new supply for the year, based on the record 14.09 million dwt scrapping in first quarter.

“Scrapping in second quarter at 8.65 million dwt was good, but a much slower rate compared with the first quarter. However, the third quarter at 3.24 million dwt is a truly disappointing number.”
The Precious Shipping executive outlined the current state of the dry bulk shipping in terms of available capacity and vessels scheduled for delivery.

He said the fleet 2016 started with 771.90 million dwt and increased to 785.78 million dwt by the end of third quarter for a 1.77% net fleet growth. A further 4.8% (36.94 million dwt) is scheduled for delivery in the balance of 2016 and another 4.92% (37.99 million dwt) in 2017.

Hashim said if a slippage factor of 55% (it was 46.03% in 2015) was applied to the scheduled deliveries, and if it was assumed that scrapping would reach 34.7 million dwt per annum (annualised from the 25.98 million dwt scrapped until the third quarter of 2016), the industry would be left with a net fleet growth of 2.82% to 793.68 million dwt in 2016, and it would decline by 1.07% to 785.22 million dwt in 2017.

While an attack specifically targeting commercial shipping is considered unlikely, the threat of a merchant vessel being caught up as “collateral damage” in the escalating Yemeni conflict is real.

That’s the sobering analysis from Dryad Maritime following two recent attacks on shipping in the Bab al Mandeb Strait, a 30km wide chokepoint at the foot of the Red Sea bordered by Yemen and Horn of Africa nations Djibouti and Eritrea.

The Portsmouth-based maritime security firm has urged a “heightened state of alert” following the latest incident involving the U.S. Navy’s USS Mason which detected two inbound missiles within a 60 minute period around 1900 (local time) on October 9. The missiles, which the Pentagon says were fired from within Yemen, impacted the water before reaching the guided missile destroyer.

Houthis rebels have denied any involvement in the failed attack but have been linked to an October 1 missile strike that left a UAE high-speed catamaran, reportedly transporting aid, wounded Yemenis and passengers near Yemen’s Red Sea Port of Mokha, severely damaged.

Part of a Saudi-led coalition that has opposed the Houthis and imposed a naval blockade on Yemen since March 2015, the UAE denounced the incident as “an act of terrorism”. Its foreign ministry told the BBC that the Australian built HSV-2 Swift logistics catamaran was leased from the Abu Dhabi-based National Marine Dredging Company and “did not have any military capacity”.

Tension in Yemen’s civil war has heightened following an alleged Saudi-led airstrike on a funeral in Yemen’s capital on Saturday that killed more than 140 people and wounded 525. International observers say the Bab al Mandeb Strait incidents signal a major shift, if not in tactics by the Houthis, then certainly in weapons capability.

It’s an assessment echoed by Michael Edey, head of operations at Dryad Maritime, who says the attacks in a similar location indicated the “group has the capability and intent to attack shipping in the Strait”.

While the likelihood of a deliberate attack on commercial shipping remains “low”, Dryad says that doesn’t mean merchant vessels are immune from being hit by a missile intended for a coalition warship.

“As we saw from the attack on HSV-2 Swift, the Houthis are willing to target commercial shipping that they believe, rightly or wrongly, to be supporting the coalition and so could hit a vessel that is innocently transiting through the area, rather than participating in the conflict,” Edey said.

As one of the busiest shipping lanes in the world, Edey says the international community has already shown a swift reaction to ensure the Bab el Mandeb Strait remains open to maritime traffic. US warships were sent to Yemen’s coast after the HSV-2 Swift attack.

There has been no official confirmation of the weapons fired in either incident but Edey said it was clear the rebels had new capability capable of targeting shipping in the narrow waterway which connects the Mediterranean via the Suez Canal and Red Sea and the Indian Ocean via the Gulf of Aden.

“The Houthis claimed the attack last week used C802 anti-ship missiles although this has been refuted by others, stating that the smaller C704 is a more likely weapon. In either case, the missiles were not in the Yemeni military inventory before the civil war and so must have entered the country in spite of the UNSC ban on weapons.

“Irrespective of the identity of the missiles, the fact remains that the Houthis have demonstrated their capability to strike at vessels in the Bab al Mandeb.”
Dryad has echoed the security advice of maritime authorities in the wake of the attacks, saying the threat may come from a variety of different sources such as “missiles, projectiles or waterborne improvised explosive devices”.

“Vessels should maintain the maximum distance from the coast of Yemen and use the traffic separation scheme lane to the west of the Hanish Islands during daylight and do so at maximum speed,” it said in a statement.

“Vessels in the region should report hostile activities immediately and contact coalition naval forces via VHF bridge to bridge radio but also consider calling UKMTO to report any suspicious activity.”

With more than 500 years of collective naval maritime experience, Dryad Maritime advises mariners on threats to safe navigation including piracy, environmental, commercial and regulatory “pressure”.

Senior Singaporean maritime lawyers are expecting the volume of insolvency filings in the shipping and oil-and-gas sectors to increase as markets show no signs of improvement. “Shipping, together with the oil and gas sector, is becoming most prominent in insolvencies, with everyone from financiers, to owners, to suppliers getting involved,” said Felicia Tan, director of Incisive Law, the Singaporean alliance partner of international shipping law firm Ince & Co. Tan is one of several new appointments announced last week by Ince Law Alliance in Singapore and which returned to full strength the senior legal team of Incisive Law. The latter had seen its ranks decimated in October last year when key lawyers left for opportunities elsewhere.

Tan, who joined from Singaporean law firm Allen & Gledhill in July, specialises in dispute litigation and arbitration. Incisive is currently representing clients in the Swiber Holdings and Hanjin Shipping insolvency cases. She expects to be kept very busy in the foreseeable future. “There is quite a lot going on beneath the surface and everyone is worried. There will be more insolvency filings because the supply chain is so interconnected. I have heard that some creditors are facing insolvency because of long, drawn out procedures. Not every creditor has the liquidity to last the duration of an insolvency proceeding. We might face a situation where liquidators are dealing with other liquidators ,” she explained.

She notes that recent insolvency cases – Hanjin, Swiber and even OW Bunker – have become more complicated because of the increasingly complex way the industry is structured and the multiple jurisdictions involved. “Everyone from financier to insurers and everyone else down the line is involved, everyone is worried. Various contracts have different litigation clauses, so how do you litigate without interfering downstream and becoming personally liable. If, for example, a financier has the right to step in and take over a claim, what happens if they are not successful? Are they then responsible?” she said.
Tan suggests to her clients that they pay particular attention to contractual set-offs and debt assignments, and put in termination clauses so that they can cut their losses early. “The market has always been structured around trust and large credit lines. But now you need to calibrate those with market conditions,” she suggested. Tan also warns that the industry should be prepared for more catastrophes. “This is not likely to stop at Swiber and Hanjin ,” she said.

Singapore has been fine-tuning its court insolvency protection laws in the ongoing quest to turn the country into an international dispute resolution centre. Added transparency Tan points to the High Court’s recent handling of the Swiber judicial management application as an example of how the court is demanding that judicial managers provide more details to creditors on what is taking place. Swiber’s judicial manager has been ordered to provide the court with update reports every six weeks. The judicial manager is also required to draw up a cost schedule detailing a timetable of what will be done and how much it will cost. “This is a good for preventing costs from getting out of control,” she said.

In the Hanjin case, the High Court has granted an interim stay against claims being made against the company in Singapore. Singapore still does not have cross-border automatic recognition of foreign moratoriums granted, so the stay was only granted on application by Hanjin. Singapore is taking steps to improve the situation. The country this month has hosted a judiciary conference where 13 international specialist insolvency judges gathered to discuss how their court systems can work towards a universal approach to insolvency. In addition, Singapore continues to promote alternative non-court-based dispute resolution via mediation and arbitration.

Last week, the Ince Law Alliance revealed that it had recruited a number of prominent Singaporean lawyers to return to full strength and broaden the range of expertise at the firm. Along with Tan, Moses Lin joined the team from Hill Dickinson. Lin is a commercial litigation and arbitration lawyer and is described as being experienced in handling a broad spectrum of commercial disputes. His focus is primarily on marine, commodities and international trade. Also joining the team are two new junior associates, Justin Seet and Samantha Ch’ng, who will offer support on a broad spectrum of non-contentious matters. At the same time, Edgar Chin, who joined Incisive in 2014, has been appointed joint managing director alongside Bill Ricquier. Chin, a former claims director at an International Group protection-and-indemnity (P&I) club, is said to have extensive and in-depth legal and practical experience in the shipping and P&I industry.

Lawyers for four shipowners pulled into the OW Bunker legal fracas are arguing that their ships should be free of liens because the collapsed Danish marine fuel giant committed fraud by continuing to sell when executives had suspended payments to physical suppliers in October 2014. Law firm Holland & Knight argues that the alleged fraud invalidates liens that give OW power to arrest ships in US federal courts, as well as the liens that the bunker giant passed on to ING Bank because its $700m credit facility was secured by OW accounts receivables.

The attorneys, led by Holland & Knight’s James Power, contend in court papers that OW Bunker already had decided to suspend or defer payments to physical suppliers when the company’s credit situation became critical in the weeks before it collapsed into bankruptcy. But it continued to ink deals with customers to supply bunkers “with no intention of satisfying the underlying physical supplier contracts”, the lawyers wrote in a memorandum challenging ING’s request to US District Judge Katherine Forrest for summary judgments upholding its claims in New York that it has liens against the ships.

Lawyers for the Dutch bank are preparing a response to Holland & Knight’s latest manoeuvre. “Those arguments don’t have merit,” said Seward & Kissel partner Bruce Paulsen, one of ING’s lawyers, of the arguments by the owners’ camp. The shipowners are challenging liens against the 53,400-dwt bulker Temara (built 2007), which is owned by Spain’s Ership Alvargonzalez; H Vogemann’s former 29,500-dwt general cargoship Voge Fiesta (now Eagle Trader, built 1997); the 32,000-dwt bulker Ocean Harmony (built 2004), which is owned by Ocean Line Holdings of China; and the 95,700-dwt Maritime King (built 2011), a bulker controlled by Japan’s Shoei Kisen Kaisha.

The cases are among several that have involved competing claims from physical suppliers, OW’s surviving entities and ING over fuel delivered but not yet paid for in the weeks before OW collapsed in November 2014. But in these four cases, the fuel in question was ordered by charterers and not owners, and yet ING was able to seize the ships under US lien law, which is generally seen as supplier friendly. The OW debacle has served to test the limits of liens in the US federal courts, and Judge Forrest already has ruled that physical suppliers do not have a lien in cases where the vessel interests contracted only with OW, which served as a middleman in the bunker transactions. A decision finding that OW and ING do not have liens to arrest the ships would be a win for shipowners caught in the OW wrangle, shielding them from arrest in the US and potentially other countries that recognise US liens. However, some lawyers expressed doubt that the effort would work.

Power argues that OW also should not have the benefit of a lien in the US courts because of its “unclean hands” as it allegedly sold fuel with no intention to pay the underlying physical supplier. “Congress did not intend by passing the lien act to give the special lien for necessaries to an entity that perpetrated the contract with fraud,” the lawyer told TradeWinds. “To be clear, there is no way that any court, exercising the power of equity, would reward OW for a contract where it knew in early October that it was not going to pay the third-party physical suppliers.”

The prolonged and deep recession facing dry bulk shipping is so severe that the industry will not return to profitability until 2019, and then only if there is zero growth on the ship supply side and trade growth increases by 2% a year.

This grim assessment of the dry bulk business is made by BIMCO in its latest Road to Recovery report that outlines a sector in crisis and requiring a change in business model before profitability can be achieved.

The report found that even if trade did manage to achieve 2% growth – regarded as optimistic – shipowners still needed to scrap ships in far greater numbers than has been seen to date. The other key metric to the recovery in 2019 was keeping supply-side growth to zero, which if not achieved would delay the recovery into the 2020s.

Dry bulk shipping is awash in excess capacity and the fleet continues to grow despite record levels of scrapping. This year there has been capacity growth of more than 30 million dwt, while 25 million dwt has been demolished.

Peter Sand, chief shipping analyst for BIMCO, said the fleet growth had to be neutralised in future, and fortunately the prolonged low freight rates were pushing the industry to be more responsible on the supply side.

“What we have seen this year was the all-time low level of the Baltic Dry Index, so it is highly relevant to continuously advocate for high levels of scrapping because this is a supply side matter more than anything else,” he told IHS Fairplay.

However, the dry bulk shipping industry has only achieved zero supply-side growth in three of the last 35 years, so having ship demolition at equal or greater levels than deliveries for the next three years – basically scrapping its way to profitability – would be no easy task. Timecharter equivalent earnings (TCE), a standard shipping industry performance measure, fell to 1970s levels in the early part of 2016, and even increasing activity in the dry bulk market in the months after could not raise rates to break-even levels.

The Handysize spot market rates averaged USD3,900/day in the first half of 2016, a 22% decline, and Supramax spot rates averaged USD4,570/day, down 27% compared to the first half of 2015.

This prolonged crisis is likely to have a significant impact on how the dry bulk shipping business is conducted in the future, and many of the changes are likely to spill over to other shipping sectors as well, the BIMCO report found.

However, what sets the dry bulk business apart is its incredibly fragmented nature. There are 10,800 ships in the global fleet, but only four companies own more than 100 dry bulk ships, and on a dwt basis, the largest-owned fleet represents less than 4% of the total fleet.

Angus Frew, secretary general and CEO of BIMCO, said this meant the market was basically all small companies. “The problem is that everyone looks over their shoulder and thinks someone else will scrap their ships. But everyone needs to do their bit because the oversupply will only go away with concerted action of all shipowners,” he said.

The BIMCO executives said there had to be a new industry model with consolidation creating bigger companies running larger fleets and operating on a more sophisticated level. In the future, there would be many larger dry bulk shipowning companies operating as logistics providers to the commodity giants with a focus on risk management and Return on Capital Employed (ROCE). The asset play would be a subsidiary benefit to these businesses rather than the number one business goal.

For instance, there have been 34 giant Valemax ships launched since 2011 (around 380,000 dwt). Then in March 2016, a further 30 Valemax ships were ordered for delivery in 2018 by three Chinese owners for a combined USD2.5 billion with back-to-back 25-plus year contracts of affreightment (COA) with Brazilian mining giant Vale. Once these orders have been delivered, the Valemax fleet will be able to carry over 50% of Brazil’s current iron ore export volume, eating into the business currently carried by the existing Capesize fleet.

“Vale is already developing major relationships with the Chinese shipowners,” Frew said. “You will see more of these direct relationships and the commodity giants will ultimately want to deal with fewer suppliers that are able to provide a bigger portion of their transport requirements. We have just seen China Shipping and Cosco put their fleets together and we will see more and more of this activity in the years ahead.”

BIMCO said the changing structure of the shipping business was having wide-reaching impact across the dry bulk shipping system. The direct relationships between carriers and shippers on major dry bulk routes would place shipbrokers under pressure to widen the services they offer. Shipyards were facing a stark choice of close or consolidate, and a reluctance by traditional banks to provide ship finance was placing constraints on shipowners.

Yet even though the BIMCO report concluded that it was difficult to have an optimistic outlook for the dry bulk shipping industry in the next few years, chief shipping analyst Sand said there were positives to be found in the depressed business.

“There is oversupply, but we are constantly seeing growing demand levels, so this is a situation we can handle ourselves within the industry and with the tools we already have available,” he said.

“The future may be dull but it could also be profitable, and that is what matters for the industry – bringing back profitability and facing the fact that there is no new China around the corner. We need to adapt to this lower level of demand while addressing the supply side. If the industry can do that, I think there is a brighter future ahead for dry bulk business.”

In brief – Australia unlikely to depart from The “Halcyon Isle” case position

The much anticipated decision of the Full Court of the Federal Court in the appeal from the first instance decision of McKerracher J in Reiter Petroleum Inc v The Ship “Sam Hawk” [2015] FCA 1005, which we referred to in our most recent issue of Transport & Logistic News, was handed down on 28 September. The appeal was allowed unanimously.

Do Australian rules of private international law recognise maritime lien in circumstances of the case?

As we reported in the September 2015 issue of Transport & Logistic News, bunkers had been supplied to the vessel in Istanbul at the request of time charterers. The bunker supplier, Reiter Petroleum Inc arrested the vessel in Western Australia and the owners sought to have the arrest set aside. McKerracher J had identified the issue for his consideration as being “whether Australian rules of private international law would recognise a maritime lien in the circumstance of this case.” His Honour, in declining to stay the arrest, did not follow the Privy Council’s decision in The “Halcyon Isle” [1981] AC 221 and applied the lex loci contractus as giving rise to a maritime lien, although the lex fori did not recognise the supply of necessaries as giving rise to a maritime lien.

The contract between the time charterer and Reiter Petroleum contained an express provision that the seller of the bunkers should be entitled to assert a lien and that the law of the United States of America should apply to determine the existence of any maritime lien, regardless of the Court in which the proceedings are instituted.

Section 15 of Admiralty Act found not to apply
The very detailed and thorough Full Court judgments of the five appeal judges include an analysis of both Australian law in relation to maritime liens but also of relevant case law in other jurisdictions.

Chief Justice Allsop and Edelman J delivered a joint judgment, finding that there was no jurisdiction under section 15 of the Admiralty Act 1988 (Cth) as “a proceeding on a maritime lien”, as the lex causae was not either Canadian or United States law (on which the claimant relied to assert a maritime lien against the shipowner for the supply of bunkers) and also that even if that law did apply, those rights would not be characterised under Australian law as a maritime lien within section 15. Instead, Australia should follow the long established English approach as set out in The “Halcyon Isle”.

Justices Kenny and Besanko also found that neither Canadian nor US law applied and section 15 of the Admiralty Act had no application in this case. They also concluded that there was no reasonable prospect of success on a claim based on section 17 (“general maritime claim”).
Justice Rares agrees with orders proposed but disagrees on lex fori conclusion

Finally, Justice Rares agreed with the orders proposed by the other judges, (i.e. allow the appeal, set aside the writ and arrest warrant and order costs to be paid by Reiter Petroleum) but disagreed with the conclusion that the lex fori was the proper law for the classification of a foreign maritime lien. In so doing he was not inclined to follow the reasoning in The “Halcyon Isle”. However, in factual circumstances where there was no reason for a US lien to arise, there was no enforceable maritime lien on the vessel “San Hawk”.

The decision removes the international uncertainty – albeit by a majority decision – and it now seems unlikely, despite the views expressed by Rares J, that Australia will soon depart from the position as stated in The “Halcyon Isle”.