The dramatic turnaround in the fortunes of the shipping industry has been reflected by the fortunes of the freight derivatives market. Freight derivatives did well in the first three quarters of last year and full-year figures are up substantially on 2007, but trading slumped in the final quarter.

Figures compiled by the Baltic Exchange reveal that the volume of Forward Freight Agreement (FFA) in the dry trades grew by 15% on the previous year while tanker FFA trades were up 14%. Total reported trade volume in the dry bulk FFA market for 2008 was 2,139,382 lots (where a lot is a day’s hire of a vessel or 1000 metric tonnes of ocean transportation of cargo). 58% of all dry trades were cleared in 2008, up 30% on 2007. In the tanker market FFA volumes were estimated to be 427,121,494 tonnes traded. Cleared business is thought to represent 71% of all trades.

However, trading volumes in the last quarter of 2008 were down in both the dry and wet markets. In Q1-Q3 an average of 46,053 lots were traded weekly in the dry market with 53.5% cleared, compared to 28,349 lots traded and 81.5% cleared in Q4.

For tankers in Q1-Q3, an average of 476 trades were transacted per week of which 77% were cleared. In Q4 tanker trades dropped to an average of 311 per week, of which 87% were cleared.

Shipping accountant and Maritime London member Moore Stephens says that, despite the current economic downturn, shipping is still a good business to be in, and that resourceful investors will find opportunities to expand, or to get back into shipping, over the next twelve months.

The easy money has dried up

Julian Wilkinson, head of the Moore Stephens shipping team, says, “Shipping enters 2009 with at least one certainty – the good times are over for now. The easy money has dried up, the old ships have been scrapped or are laid up and there are no prospects of markets going up any time soon. But, in a cyclical industry, sensible players make money whichever way the market moves. For many people in shipping, a sharp downturn in freight rates and ship values is the sound of opportunity knocking, rather than the prospect of a knockout.”

Writing in the firm’s Bottom Line newsletter, Mr Wilkinson explains, “Newbuilding order cancellations are growing quickly, so it is certain that some shipyards will never be built, and others will take a hit. Even the major yards are struggling with finance, and smaller yards trying to get into the market cannot secure guarantee finance. So although steel prices are falling, energy prices are falling, wage expectations are falling and interest rates are falling, it looks like a tough time for shipbuilders in general. The exception will be the major groups and yards in niche areas such as cruise ships, LNG and more complex vessels, which will emerge from the trough having seen lower cost competition die before it could grow.”

“Shipping banks are short of cash to lend and that doesn’t seem likely to change. Although shipping is still a solid big-ticket business, many banks that came into shipping in rosier times will not relish the workouts they will face in 2009, and will walk away. So we can expect to see fewer banks in shipping, lending more carefully, at higher margins and for shorter tenors. Shipowners who have been around for a while will recognise this as a good thing, especially as higher margins will be offset by lower interest rates as interbank rates come more into line with central bank rates.”

He continues: “Every sector will find cashflow a problem. Every sector will struggle with ship valuations and loan covenants. And, inevitably, there will be casualties. But look again and you can see why there is still considerable optimism amongst owners. The lower markets should rein in spiralling crew costs. Scrapping of old tonnage is increasing and will increase faster as the year progresses. And owners have made a lot of money in the last few years, so they are sitting on a lot of equity. Interest rates everywhere have plummeted. Put companies and newbuilding orders in trouble together in the same room as an owner with equity and access to low-rate finance and you see assets moving from an over- exposed and perhaps inefficient owner to a more prudent, solid operator.”

“Yes,” concedes Mr Wilkinson, “2009 will be a rough ride for everyone. But those who watch their cashflow and who have not over-extended themselves in the boom, or who sold out before the peak (and there were a lot who did) will see this as a chance to expand, or to buy back into shipping. Whatever is happening in the world, shipping is still a good business to be in.”

Mutual delay insurer The Strike Club says that it has been forced to increase premiums the face of “spiralling claims and the deepening crisis in world financial markets”. The club says that its members will be asked for a 15% increase in the advance call rates for the 2009/2010 policy year that starts on 1 February. The percentage increase is double last year's.

The 15% applies before any adjustment for individual claims experience, but the club says its directors are prepared to “take a hard line on the level of rates and deductibles for members with unsatisfactory loss records.”

Release calls in all three classes of insurance the club offers are unchanged at 20%. Income in “Classes I and II”, which cover a ship's daily running costs or charter hire during delays caused by onshore incidents and following congestion, year has risen by 20% in 2007 -2008, but claims are about 25% higher than the previous year at the same time. The underwriting accounts currently show a combined deficit of around 10%, with only USD50,000 of claims still outstanding.

The club also provides “Class III” covers which applies to delays resulting from onboard incidents, such as officer or crew strikes and a wide variety of other causes (collision/grounding, drugs on board, piracy, kidnap-ransom, stowaways, machinery damage etc), leading to a ship going off-hire. In this class income for the 2007/2008 year has increased by 23%, but current claims levels are 70% higher than the previous year at the same time. The year is expected to show a deficit of just under 10%, with some USD100,000 of claims still outstanding.

The directors state: “Despite the club’s prudent investment strategy, which endeavours to ensure preservation of capital above all else, due to the recent unprecedented turmoil in financial markets the club does not expect any contribution from investments in this underwriting year. However, nor does the club anticipate any significant decrease in its capital base resulting from investments.”

Bill Milligan, chief executive of Strike Club Management, said the general increase for February’s renewals is on a par with the increases announced by most P&I clubs, while several have had to make additional cash calls.

“All mutuals are facing one of the toughest renewal periods yet experienced,” he said, “and the overriding objective is to try to maintain adequate reserves.”

The London P&I Club warns that the recent decision of the European Court of Human Rights (ECtHR) in Strasbourg in the case of Apostolos Mangouras, the master of the Prestige, could seriously increase the risk of bail requirements being influenced by political considerations.

The ECtHR ruled that both the length of Capt Mangouras’s detention and the amount of bail demanded were not excessive in the circumstances of the case, as he had claimed. The club describes that decision as giving rise to serious concern within the shipping industry generally.

The court found that the level of bail imposed was not disproportionate to the circumstances of the case, including the seriousness of the consequences of the incident, and took sufficient account of Capt Mangouras’s personal circumstances. It also concluded that the amount of time which Capt Mangouras spent in prison was short, compared to comparable cases.

The club says that the ECtHR has seemingly failed to understand that the provision of bail for criminal charges falls outside the ordinary scope of P&I cover. The mutual liability insurer also says that the court sought to justify itself by reference to EU legislation which post-dates the Prestige incident.

The club says it understands that Capt Mangouras is actively considering an appeal against the ECtHR judgement.

The Prestige sank off Spain in 2002

Capt Mangouras was arrested immediately upon arrival ashore after battling for days to save the 81,000dwt tanker Prestige after it broke apart and sank off the coast of Spain in 2002 in an incident which led to extensive pollution following the release into the sea of 70,000 tonnes of fuel oil. He spent 83 days in prison and was only released upon payment of bail amounting to euros3m.

The club says in a statement: “The Prestige was entered for marine liability insurance coverage with the London P&I Club which, given the exceptional circumstances of the case, and the probability that any legal challenge was likely to take some considerable time, took the unprecedented decision in January 2003 to assist Capt Mangouras in establishing bail on humanitarian grounds.”

It adds that the Club says the level of bail set was “so extraordinarily high that there was no prospect of Capt Mangouras or his family being able to raise it from their own resources”.

Stephen Roberts, claims director with A Bilbrough & Co, managers of the London P&I Club, says: “The concern is that the ECtHR was influenced heavily by the consequences of the incident rather than by the actual conduct and means of Capt Mangouras, who has received strong support for his actions from all over the world. And to that extent the decision also highlights the basis for the concerns currently being expressed by leading international shipping bodies, including Intertanko, that the application of the EU Directive on Ship Source Pollution must be proportionate to the degree of personal fault on the part of the individual responsible for causing pollution, and not focused on the pollution and its consequences.”

Shipbroking and services group Braemar Shipping Services says in an interim management statement for the four months since the end of August that it expects lower profits from shipbroking in the next financial year.

Nevertheless it says: “The Group is financially strong with cash reserves and no debt which should enable us to take advantage of attractive investment opportunities which may arise in current markets.”

Braemar says: “Shipping markets have experienced a significant correction over the past four months and in varying degrees dry and wet freight rates and vessel values are sharply lower, mainly in response to the slowing global economic demand and the significant contraction in the availability of bank lending. However, within our Shipbroking division chartering has remained active and to date there have been no significant cancellations within our forward order book. Our Technical Services businesses have maintained the high activity levels experienced in the first half and the Logistics and Environmental businesses are continuing to perform steadily. The Board is confident about the out-turn for the current financial year.”

In the next financial year 2009/10 the company expects lower revenues and profits from its shipbroking activities.

It says: “Although the number of chartering transactions in which we are involved is expected to be broadly unchanged from 2008/9 levels, average commissions will be lower. Furthermore second hand sale and purchase income is expected to fall and this will only be partly offset by an increase in demolition activity. The appreciation of the US dollar relative to sterling, if it remains at current levels, will also ameliorate any reduction in dollar revenue. We believe our forward order book in respect of time charter and newbuilding business to be substantially secure, because the prices at which the majority of orders were placed are well below peak levels and because of the relative strength of the owners, yards and charterers with whom we conduct business.”

Regarding shipping services Braemar says: “While there is likely to be some effect of the global slowdown on our non-broking businesses, to date we have seen little impact, largely because the demand for their services is less dependent on the level of world trade and because of the longer term nature of the projects involved.”

ISM expert Phil Anderson has warned ship operators not to be tempted to cut training budgets in this poor economic climate. Instead, he insists, “now is the time to reinforce the investment – and plan for the return of the good times.”

In the latest edition of his safety management newsletter, Reportism, Dr Anderson analyses the current financial situation in the shipping industry and the problems looming in the P&I Clubs and marine insurance sectors.

He reflects that during the last bad time, during the 1980’s and into the 1990’s, some sectors of the industry lost the ability to manage safety and lost the ability to self regulate. There were, he suggests, at least two memorable results – unprecedented accidents and insurance claims on the one hand and the development of the ISM code on the other.

The biggest problem which has faced the industry during the recent ‘good time period’ was the serious shortage of adequately trained and experienced masters and officers. This problem was a direct result of the mistakes which had been made during the previous ‘bad time’.

Anderson optimistically speculates that if the ISM Code has taught us one thing it is, hopefully, that we will learn lesson from our previous mistakes and ensure that we implement corrective actions to prevent a recurrence of the same problem.

“It does not take a genius or an expert in marine casualty investigations”, he suggests, “to understand that one of the major factors behind the rising insurance claims can be traced to problems in managing safety – both on board the ships and in the office ashore”.

He is adamant that this is a problem which can be dealt with and addressed.

“The causal factors behind almost all of the maritime accidents which were occurring are, invariably, human element related issues. A properly developed and implemented ISM Safety Management System should create the barriers necessary to prevent these accidents, and consequently claims, occurring”.

Fuel cells will be a long term sustainable energy solution for ships but, for immediate fuel savings, reduced environmental impact and reduced operational costs, many options are available now for incorporation in new designs, according to Lloyd's Register.

Speaking at SMM Istanbul Zabi Bazari, ship energy services manager for Lloyd’s Register Marine Consultancy Services, said that energy savings as high as 40% can be achieved by incorporating new systems and approaches into the design of new ships. Looking ahead, he said that fuel cells could eventually become the main energy unit in commercial ships when low-carbon technologies and renewable sources of energy are firmly in place.

In his speech, Dr Zabi reviewed existing and potential technologies in two main categories: hull and propulsors; and engines and auxiliary machinery. To achieve a reduction in a ship’s hydrodynamic resistance, he advocated options such as optimised hull forms, latest foul release paints, the use of air cavity or air bubble systems, the use of sails for capturing wind and solar energies. He underlined how the energy lost in propulsors can be mitigated by the use of contra-rotating propellers, flow-wise integrated propeller-rudder systems and propeller boss cap fins as well as hull mounted fins upstream of propeller for streamlining flow at entry to propeller.

Dr Zabi identified the use of waste heat recovery systems, alternative fuels and electronic control common rail fuel injection system as the most effective and immediate means of reducing fuel consumption and emissions with existing engines. But he considered fuel cells as the most important and most likely long-term low and zero-carbon alternative. He brought the audience up to date with developments in fuel cell technologies and the likely timeline for practical shipboard application.

He said that after a further three year period of research and development, we will see a period of adoption of fuel cell technology – primarily to gradually replace auxiliary power generation engines. But full replacement of existing engines/fuels combinations to fuel cell would not be likely for 20-30 years yet, he advised. He reviewed options for rotating machinery including high efficient electric motors and variable speed drives.

The UK P&I Club’s Pre-Employment Medical Examination Programme has recently processed its 200,000th examinee. Dennis Baclay, a 34-year-old Filipino, met the Programme’s exacting standards at the SuperCare Medical Service Clinic in Manila on 13 January. The UK Club’s Programme assesses whether crew candidates are suffering from any disease or disorder likely to render them unfit for service at sea or endanger the health of others.

The Supercare clinic is one of only eight accredited by the UK P&I Club in the Philippines, having joined the PEME Programme in 2007. It has carried out over 1200 examinations on UK Club members' crew, failing nearly eight per cent of candidates.

The UK Club launched a pilot scheme in the Philippines in 1996 to overcome problems with seafarer medical examinations and fitness standards. It based its significantly higher examination standards on the ILO Guidelines for conducting pre-sea and periodic medical fitness examinations for seafarers and Merchant Shipping Notice MSN 1765 (M). The experiment evolved into the UK Club’s worldwide Pre-Employment Medical Examination Programme.

The number of completed examinations increased from 539 in 1996 to 85,466 in 2004, passing 100,000 in the following year. Since then, it has doubled. The overall rejection rate has come down from 10% in 1997 to just under five% in 2004/06 and around 3.5% today.

The UK War Risks Club says it will return 10% of the net Advance Contribution paid by its members for the 2008 policy year if they renew for 2009. The club says: “The directors’ decision reflects the projected operating result for the 2008 policy year which ends on February 20th. The return will be credited against the contribution required for the next policy year.”

Andrew Ward, director of underwriting at UK War Risks, said: "I am pleased to announce that the Club is able to make a return of call despite the challenging investment markets in 2008. The strength of our reserves and a prudent investment policy has meant that we are once again able to demonstrate the benefits of mutuality to the membership."

Advance Contribution rates required by the UK War Risks Club from 20 February 2009 will be as follows:

The worldwide trading rate for passenger and cruise ships will be 0.0363 per cent. Other ships will be subject to a worldwide rate of 0.0102 per cent and a restricted trading rate of 0.0051 per cent.

The UK War Risks Club, managed by Thomas Miller, has over 850 entered ships, valued at over $30 billion. It offers cover for hull and machinery risks, detention and diversion, war risks P&I liabilities, sue and labour expenses and discretionary cover. In October, the club decided to accept applications from 20 February for war risks insurance from shipowners with no connection with the United Kingdom. Until then it had concentrated on UK owned and flagged vessels.

The club says: “The aim is to secure a broader membership base, spreading the risks more widely and achieving greater operating economies of scale.”

Leading UK law firm and maritime specialist Hill Dickinson is to open a new office in Singapore to service its growing number of clients in the region. The expansion reflects the existing and increasing activities of the firm throughout the Asia Pacific region and in particular builds upon Hill Dickinson’s global reputation for marine work.

Shipping and casualty partner Tony Goldsmith will move out from London to run the operation. He will be joined by associate Andrew Lee.

Hill Dickinson senior partner, Tony Wilson, said: “It is a bold step to open a new office in the current economic market and this demonstrates our commitment to invest in the firm’s future. We have based the model for the business on our successful operation in Piraeus and having a team on the ground will enable us to be on hand to attend casualties and urgent situations immediately. Our presence in Singapore further reinforces the firm’s international connections and supports the City’s drive for increased global connectivity and inward investment internationally.”

Maritime London member, the Port of London Authority and Museum of London Docklands are teaming up to celebrate 100 years of London’s port. Launching in March, Port of London Authority: A century of service will be a year long exhibition of images, films and archive material from the PLA’s archive and collections. As well as never before seen footage of the Thames, visitors will also be able to enjoy a brand new film about the PLA’s work, commissioned especially for the centenary.

Describing London as “one of Europe’s great cities”, PLA chief executive Richard Everitt, comments: “Since the first Londoners settled on the banks of the Thames thousands of years ago, the river has fed, supplied and transported them. It still fulfils this vital task today under the stewardship of the Port of London Authority. For the last 100 years the PLA has battled through two world wars and a revolution in shipping, to ensure the river remains an economic powerhouse for the people of London and the south east.”

“The tidal Thames is safer and more efficient today than it has ever been, and now the Museum of London Docklands is telling its story. It’s a tale of upheaval, change, sacrifice and, ultimately, success. It’s the story of a port authority, its people, the docks, and a river that has evolved alongside the city it serves.” Port of London Authority: A Century of Service opens on 30 March 2009 and runs until 19 April 2009 at Museum of London Docklands.