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Ship Costs


Very few ship owners can claim not to be at the mercy of the market when it comes to earnings levels with the result that profitability, or even survival, depends on cost-efficiency. With no apparent premium for quality, becoming a "low cost" operator becomes the goal for many ship owners - with the danger that such strategies, while a necessity, can tread a thin line between "cost-efficient" and "sub-standard". With market prospects for 1999 looking less than rosy across all the key ship sectors, cost issues must assume an even higher than normal profile. Drewry Shipping Consultants Ltd's report, "SHIP COSTS: Issues, Developments and Prospects to 2003", suggests that hard pressed owners may have some cause for concern. Most of shipping's support industries are cyclical and, latterly, virtually all of these have been "highly competitive" - or, effectively, with the balance tipped in owners' favour. For owners, therefore, it is not if costs will increase but rather when and how rapidly? Among Drewry's key conclusions are the views that::

  • 1998-99 looks set to mark the last stage in the cycle of manning cost reduction. Further low cost labour pools are not available - nevertheless, the current labour pool still provides significant variations in seafarer earnings levels and employment conditions. Looking further forward, the picture becomes more complex.
  • Owners already have booked their reduced insurance premiums for 1999 - and some have locked in two year deals - and, incredibly given the state of much of the insurance market, may still be in the driving seat in 2000. No one, however, believes that this state of affairs can continue - and owners should fear the repercussions of any major catastrophe.
  • The ship repair market appears to have been "recovering without success" for several years. For yards, market share has been the battleground - keeping down costs to owners - and, at present, many owners may put scrapping ahead of expensive repairs on older units. This said, the repair industry continues to look to regulatory bodies, insurers, class, etc. to enforce higher standards and expects this to swing the cyclical balance back in its favour.
  • The ship finance sector is undergoing one of its cyclical shake outs. Spreads, certainly, have widened - taking some of the edge of the "bargain" newbuilding and secondhand prices that have been on offer - and the number of lenders interested in ship deals has diminished. A squeeze here merely adds to pressure to contain operating expenses.
  • Many owners are seeing port costs as a growing problem area.

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The operating cost pattern evident during the 1990s tends to suggest that, overall, these outgoings have been either stable or even in decline. Drewry notes that this superficial analysis can be misleading as it masks important changes in the relative significance of individual costheads - and it is the assessment of these that contains the pointers to the future. In practice - and despite the search for low cost crews - Drewry notes that the 1990s have seen manning costs rise in both absolute and relative terms. On the other hand, real savings have been achieved by owners in the repair and maintenance and hull and machinery insurance sectors. The 1990s overall have seen rises in P&I insurance costs - though this has not been one of the largest costheads - but latterly these costs have been checked by savings secured from the reinsurance sector and, to a degree, the widening of owner choice through the evolving fixed premium sector competition to the P&I Clubs. More information: Drewry Shipping Consultants Ltd.


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