Operating costs to increase in 2017 and 2018

Oct 27 2017

Repairs & maintenance and spares are the categories, which are likely to see an increase in costs most significantly in each of the two years.

The survey is based on responses from key players in the shipping industry, predominantly shipowners and managers in Europe and Asia. Those responses revealed that vessel operating costs are likely to rise by 2.1% in 2017 and by 2.4% in 2018.

Repairs & maintenance costs are expected to increase by 2% in both 2017 and 2018, while expenditure on spares is predicted to rise by 2% in 2017 and by 1.9% in 2018. Drydocking expenditure, meanwhile, is expected to increase by 1.7% and 1.8% in 2017 and 2018, respectively.

The survey also revealed that the outlay on crew wages is expected to increase by 1.7% in each of the years under review, with other crew costs thought likely to go up by 1.6% in 2017 and 1.5% in 2018.

Lubricant costs are expected to rise by 1.6% in both 2017 and 2018. Meanwhile, projected increases in stores are 1.5% and 1.7%, while management fees are expected to rise by 0.7% and 1% in 2017 and 2018, respectively.

The cost of hull and machinery insurance is predicted to rise by 0.5% and 1% in 2017 and 2018, respectively, while for P&I insurance the projected increases are 0.7% and 1.1%, respectively.

Of the ship types, operating cost rises for tankers were 2.1% and 2.7%, respectively.

Survey respondents highlighted various areas of concern likely to result in increased operating costs over the next two years. Crew costs were high on the list, with one respondent noting, “Crew costs are 60% of our operating expenditure, and weigh heavily when there is high demand for – but a limited supply of – manpower and when employers are required to meet increasingly onerous requirements.”

Another noted, “Crew and insurance related expenses are the two major factors in our operating expenses but, while we expect insurance costs to fall over the next two years, we anticipate that crew costs will remain the same.” Another said, “Most shipping companies, but especially those operating tankers and chemical and gas carries, are facing the prospect of increases in costs through 2018 for hiring qualified crew.”

The increasing cost of regulatory compliance was highlighted by a number of respondents, one of whom said, “New regulations are certainly going to have a major impact on our operating costs.” Elsewhere it was noted, “Retrofitting vessels with technology, which has not been fully vetted for compliance with existing and new regulation can destroy cash flow.”

A respondent commented, “We do not expect income to increase significantly over the next 12 months, which in turn will limit the available budget for operating expenses.” Other respondents also expressed doubts about factors, which are likely to constrain their earning capacity at a time when operating costs are increasing. Areas of concern included such familiar items as continued tonnage overcapacity in some trades and the cost of finance.

One respondent said, “Excess capacity, and the amalgamation and acquisition of existing operators and assets, could lead to a market, which is shared by a small number of operators.” Another complained, “Over-supply of tonnage, most notably that built in China, has caused a significant fall in charter hire.” Other, more general, comments, included, “Markets across the board will be nervous, with sharp ups and downs,” and: “Prospects look gloomy, with no clear horizon in sight.”

Respondents were asked to identify the three factors that would most affect operating costs over the next 12 months. Overall, 21% of respondents (similar to last year’s survey) identified finance costs as the most significant factor, followed by crew supply, which stood at 19% and displaced competition in second place.

Competition was down from 19% to 15% and from second to equal third place, which it shared with the cost of new regulations - included in the survey for the first time. Demand trends and raw material costs, meanwhile, shared fourth place at 10%, with labour costs fifth at 9%, all significantly down on the figures in last year’s survey, which were 17%, 11% and 13%, respectively.  

Richard Greiner, Moore Stephens Partner, Shipping & Transport, said, “The predicted 2.1% and 2.4% increases in operating costs for 2017 and 2018, respectively, compare to an average fall in actual operating costs in 2016 of 1.1% across all main ship types recorded in the recent Moore Stephens OpCost study.

“One year ago, expectations of operating cost increases in 2017 averaged 2.5%, so the fall now in that expectation to 2.1% must be regarded as good news. Predicted increases in operating expenditure are a matter of concern for any industry, and particularly one such as shipping in which a range of factors have conjoined in recent years to inhibit (and, in some cases, eradicate) profit margins. But shipping has seen a lot worse. If it does transpire that operating costs rise by 2.4% in 2018, for example, that will still be less than one-sixth of the actual operating cost increases absorbed by the industry 10 years previously.

“It is significant that, for the first time, new regulations were included in the list of factors, which respondents could cite as most likely to influence the level of operating costs over the next 12 months. It was even more significant, perhaps, that 15% of respondents did indeed identify the cost of regulatory compliance as a major consideration when weighing future operating cost increases.

“The Ballast Water Management convention, now with an extended implementation window, is still potentially the most expensive item on the menu, but by no means the only one. Tellingly, one respondent referred to new regulations which ‘most of the time are unclear and indefinite.’

“The fact that repairs & maintenance and spares emerged as the items with the largest projected cost increases in both 2017 and 2018 was perhaps unsurprising in that they are two items of expenditure on which owners and operators might conceivably have economised or delayed in previous years, and such economies cannot be sustained over longer periods without impacting safety.

“It was evident from the responses to our survey that the shipping sector is concerned about the conflation of higher operating costs and the potential reduction in revenue earning opportunities which it faces over the next two years. As one respondent succinctly observed: ‘The problem with shipping is not so much costs, but income.’

“There is certainly some truth in that. Shipping has gone through – and is still navigating – a prolonged downturn. It is a cyclical industry, but cycles imply movement both up and down, and there has not been enough of the former in recent years. The cyclical nature of the industry also increases volatility in the likes of charter rates and vessel values which may adversely affect earnings.

“There is however, evidence to support the view that an appetite still exists for ongoing investment from both traditional and external investors, supported by a number of recent indicators of positive sentiment.

“This is in an industry whose attractions currently include low prices and comparatively limited ordering of new tonnage. That is good news, because it is such investment that shipping will need if it is to meet the rising cost of operating in the industry,” Greiner concluded.  

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