Opex set to increase in 2015 and 2016

Nov 06 2015

Vessel operating costs are forecast to rise in both 2015 and 2016, according to the latest survey by accountant and shipping consultant Moore Stephens. Crew wages, repairs and maintenance, plus drydocking, are the cost categories likely to increase most significantly during the period.

This annual survey is based on responses from key players in the international shipping industry, predominantly shipowners and managers in Europe and Asia. Their responses revealed that vessel operating costs were expected to rise by 2.8% in 2015 and by 3.1% in 2016.

Crew wages were forecast to increase by 2.4% in 2015 and by 2.3% in 2016, with other crew costs thought likely to go up by 2% and 1.9%, respectively for the two years. The cost of repairs and maintenance was expected to rise by 2.3% in 2015 and by 2.4% in 2016, while drydocking expenditure was predicted to increase by 2.6% and 2.3%, respectively.

The cost of H&M insurance was estimated to rise by 1.8% and by 1.9%, respectively, while for P&I insurance, the projected increases were slightly lower at 1.7% and 1.8%, respectively.

Expenditure on spares was forecast to rise by 2.3% in 2015 and by 2.2% in 2016, while for stores, the corresponding projected increases were 1.8% and 1.9%. The increase in outlay for lubricants, meanwhile, was thought to be 1.1% and 1.7% in 2015 and 2016, respectively and that for management fees 1.7% in each of the two years.

For 2016, the tanker sector was predicted to experience the highest level of increases – 3.4% - compared to the overall survey average of 3.1%. 

One respondent said,“We expect costs generally to increase as charter rates creep up, although they will probably lag behind the latter. With charter rates generally low at present, the provision of services to the shipping industry needs to remain competitive, with suppliers reluctant to put up charges too soon for fear of losing business.”

Elsewhere, it was noted,“Future operating costs will increase exponentially due to innumerable new regulations, the low competence of seafarers, the high bargaining power of the oil majors, stricter rules regarding maintenance and repairs carried out in ports, the advent of more sophisticated on board machinery and increasing consolidation in the marine equipment and services sector, resulting in more bargaining power for fewer, larger companies.”

Another respondent highlighted the fact that shipmanagers were under increasing pressure, pointing out,“Overcapacity within the markets is driving charter rates down, owners are facing higher costs to finance vessels, and operators are fighting much harder for cargo. Shipmanagers are now required to look after much more for the same management fees.”

Another emphasised,“Due to the high financial costs involved in operating a newer world fleet and to an over-supply of tonnage and depressed freight markets, there will be increasing pressure to maintain or freeze operating cost levels in order for owners to remain competitive. This is likely to change between 2017 and 2020, however, with significant capital expenditure required for regulatory compliance.”

One respondent predicted,“Crew costs will continue to be the main area of increased operating expenditure,”a sentiment echoed by another, who pointed to the effect of the Maritime Labour Convention 2006 to support this opinion. Elsewhere, however, it was noted, “Crew costs will remain stable because the workforce will always be recruited from cheap countries.”

‘Staggering’ cost increases due to redundancy in electronic navigation and communication equipment, and increased port dues, were among other issues deemed by respondents to be likely to result in an increase in operating costs.

Moore Stephens also asked respondents to identify the three factors that were most likely to influence the level of vessel operating costs over the next 12 months.

Overall, the most significant factors identified were finance costs at 22% (compared to 21% in last year’s survey) and competition also at 22% (up from 18% last time).

Crew supply was in third place with 17% (down 3% on last time), followed by demand trends (down 1% to 16%) and labour costs, unchanged at 13%. The cost of raw materials was cited by 8% of respondents (compared to 10% in last year’s survey) as a factor that would account for an increase in operating costs.

Moore Stephens shipping partner, Richard Greiner, said; “The predicted increases in ship operating costs for this year and next compare to an average fall in 2014 of 0.8% in operating costs across all main ship types recorded in the recent Moore Stephens OpCost report.

Nevertheless, the level of increases anticipated for 2015 and 2016 are low in comparison with many we have witnessed in recent years. Shipping has seen much worse, and prevailed. For example, many of the companies, which endured a 16% rise in operating costs in 2008, are still operating successfully today.

“It is no surprise that crew wages feature near the top of the predicted operating cost increases for both 2015 and 2016, not least because of the entry into force of the Maritime Labour Convention 2006, which mandates the manner in which seafarers must be paid. For shipping, as for every industry, investment in good people will always be money well spent.

“Meanwhile, a government spokesman for the Marshall Islands recently characterised the IMO secretary general as a ‘danger to the planet’ for his alleged failure to endorse more stringent curbs on the shipping industry’s CO2 emissions. This is what Sherlock Holmes might have described as a ‘three-pipe problem’ – politics, gas and competition. It is not an unusual combination in shipping. In the end, however, it is likely to have an impact on the industry’s operating costs and there is no accounting for that, ” he concluded. 

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