It is nearing pay-cut time for officers operating ships as owners look at ways to trim operating expenses and stay profitable in a falling freight market.
Many ship owners have internally started discussing this unpopular move, which would become public in the coming days. With freight rates plunging to the lowest levels in years because of the credit squeeze and declining global trade, owners feel this action is essential to prevent shipping companies going bust.
Firms losing money from operating ships are looking to cut at least 20-25% from the salary of an individual officer hired to operate ships. There are some 26,900 Indian officers working on ships globally—18,000 of them on foreign ships and 8,900 on Indian ships.
Crew wages, particularly for officers, account for a major chunk of the operating expenses of a shipping firm. In the current freight market, shipowners say they are struggling to even recover their operating expenses, spent mainly on crew, maintenance, insurance, fuel and lubricants. Reducing the number of officers employed on board a ship is not possible because maritime authorities, world over, prescribe a minimum number of staff required to operate a ship safely.
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During the shipping boom of the last four-five years, officers sought and secured hefty pay packages from their employers. During the last one year alone, salaries went up by about 25% on an average. Ship officers such as captains and chief engineers now get anywhere between $11,000 (Rs55,000) and $13,000 a month, depending on their experience. Cash-rich owners, then, had to relent rather than risk losing the chance of tapping a small pool of well-qualified and trained officers at a time when the global shipping industry was facing a shortage of crew.
The tide has now turned against the shipowners as the financial turmoil and reduced consumer spending in Western countries slow demand for goods. Freight rates for dry bulk shipping has been the worst affected by the crisis.
The Baltic Dry Index, a measure of shipping costs for dry bulk commodities such as coal, iron ore, steel and grains, has plunged by 93% from a record high on 20 May, forcing many ships to remain idle in anchorage for lack of cargo.
Shipowners are also at risk of breaching their loan accords because the decline in rents has caused a similar plunge in ship prices.
In the container shipping segment, rates have fallen to a level where owners can hardly meet operating costs and will soon fall behind debt payments. And, those now taking delivery of new ships will not break even for several years. As a result, container shipping lines such as Denmark-based Maersk Line and CMA CGM SA of France have announced tie-ups to offer common services on the Asia to US routes to economize fleet operations and survive the turbulence.
Though oil prices have almost dropped back to their 2007 levels, resulting in lower ship fuel costs, ship insurance costs have spiralled because of piracy in the Gulf of Aden where Somali pirates have attacked and captured several ships transiting this trade route in the past few months.
The tanker market has been the only saving grace for shipowners this year. But, this market may also see downward pressure if the Organisation of Petroleum Exporting Countries effects more production cuts to the 1.5 million barrels per day announced early November to shore up oil prices.
Local ship owners, specifically, have also been hit by the weak rupee while making payments towards shipbuilding contracts booked when the rupee was stronger compared with the dollar. Though bank loans taken for such ship purchases are in dollars, they have to account the transaction in rupees on their books, according to the law. Because the dollar has appreciated this year, owners have to pay more rupees for a greenback, ending up showing several crores more towards ship acquisitions on their balance sheet than originally planned.
The cost-cutting efforts of shipowners have gathered a sense of urgency because nobody is able to clearly foresee how long the slump will last. This has forced many global owners to either cancel contracts awarded for building new ships during the boom time or delay construction.
As Andreas Vergottis, a research director at London-based shipping hedge fund group Tufton Oceanic Ltd, recently put it: “Shipping is the best industry on the way up, but it’s the worst industry on the way down.”
P. Manoj is Mint’s resident shipping expert and writes on issues related to shipping and logistics every other Friday. Respond to this column at firstname.lastname@example.org