LONDON: Vessel operating costs are expected to rise in both 2017 and 2018, according to our latest survey. Repairs & maintenance and spares are the cost categories which are likely to increase most significantly in each of the two years.
The survey is based on responses from key players in the international 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.
The cost of repairs & maintenance is expected to increase by 2.0% in both 2017 and 2018, while expenditure on spares is predicted to rise by 2.0% 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.
Richard Greiner, Partner, Shipping & Transport, says, “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 our recent 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 ten 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.
“Elsewhere, there were some interesting predicted cost increases in the individual market sectors.
The offshore industry, for example, is predicted to be facing increases of 3.5% in crew wages for 2018, compared to the 1.4% predicted for bulkers and the 0.7% for container ships. Indeed, the offshore sector is facing the biggest increases in operating costs in the next two years in every category of expenditure covered by the survey.
“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.