September 23, 2008

The Ostrich Strategy.

Inured as I am, like the rest of us, to catastrophic scenarios about global warming, and frustrated as we all are with our individual inabilities to seemingly do anything about it, a few recent reports have, nevertheless, made this mariner sit up and take notice. To be honest, the first of these confirms my two and a half year old suspicions when I encountered the worst weather I have seen at sea in decades in the North Atlantic. It was, simply, scary.

But let me list those recent reports here

1. A study by the Florida State University (FSU) says that the increasing strength of tropical revolving storms witnessed in recent years is because of global warming. And that hurricanes, cyclones and typhoons will continue to get stronger and stronger.
Although the theory has its critics, FSU says that this reasoning, first put forward by Kerry Emmanuel at MIT in 2005, is consistent with the study of Hurricanes on the US East coast over the last 30 years. The reason for this, the ‘heat engine’ theory, seems to be that warmer oceans give the ocean greater energy which it then provides to storms.

2. A recently released UN study identifies India as a ‘hot spot’ that is particularly vulnerable to extreme weather conditions which will be caused by climate change. Incidentally, unusual weather patterns experienced worldwide have been witnessed in India too. Melting glaciers, drought, floods and cyclonic activity is just a start. One of the major fears put forward in the UN report is that coastal areas of this country, including the cities of Mumbai and Kolkata (and London and New York elsewhere) could go underwater by 2050 if sea levels continue to rise.

2050. That is well within our children’s lifetime, or should be if we have any. I would, in all honesty, recommend contraception instead.

(A ‘hot spot’, according to the UN report, is one particularly vulnerable demographically, politically and economically. There are also major security implications, given that Pakistan is also a ‘hot spot’, along with Indonesia and large swathes of Africa.)

3. A Reuters report quotes the US National Oceanic and Atmospheric Administration says that Asian short term pollution from power plants, cooking and heating will be responsible for a fifth of global warming by 2050. "We found that these short lived pollutants have a greater influence on the Earth's climate throughout the 21st century than previously thought," an official said.

And, of course, the new consumers of the world, China and India, lie in Asia.

Given that nobody will wave a magic wand tomorrow morning before cornflakes and make this reality disappear, and given that worldwide measures to tackle this display the familiar lack of political will, spinelessness and short sightedness we expect from our leaders, things will get worse before they get better. Maybe they won’t get better, and mankind would have run its course.

Thing is, there is probably going to be no ecological doomsday tomorrow morning either, which means that we will still have to pay the electricity bill day after tomorrow. So we cannot just surrender and die. And since we can’t do that, we will have to let this game play out either way, and things are therefore going to get worse for another few decades or so. The maritime industry, besides the world, has to prepare for a situation which will deteriorate as surely as fresh cream in Indian summer.

As the Times of India says in an editorial, “Adapting to the inevitable, at least in the short run, is as important as planning long term strategies to counter the effects of climate change before we are able to establish a global culture of sustainable living.“

Here’s my list, then. In no order of importance, this is just some of what climate change is likely to do to our industry. I am assuming that these reports are accurate enough under the circumstances, or at least indicative.

· Worse/unpredicatable weather. Responses may be a review of load line zones including seasonal ones and higher safety and construction standards. Fallout of this is obviously higher operating costs.
· Higher casualties, greater loss of life and ships, escalated environmental damage.
· Higher insurance premia as risks increase, including risks of marine pollution due to ‘Acts of God’
· New ports as older port areas and connected hinterland slowly immerses with rising sea levels.
· More stringent emission standards. Higher costs.
· Greater difficulty finding people willing to go out to sea
· Relocation of shipping nodes (if Mumbai, London and New York are to slowly sink..)
· Reduction in trade as many cargoes get financially unsustainable for export because of rising freight and insurance costs and countries start looking inwards rather than outwards.
· Major issues sourcing financing for shipping. This is a cyclical long term game, and the realisation will dawn that the long term isn’t looking too good.
· New sea routes as Arctic glaciers melt. More dangerous, because they are more North in areas of more extreme conditions.

We listen to these predictions and think, subconsciously, that 2050 is a long way away. I am sorry to burst that bubble, but a) recent events with melting polar ice caps have indicated a much faster rate of deterioration than hitherto imagined, and b) the world will not collapse over cornflakes and a hangover on New Year’s day, 2050.

It will continue to deteriorate, week in and week out, and at some point, the collapse will accelerate and become catastrophic. So, unless we have a good crystal ball lying around, we better start thinking about our options now.

So far the maritime industries, like the rest of the world, have their ostrich heads in the sand.

Which is not such a hot idea. As sea levels rise on the beach, that bird will be the first to go, regardless of where the head, or other sensitive parts, are.


September 20, 2008

Preparing for the end of the Boom

In June this year, I had felt that, “ the honchos at Bear Stearns will tell you, every boom has a bubble and every rose has a thorn. With the world's largest consumer, the USA, in recession and with growth rates in India and China slowing down a bit, trade is likely to drop.” (Marex, column titled Monster’s Maritime Ball)

I also said there that, “Boom graphs cannot be extrapolated to infinity. The consequence of such a slowdown is likely to ease the pressure on manpower to an extent; how much, of course, remains the million dollar question.”

It is with mixed feelings, therefore, that I now report that the Baltic Dry index has crashed 40 percent since around the middle of May, and that Goldman Sachs predicts another 40% drop next year, and another 47% in 2010.

VLCC hire rates have crashed, too. And so have shipyard stock prices in Korea and shipping company stocks almost everywhere, including in India, where SCI’s stock price has crashed 26% and Mercator lines 32% in 3 months when the BSE fell just 11%.

The think seems to be that oil prices may have stabilised after the US Georgian expedition and that the dollar will now strengthen. In any case, there is fear that oil demand will fall along with other raw material demand, assuming that the world economy follows the US into a slowdown.

In a separate development, Morgan Stanley predicts that about 23 billion dollars worth of newbuildings will be cancelled in the next three years, and there may be delivery delays for up to 20% of the scheduled order book. About seven percent of contracted new build deadweight is what that 23 billion means, in real terms.

The reasons cited for the predictions are many; recession in the US, slowdown in raw material demand in China and India, the Olympics when China shut down polluting steel mills (which will not reopen till after mid September, given that the Paralympics are scheduled in that month) and financial turmoil in the world markets, led by the US subprime crisis, effecting shipbuilding. As usual, bad news always has much justification that the so called experts parade after the event.

Some others, no doubt hedging their bets as any good management graduate tends to do, say that fears of recession in shipping are overstated, and that though shipping growth may moderate a bit, there is no real cause for concern. China will reopen its factories, and VLCC
demand will pick up as it is a seasonal blip, the US crisis will abate, and all of us will live happily forever after.

Now that I have the experts and their macroeconomic picture out of the way, this is what this layman thinks will happen to shipping worldwide and in India:

· One cannot have the world’s largest consumer, the US, in recession without worldwide impact. This means demand for oil, raw material and finished goods and services. Much of these finished goods come from China. Ergo, China will slowdown too and its demand for raw materials, including oil and ore, will drop. Impact on shipping.
· The upcoming US Presidential elections will force focus on their pressing domestic financial subprime crisis; though this may have some collateral advantage to world financial markets, the fact is that the losses incurred by major financial corporations are being socialised in that country. Which means that the common citizen will pay for financial fraud, and which means that the deficit will grow, not lessen. The subprime crisis may hit prime borrowings too, around the world, with consequent financial turmoil in the shipbuilding markets. Some owners may default on payments to yards, particularly as they see freight and hire rates dropping.
· The ruling coalition in India will do everything in its power to keep inflation down. They want power before they want growth. Growth is already being sacrificed towards this end, and inflation is still rising. The economy, including agriculture, has slowed down. I think this cycle is not complete, and further slowdown will have a further negative impact on Indian shipping. Things are likely to get worse before they get better.
· As shipping slows down, the worldwide seafarer manpower crisis will stay on the front burner, but the flame may be lowered quite a bit. Estimated future numbers pertaining to seafarer shortages will be lowered. Ship managers may heave a small sigh of relief, though I think that a shortage will persist unless there is a prolonged worldwide recession.
· Freight rates will continue to drop for some time. As newbuildings come into the market, existing ships will have a competitive edge with cheaper available tonnage.
· The bulk market will be noticeably oversupplied with tonnage. Maybe some others too.

In short, I feel that though there may not be a large recession in shipping, a slowdown is very likely. Soon, the boom cycle may be peaking, though a bust is probably unlikely. At the very least, though, we will have to get used to numbers that are more moderate.

This slowdown, if it happens, may well be a blessing in disguise for Indian owners and ship management companies, given that a boom afforded us a peek, of sorts, into the future.

We know, for example, that the maritime community needs to fix many issues related to seafarers, primary amongst them being HRD policies, encouraging long term associations and countering worldwide criminalisation. We know that we have to scale up management skills to handle growth in shipping. We know this growth will come, even if it is delayed a bit. In addition, because we may be able to take a step back away from firefighting, we may well have some time to fix systemic problems, especially with managing attraction, retention and attrition of seafarers. We have been reminded that without sufficiently qualified and experienced officers to operate ships, we are up the creek without a paddle.

I suggest that this possible slowdown should be used by owners and ship management companies to get a handle on this critical (and critically ignored) element: the seafarer. On the ‘To Do’ list, in order:

1. Analyse manpower requirements over the next three years. Set up this analysis every six months to review changing environments.
2. Make a workable model which details, for each firm, where these bodies will come from. Fund this model appropriately.
3. Have a robust programme for attracting youngsters into the industry. Fund it and operate it. Newspaper advertising alone is not a robust programme, by the way.
4. Think up a new mechanism for retention and other HRD issues. Discard the present nonexistent HRD policies and adopt ones suitable for this century. Match them with other industries; your potential employees certainly do.
5. Set up a system in place for review of administration essential on board, including review of all paperwork. Remove unnecessary workload.
6. Address STCW fatigue issues that are widely and universally violated at present.
7. Setup industry initiatives to promote or amend seafarer issue legislation. The ISPS and the STCW are the first two here; with regard to criminalisation, the ‘fair practice’ guidelines need to be strengthened and made into law.

Create a sustainable business model that factors in true employee costs after you have this well thought out programme in place. Else, as usual, ideas will be shot down because ‘where will the money come from?’ or for a million other alarmist reasons.

Detail what you need to do and what it will cost. Factor the cost into your business model and churn numbers. Reach a decision and then implement. The whole world does it this way; we in shipping, however, often tend to ‘save costs’ without thought on the long term impact of this one sided, immature style of management. Unsurprisingly then, a kingdom is lost for the want of a nail. It is also lost because ship management companies often look at their own financial interests at the expense of the ship owner’s.

Saving costs is not the reason for our existence. Professional operations while making a reasonable profit is.

Doing this will, in my view, make us stronger. It will create a sustainable well thought out business model and address demands of this cyclical industry. Demands, which so far have been managed by what I call the fish market style of management. Which is, take what you can get, and do not think of tomorrow.

We need to do all this, and more, regardless of a slowdown. A slowdown just gives us a breather to get our ducks in a row, so to speak.

All that said, I hope I am wrong and this slowdown never happens. However, if it does, we need to do one more thing.

This time around, please don’t treat seafarers like cattle even if you do not need them.



September 10, 2008

Warlords, Drug lords and the new anatomy of ship security

In January this year, this column carried a piece (ISPSo Facto) which highlighted the farcical unworkability of the ISPS code as applied hurriedly and without thought to seagoing ships today. My opinion remains that the ISPS code is overwhelmingly impractical and unworkable in its present form.

For those of us who thought that we could cheer up because things could not possibly get worse, we now have some news. They probably will; I can see the writing on the wall. New threats are emerging or old ones dramatically escalating in different areas of the world. Let us look at just two such areas today: the Horn of Africa and the US East Coast.

Piracy, or more accurately, hijackings of ships, has been an unpleasant fact on the Somali coast for almost a decade and a half. The difference between the time I was plying on the coast (Red Sea/Yemen to Kenya/Tanzania) and now is that the killing zone has moved north and threatens the entrance to the Red Sea, and indirectly traffic through the Suez Canal.

In the last four months, seven ships have been hijacked off the Horn of Africa. A third of recent piracy attacks worldwide have been in this area which is a critical shipping route, situated as it is at the entrance to the Red Sea. Four ships were hit on the same day recently; close to a hundred crewmembers were kidnapped on that one day alone. The number of reported attacks on ships has tripled this year; industry experts believe that many incidents remain unreported.

In the past, ransoms up to millions of dollars have been paid for safe release of ships and crews. Past (and present?) Somali links with Al Qaeda make this anarchic country, with no government since 1991 and in the grip of warlords, a particular cause for concern.

And before I forget, one more thing has changed: owing largely to the fact that the shipping industry has done nothing except ransom ships (and crews, though they are always collateral damage to the industry) with millions of dollars each (ransoms for European ships are higher, which should tell us something about the value of skin colour), the IMB in Malaysia recommends ships now stay 200 miles off the Somali coast, compared to the 100 recommended when I was on a liner service there last a few years ago. We think that this is acceptable progress and good risk management after a more than a decade in that hostile environment.

Threats in the United States emanate from an old enemy that has learnt new tricks: The US Coast Guard says that in this year alone, they have detected twenty seven semi submersibles headed for the United States, each carrying up to ten tonnes of cocaine. This is greater than the number of such known submarines in the last six years combined, and represents a dramatic escalation in the drugs trade and consequent security concerns. The number of submarines undetected is, of course, anybody’s guess.

Eighty feet long and with a military design (fingers are pointed at ex Soviet Union technology and technicians working in manufacturing facilities in the river estuaries of Colombia), these sleekly designed drug subs, each with a crew of two, twin silent propellers and with a profile above water only eighteen inches high (just enough to take in oxygen and release exhaust), can carry drugs thousands of miles and at a decent speed directly from Colombia to the US coastline. These semi submersibles, almost identical to military submarines, mark a significant advancement in the ability of drug smugglers to pose a serious threat to the United States. This method of smuggling cocaine is a generational leap in drug smuggling and does not need corrupt officials ashore to be successful. To make this nightmare complete, these subs are undetectable by radar and not visible except at very close range.

And by the way: these submarines are abandoned after drug drops on the US mainland even though each costs several million dollars to manufacture; the street price of the drugs each one carries is worth tens of millions of dollars on the streets of the US and so a few million can be written off without discomfort.

Officials in the Department of Homeland Security are very worried at the increased sophistication of these drug subs. Officials fear that the submarines can easily deliver terrorists or weapons, including unthinkable and unspeakable ones, into the USA.

I guess what these stories are telling us is that the threat perception of a few years ago is already redundant, and that the ISPS code cannot cater to the rapidly escalating security scenario; hell, it can barely cater to normal operations at the best of times.

We have been often told of the links between terrorism and organised crime. Hawala linked to Dawood Ibrahim, the ISI and the WTC bombers. LTTE cadres are carriers into Europe for Columbian drug lords. Indonesian terrorist and separatist groups in Aceh linked to the Bali bombings and Al Qaeda. Al Qaeda linked to everybody’s aunt including terrorists in the Philippines. The Taliban being opium financed and created by the Pakistani ISI. Past links between the IRA and the Columbian drug lords.

What are the chances that these links will get stronger? Should we not assume that they already have? And if so, what do we think will happen?

I expect the immediate threat to shipping around the Horn of Africa to be resolved by military force of some kind, though partially; Somalia has a 3200 mile coastline. I also expect that boarding of hijacked merchant ships on the high seas by military commandos will become more of a possibility, as will some in house measures, including the use of armed security personnel by some owners; at least one is already doing so. Insurance may well get more expensive, too.

Around the US Coast, and given the fact that those mini subs are alleged to get logistical support from private vessels at sea, I expect an increase in overt and covert surveillance, combined with perhaps raised vessel reporting and other requirements. I expect that the US will take action on this quickly; they have a hole through which a few hundred tonnes of anything can be brought in annually, breathing or otherwise, and seemingly at will.

I expect new legislation in many countries and pressure on the IMO to strengthen existing security resolutions, the end result of which will be to increase operating costs somewhat, reduce again the Master’s authority in the open sea while increasing his responsibility and contribute to fatigue of already stressed out crews. Daily ISPS checks of the ship at sea, anybody?

In short, I expect more of the same post WTC attack (if you are not with us, you are against us) kind of responses. In addition, I expect they will be as unworkable and as unsuccessful as those, because, to repeat while getting blue in the face, ships crews are ill manned, ill equipped, ill trained and too overworked to deal with security, terrorism and organised crime in any meaningful way. Asking them to do this is like asking pilots and cabin crew to be responsible for security at JFK.

There is one thing we can do this time around, however. The shipping industry can engage countries like the US and organisations like the IMO and help them in bringing about changes that are practical and workable. Whether in Somalia, the US today, or another region tomorrow, we should not be caught flat footed as we were last time, when ill conceived and hasty regulations were stuffed down our throats. Industry bodies must engage the IMO and Marine Departments of countries meaningfully; regulations once written tend to be etched in stone, so it is much better to have a hand in shaping them. India, too, must strengthen the quality of its IMO contingent.

If all this hoo haa results in elements of ship security being outsourced to professional outfits, then we are also looking at an upward pressure on freight rates, besides insurance costs. That is another piece of math the industry could do well to flesh out, starting now.

Incidentally, this is also a good time for the maritime world to try to tweak the present ISPS code to make it workable.

Finally, Masters of vessels bound for the Gulf of Aden or down the Somali coast would do well to start exercising their minds with some, “What if” scenarios, two hundred miles off the coast or not. Scenarios like, “what do I do if six men with grenade launchers and AK47s knock on my door right now?”

Lie back and enjoy it?


September 04, 2008

Carpe Diem

May I remind all of us, especially those who are serious about overhauling our archaic system of sourcing and retaining seafarers, improving maritime legislation or operations and addressing other Industry critical issues, that we don't have unlimited time to do so?

And this is why I think so:

Shipping is in a boom cycle. Right now, everybody is making money. Thousands of additional officers are required, and everybody is trying to figure out which woodwork they will crawl out from. Industry flesh is willing to experiment, spend money, think laterally and, most importantly, give time to this massive problem. Putting it more succinctly, the ship manning crisis is a cluster bomb exploding in our faces and so demanding immediate attention. It is a clear and present danger.

It will not remain so indefinitely. And mental bandwidths, money and resolve will all dissolve if, for example, the business of shipping sees a recession coming up or notices a new commercial danger that threatens to eclipse the present one. Besides being human nature, this is also in the nature of the beast: the maritime industries seem to believe largely in management by firefighting, at least so far.

Some recruiting companies may wonder why we should bother to solve a problem if it is temporary. After all, we are booming today: who knows where we will be ten years later? Meanwhile, I am all right, Jack. I can kill time for the next few years and retire with my pension plan.

After all, when supply matches demand or exceeds it, there is no problem, is there?

There is a problem, actually. Killing time waiting for the problem to pass does not solve ongoing issues of Indian youth voting with their feet rejecting seafaring as a career. It does not solve the problem of lower safety at sea because of quick promotions or inexperienced officers on board and the fact that we tend to see seafarers as labour, not employees, with consequent ongoing troubles. Long term growth of the Indian maritime sector is, therefore, not possible unless these problems are addressed.

In addition, of course, if the number of Indian seafarers reduces, so will the requirement of Indian recruiters. Chinese recruiters (why do I hesitate to use the term Ship managers?) may well manage Chinese seafarers better, if that is the way we are headed. Killing time may therefore kill the golden goose; it may well be a suicidal idea.

We also need to remember that a large pool of seafarers will automatically generate a pool of talent waiting at the blocks to sprint into areas within the Industry where we do not have predominance yet; Insurance, Project Management, Maritime Law and Arbitration, Chartering, Risk Management and Reinsurance are the tip of this iceberg. We are only limited by our imagination here.

Indians should plan to dominate the maritime world. Is there a reason why Mumbai should not aim to replace London as a preferred international Industry node?

To achieve this, we have to act today. Today governments will act faster than they usually do because of market forces; see how resources are being pumped into ports and associated infrastructure, and how new initiatives are being taken with coastal shipping. Single minded and concerted pressure to improve the broader shipping policy needs to be applied; it is only logical that Indian ocean shipping be given the same thrust.

We need to pressure international maritime organisations today. Along with the Phillipines, we cannot be ignored at the global seafaring table. Similar to the demand for a Security Council Seat at the UN, India has to raise its profile at the IMO. It must have a larger say in what is mandated for the shipping community, because it has a larger stake in it today. The time to do that has come. We should not be satisfied with being poor cousins anymore.

Indian government and industry organisations should take the lead in protecting Indian seafarer interests. A beginning has been made with the Hebei Spirit case. However, statements like this made by an official recently saying, “We are telling maritime training institutes to hide this incident from young boys looking to take up a career at sea” serve us poorly. This is, simply, not the way to attract talent in the information age. The way to do it is to empower people: with information, knowledge and excellent professional training. Trying to lure them with falsehoods will only exacerbate the mess the industry finds itself in.

Flag and Port States will listen more and often to an awakened maritime India pushing to take its rightful place in the world. Right now we always negotiate from a position of weakness, and it is not unsurprising that we walk away with weak results.

Owners will listen better in boom times. They are making money and want to grow. We need to show them that we are capable of solving their longer term manpower, operational, technical and commercial concerns.

Delay will cost us. If we don't take the lead in responding to the needs of the maritime community worldwide, somebody else will. The vacuum will be filled anyway, since nature abhors it; it will just not be filled by us. We don't want to be in a postion where a Chinese columnist writes an article, much like this one and ten years from today, reminding readers how the Chinese successfully replaced Indian mariners worldwide at sea and ashore, do we?

The time is now. Start tackling the rot at two levels today. First, systemic problems have to be solved by a mix of government and private initiatives which streamline policy to respond to the needs of the present generation of Shipping. Industry bodies have to get their acts together today to do this.

Secondly, we have to start acting on individual ideas for improvement right now. Most of us have thoughts on strengthening the Indian maritime industry which we think will work. We have to implement them in our own little ways and within the spheres of our professional influence, starting today. Gauge success and adopt quickly to the fast changing industry environment. Have the courage of your own convictions: take them to the marketplace!

Remember Shaw's words: "The reasonable man adapts himself to the world; the unreasonable man persists in trying to adapt the world to himself. Therefore all progress depends on the unreasonable man"

Therefore, at least for the Ship managers out there (as opposed to the Recruiters) the time is now. Strike when the iron is hot, when your efforts will get a hearing and traction from owners who are focused on the cluster bomb threatening their economic well being. Strike now, when the Indian government can be persuaded to see the advantages of incremental employment, removal of infrastructure bottlenecks and growth opportunities for the country. Strike now, when Port and Flag States can see business increasing provided that they get their ducks in a row. Strike now, when the wider industry is straining to grow but is hamstrung by ancient policies and unsustainable strategies.

Strike now, for nobody will listen to you in a recession.

India provides 6% of the personnel in the global shipping industry. We have an excellent opportunity to raise this percentage; aiming to just retain market share is not the formula for growth.

This is the moment to show the world, like we did a few decades ago when we demonstrated that India could provide quality officers to the world fleet in large numbers. Well educated, professional, good language skills, hardworking and with integrity. This is the time to launch a similar attack on the wider maritime world.

So, folks, killing time is not an option, for all the reasons above; reasons which Thoreau summarises with his usual brilliance:

"As if you could kill time without injuring eternity"