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Ship Operating Costs Expected to Rise in 2018 and 2019

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International accountant and shipping consultant Moore Stephens says total vessel operating costs in the shipping industry are expected to rise by 2.7% in 2018 and by 3.1% in 2019. according to its latest survey.

Responses to the firm's latest annual Future Operating Costs Survey revealed that drydocking is the cost category likely to increase most significantly in both 2018 and 2019, accompanied in the latter case by repairs and maintenance. The cost of drydocldng is expected to increase by 2.1% in 2018 and by 2.3% in 2019, while expenditure on repairs and maintenance is predicted to rise by 2.0% in 2018 and by 2.3% in 2019.

The increase in expenditure for lubricants is expected to be 1.9% in 2018 and 2.1% in 2019. Meanwhile, projected increases in spares are 1.9% and 2.2% in the two years under review, while those for stores are 1.6% and 1.9% respectively The survey also revealed that the outlay on crew wages is expected to increase by 1.3% in 2018 and by 1.9% in 2019, with other crew costs thong likely to go up by 1.5% in 2018 and by 1.8% in 2019.

The cost ofhull and machinery insurance is predicted to rise by 1.3% and 1.6% in 2018 and 2019 respectively, while for protection and indemnity insurance the projected increases are 1.2% and 1.4% respectively Management fees, meanwhile, are expected to increase 1.0% in 2018, and by 1.2% in 2019.

The predicted overall cost increases were once again highest in the offihore sector, where they averaged 4.1% and 4.2% respectively for 2018 and 2019. By way of contrast, predicted cost increases in the bulk carrier sector were 1.8% and 2.6% for the corresponding years. Operating costs for tankers, meanwhile, are expected to rise by 2.4% 2018, and by 2.9% the following year, while the corresponding figure, for container ships are 4.2% and 3.8%.

Respondents to the survey highlighted various areas of concern likely to result in increased operating costs over the next two years.

Regulation was high on the list, with one respondent noting: "New regulations will lead to extra costs for all owners, for example the Ballast Water Management Convention and IMO's 0.50% global limit on the sulphur content offuel oil used onboard ships."

On the subject ofcrew costs, one respondent said, "We do not expect any major variations in 2019. Basic crewwages for Filipino seafarers, however, will come under review in this period, and we may see some increase there."

Fuel costs were referenced by a number of respondents. "The cost of fuel treatment equipment will increase in the next two years," said one, while another remarked, "The Sulphur 2020 Rules will have a significant impact."

On a more general level, respondents voiced concerns about environmental issues, trade wars, the cost ofsecuring finance, and the global economic recession, all ofwhich were perceived to have the potential to result in increased operating costs.

Overall, the cost of new regulation was identified as the most influential factor likely to affect operating costs over the next 12 months, at 23%, up from equal third place at 15% last year.

Richard Greiner, Moore Stephens partner, Shipping and Transport, said: "The predicted 2.7% and 3.1% increases in operating costs for 2018 and 2019 respectively compare to an average fall in actual operating costs in 2017 of 1.3% across all main ship types recorded in the recent Moore Stephens OpCost study.

"One year ago, expectations of operating cost increases in 2018 averaged 2.4%, so the increase now in that expectation to 2.7% must be regarded as sobering — ifnot unexpected —news. Projected increases in operating expenditure are part and parcel ofthe workings of any industry, and must be factored into budget projections. But these latest predicted increases, whilst a cause for concern, should not unduly surprise or concern shipping, an industry which has seen — and in many cases endured much larger increases during the past decade."

He added: "One could argue that the level ofpredicted operating cost increases for 2018 and 2019 ought to be manageable in a competitive, viable industry environment. Nobody doubts shipping's essentially competitive nature, but the issue over viability is less clear-cut.

"Shipping has held up well during a 10-year economic downturn, and investors continue to express confidence in the industry's potential for profit. Sadly, some good companies have gone to the wall over the past decade but, overall, the industry has become leaner by virtue ofhaving let market forces function as they should. Yet market intelligence and common sense suggest that freight rates still need to improve significantly in order for shipping to start making the sort of money it should command in light ofthe vital role it plays in international trade and commerce.

"The more money that shipping makes, the more comfortably it can meet its operating expenses. Increases in operating costs must be expected, and budgeted for. Those costs may change in nature, because new technology is already helping to reduce outgoings in some areas, while on the other side of the coin there is the evident need for technological investment to combat the likes of cyber-crime."

REFERENCE: Ship Management International Issue No 76 November/December 2018

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