“Ship Operating Costs Annual Review and Forecast 2019/20” points to overcapacity concerns

According to a report from the Drewry Supply Chain Advisors,the costs of operating maritime cargo vessels rose in 2019, due to higher insurance rates and to repair & maintenance spending. Furthermore, this trend that is expected to continue through 2020, analysts said.

The statistics makes 2019 the third consecutive year in which costs have risen, following marked declines in operating expense (or “opex”) during the “capacity ravaged” years of 2015-16, Drewry found. 

Drewry estimates that average daily operating costs across the 46 different ship types and sizes covered in its report increased 2.2% in 2019, compared to underlying increases of just 1.1% and 0.7% respectively in the previous two years. This followed a period in which operating expenditures actually contracted over the two consecutive years (2015-16) by almost 9%, London, England-based Drewry said in its “Ship Operating Costs Annual Review and Forecast 2019/20” report.

In the most recent rise, spending rose across all six of the main cost categories, indicating how broad-based inflation continues to be, the report said. That cost-inflation curve has been dampened slightly by a continued recovery across most cargo shipping markets, but the rise in costs was still broad-based across all the main cargo-carrying sectors: container, chemical, dry bulk, oil tanker, LNG, LPG, general cargo, reefer, roro, and car carriers sectors.

“While cost pressures remain, this trend confirms the end of the deflationary era that prevailed mid-decade, as the depressed state of shipping markets forced operators to slash costs in order to survive,” Drewry's director of research products, Martin Dixon, stated. “There are limits to cost cutting, beyond which the safety of the vessel and crew are put at risk, and as freight markets have recovered, so pressure to reduce spend has lifted leading to modest acceleration in cost inflation.”

Heading into the new year, market conditions are expected to be challenging for many shipowners as the trade outlook remains uncertain and benign capacity conditions prove temporary when the current round of retrofits recedes. 

“Hence, we expect the pressure on costs to remain which will dampen any likely inflation, particularly in areas where owners have greater control, such as manning, stores, spares, and management and administration,” Dixon said. “Other cost heads, beyond the direct control of shipowners, will prove tougher to manage, particularly insurance where we expect costs to rise sharply in 2020.

Continued attempts to clean up and decarbonize shipping will add to owner cost burdens, affecting management & administration, repair and maintenance, and dry docking costs in particular, as retrofitted equipment adds to maintenance costs, Drewry concluded.

Dan Smith, a Principal, The Tioga Group, Inc. told LM in an interview that Drewry’s concern about excess tonnage is shared by many other industry analysts. 

“As long as overcapacity exists, the question is not how much it costs to operate the vessels, but how much they can recover from shippers that have multiple options,” he said.