BOW WAVE 205

Supply Led Edition

news and views on trade, insurance and risk

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Wavy Line	sam@wavyline.com
(c)2003 WavyLine.com	Issue No 205 27 Oct 03
Published free of charge to Readers
Editor: Sam Ignarski
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In this issue:

1. Welcome
2. Guest Column: Neils Kim Balling on Container Shipping
3. The Export Forum Meeting
4. Ship Breaking Guidelines Agreed in Bangkok
5. Jacuzzi Salvaged By Kayak
6. And Finally...

1. Welcome

Fairplay's Lookout column on the psychological traits currently exhibited by the Karachi Port Trust are well described. Why are jacks-in-office all so the same?

"Numerous learned studies have shown that the stronger the evidence showing that the initial premise was wrong, the stronger the group or individual will cling to that belief. This psychological phenomenon is visible in the continuing detention of Captain Apostolos Mangouras of the Prestige. The unfortunate captain is resigned to waiting until after next year's election before he can go home. Only when it is electorally safe to do so will the authorities feel safe to let him go and (implicitly) admit their mistake."

(23rd October, 2003)

http://www.fairplay.co.uk

New Readers this week include:

Sandra L Cowham,Deputy Underwriter, Allianz Marine & Aviation Andrew Clarke of CTC
Andy Sellick of QinetiQ
Marine Surveyor Leonard R Stevens of Blue Wave Marine Surveys

News of Readers

Marine Artist Gordon Frickers has just unveiled his latest work, Dumra departing Bombay in a rising S.W. monsoon.(Oils, 20 x 32) for Sir Robin Knox-Johnston to celebrate Sir Robin’s earliest times at sea.

"A way of life was ending a mere 30 years ago", Gordon writes, "yet now seems to belong to another age. It was a world celebrated by this new painting, a world known to Britain’s most famous yachtsman & navigator Sir Robin Knox-Johnston whose career started as a cadet onboard Dumra".

The painting shows Dumra in a rising South West monsoon, having just cast off her tugs. In the background we see many sights familiar at the time, the Gateway to India Building, the Tajh Mahal Hotel, local craft & 2 B.I. "I" class freighters. It shows the correct flags, the Indian crew wearing a royal blue uniform, baggy trousers and tunic that came to mid thigh with a red sash around the waist. It even shows the cabin window were Robin sweated out his early voyages & a dead cow in the harbour!

Robin Knox-Johnson said "I thought I remembered the water as browner, dirtier, with more dead cows!...but I am delighted with the painting".

The conception began as idea of Robin’s, it was researched by Gordon Frickers including at the P & O archives with the help of Stephen Rabson, also at Bombay thanks to his friend "AP" Singh & through the World Ship Society.

The picture will be viewable on the BI Web Site at:

http://www.biship.com/

Contact Gordon at:

g.frickers@btopenworld.com

Readers Write:

Freight forwarder Chris de Jong writes:

The following might be of interest to Bow Wave Readers:-
IMO/ILO/UN/ECE GUIDELINES FOR PACKING OF CARGO TRANSPORT UNITS: Annex 3

7.1: The regulatory authority should establish minimum requirements for training and where appropriate, qualifications for each person involved, directly or indirectly, in the packing of cargo in CTUs, particularly in relation to dangerous cargoes

7.4.1.1: Every person should receive training on the safe transport and packing of cargoes, commensurate with his duties. The training should be designed to provide an appreciation of the consequences of badly packed and secured cargoes in CTUs, the legal requirements, the magnitude of forces which may act on cargoes, during road, rail and sea transport, as well as, basic principles of cargo packing and securing in CTUs.

How many countries do have regulations in place to enforce this?

With the new international regulations regarding security in the transport link, how many take an active role?

In Australia AFIF, The Australian Federation of International Forwarders, with the support of the "Department of Transport and Regional Services" in Canberra, and otherss, has taken the initiative and offers a course in packing and unpacking of shipping containers. The first course was held in Sydney last week, the next one is due to be held in Melbourne next month. Those who seek more informationshould should visit their website:

http://www.afif.asn.au

or contact the Training Administrator, Simone Platt Tel: +612 9314 3055
email:asn.au

I personally feel it rather frightful to know what is happening out there between the packing facility and the consignee where so few did receive an appropriate training.

Contact Chris at:

c.dejong@bigpond.com

'A full Issue this week with an excellent piece by Econship's Niels Kim Balling.

Enjoy.

2. Guest Column: Neils Kim Balling on Container Shipping

Recently Kim responded to an item in the Journal of Commerce based on the UBS Marine Transport report from September taking issue with the statement by UBS that

"We believe the problem is always supply".

Since he is an usually acute observer of the industry we thought his words might well be of interest to Readers:

Of course supply does contribute to the cyclical volatility but the cycles as such are a combination of supply and demand. The time-span from investigating whether a shipping firm should order new capacity and until it's actually deployed in service is about 3 years. I doubt very many people have crystal balls, including the investment bankers, which can precisely predict the future 3 years hence with any degree of precision. What the professionals can do however is to call the cycles with a plus/minus 1-1.5 years uncertainty. So what you get (mostly) is a worst-case scenario of 1.5 years of over-capacity. That's bad of course, in the short-term.

But is this supply driven boom and bust cycle really "The problem" as UBS states? I don't think so.

Bear in mind that the average useful lifespan for the assets are 25 years and may be more. The cycles run in about 4 year frequencies. So the individual shipping firm is invariably going to encounter 5-6 cycles of boom and bust during the life of the asset. Even if you get the timing wrong of the beginning cycle, subsequent cycles reduce the 'risk of the error' down to about 20% of the high/low extremes. To me that means the boom/bust cycle is simply a normal part of doing business--as it is in many other cyclical industries. Other things become more important over this long time-span, like average cost of the assets and money, continuous efforts to reduce operating cost and increase asset productivity etc.

I rather think the container sector is in actual fact fairly close to the other shipping sectors, i.e. tank and dry bulk, where it's quite clear that capacity supply is cyclical as well, but the real driver of the boom and bust cycles are the occasional 'demand shocks'. These shocks can take many forms, positive and negative, and run generally in longer cycles (about 10 years). History shows each long demand cycle differs with no clear pattern over the past several decades-- but with very, very clearly defined causes for the individual 'demand shock'. The most notable negative one probably being the Tanker bust in the 1970's due to the Suez crisis. And perhaps the most notable positive example being the current boom in dry bulk caused by China demand for commodities which we are now experiencing.

In regards to the dry bulk boom it is my view that this will spill over to the container sector with very positive implications. Dry Bulk spot rates have now reached a new high (in recent times) of about 30$ per ton for basic raw materials. This could set the stage for a significant containerization of some of the 'minor bulk' markets as much of it moves in the so-called 'empty legs' of the container trades. Including inland transport and handling cost the container lines can now compete very effectively with bulk transport for say scrap and animal feeds from the US to China. The trend applies to other areas as well, like Europe and Latin America. Should these markets start to improve markedly (which I believe they will do, as China's demand is unlikely to stall in the near term) what we will finally see is an improved container equipment balance--one of the most costly issues the industry has had to contend with for the past decade. What we might see in the next decade or so is therefore a slightly lower top-line growth but a fundamental improvement of the container operators' profitability.

Obviously many parties are questioning whether the China effect is actually sustainable. The answer is a clear yes when one consider the two statistical facts that the China economy is already split 50/50 between trade and domestic demand, with the domestic demand growing slightly faster than trade. And secondly the status of only 20% of China's population qualifying as yet for being a beneficiary of the economic development in that remarkable country.

Placing the container sector in perspective I do certainly agree with the UBS advise that the cyclical nature of the industry is good for investors notwithstanding the quite low average return on equity for the industry. This applies to the other maritime sectors as well, as it does for most cyclical industries.

Although each maritime sector has its own set of dynamics they also share many basic sensitivities to the growth of the global economy. With that in mind (and I include the offshore energy services as being closely related to the tanker demand) here's some interesting data that Econships recently developed:

Total replacement value of the world maritime assets:1.2 Trillion US$ Annual replacement and asset expansion cost:115 Billion US$ (Note: I have excluded people transport, i.e. ferries and cruise sectors)

Of this the container ships constitute less than 10% of the asset pool and about 13% of the annual investment requirements. In terms of the global 'container system' one has to add equipment and ports, which brings the total share of assets to about 23% of assets and about 26% of annual investments.

A unique aspect of the entire maritime industry is however the reliance on private equity finance, primarily through ship-mortgages and structured finance especially leases. This explains why the total market capitalization of pure shipping companies (based on a threshold of minimum 50 Mill US$) is a measly 80 Billion US$, or less than 10% of the book value of the maritime firms serving the global trade of goods, raw materials and energy.

Whilst one can conclude that this disconnect between assets of the industry compared with the available equity pool for investors may be behind the recent run-up in share prices during a period of sharply increased interest in any industry involved with commodities, the situation for investors is in fact deplorable. It's almost impossible for individual investors to build a reasonably balanced portfolio of shipping activities. The reasons are many but principally due to the following:

1) Being a global industry equities are spread out tremendously between Japan, Scandinavia, other Asian and EU areas and with the US component for pure shipping being down to just 13 Bill. in market cap. (or app. 15% of the global investor universe for shipping).

2) I estimate that less than 15% of the global pool of listed companies is covered by more than 3 of the major international analysts. Standard & Poor covers even less. And if one examines the various key indices like Dow Transport, Nasdaq Transport, or any of the industry groupings provided by Reuters, Bloomberg etc. he individual investor will be thoroughly confused by the sector components being spread out over many other industry sectors or muddled up with domestic transport and/or people movement, be it airlines or the leisure industry (cruise sector). There isn't any clear reference for investors in the maritime sector, despite its actual very substantial asset base and capital requirements.

What is worse is that investors have no options at this stage to go to the mutual fund industry for shipping and maritime investments, even though it is an obvious and attractive proxy for global trade development and/or as a "China Play" etc. I have been able to identify only one very small open fund but being placed in a high-tax environment and focused on its own regional companies, even this single available open fund is limited in terms of relevance to the general investor public.

Being a 'shipping person' for 30+ years I find the situation odd to say the least, although I full well understand some of the circumstances behind it.

But may be the UBS report, as well as the recent interest in commodities, increased share prices for the maritime sector, and the general increased interest in the maritime industries which is also exemplified by the positive addition of industry analysts and many excellent maritime industry reports coming out these days, will all in all start a new trend of better investor options to get into this highly rewarding cyclical industry.

Contact him at:

tel: +852 9770 5028
e-mail:ing.my

3. The Export Forum Meeting

Peter Salmon has passed on details of the next meeting along with an invitation to any Bow Wave Readers who would like to attend.

The proceedings take place at the offices of SITPRO, Oxford House,8th Floor, 76 Oxford Street, London W1D 1BS

AGENDA

10:00 Coffee Reception

10:30 Welcome by the Chairman to include
outline of future development of the
Forum with SITPRO support

(John Turnbull,Sumitomo Mitsui Bank)

10:45 Overview of EU accession Countries
Czech Republic:Poland:Hungary
Slovakia:Slovenia

(Kate Shannon,UK Trade & Investment)

11:15 Maritime Transport Documents
UN Amendment 12 on Negotiable
Bills of Lading

(Gordon Cragge, SITPRO)

11:45 ICC Update

(Gary Collyer, ABN Amro BAnk)

12:10 Open Forum

(please e-mail/fax any questions or advice you may have - confidentiality guaranteed)

12:40 Lunch with wine & mince pies

Interested Readers should contact:-

peter@wktuk.com

4. Ship Breaking Guidelines Agreed in Bangkok

Not all of us realised that recently a meeting convened in Bangkok officially entitled 'Interregional Tripartite Meeting of Experts on Safety and Health in Shipbreaking for Selected Asian Countries and Turkey' Bangkok 7th -14th October .

Its purpose was to agree and adopt Guidelines on Safety and Health in Shipbreaking. The ILO press release contains the names of the countries whose governments, employers and workers were represented - hence the 'tripartite bit. The 'draft' guidelines were discussed and a final version was adopted by all at the end of the meeting.

We understand that these guidelines will be published around December this year after 'internal smoothing' and thereafter they will obtainable from the ILO website. The document is intended to compliment work done by IMO on recycling of ships and the Basel Convention all of which will be discussed at an IMO meeting in December.

Although the guidelines, which cover health and safety, are voluntary and therefore unenforceable, they do represent a first step in providing a framework for safe working practice, procedures and regulations where they do not already exist. And this for an industry from which most people at one time or another simply avert their eyes rather than fully contemplate the how harsh life can be lived at the edges of the shipping industry. We also understand the ILO, IMO and the Basel Convention's secretariate have been asked to form a Joint Working Party towards making the guidelines into a code and eventually mandatory law.

http://www.ilo.org

5. Jacuzzi Salvaged By Kayak

We could not resist including this recent casualty report:-

=PICANTE= (British Virgin Islands)

London, Oct 24 -- A press report, dated today, states: A sea rescue was the last thing on Johnny Albert's mind while on holiday in Majorca. But the National Sea Rescue Institute volunteer - staying with his brother, who lives on the island - had to rush to the aid of a sinking yacht (Picante,built 1990). "At 0800 Saturday (Oct 18), my brother got a call from a friend to say a yacht was dragging anchor in a storm. My brother has a semi-rigid inflatable, so we jumped in and went to see if we could help," the Capetonian said. Arriving at the scene, they saw a $14-million yacht on the rocks. "The boat was holed and flooded. The local sea rescue was there, but if they pulled it off, it was so full of water already, it would sink. They had attached ropes from the boat to rocks and were trying to keep it from toppling over. "The passengers had already got off , but the master would not leave the yacht. We tried to get him to come off, but he would not." "There was a jacuzzi on the deck, which fell off as the yacht tilted.A guy paddling around in a kayak grabbed it and towed it away," Albert said. With the yacht almost underwater, the master climbed onto the side of the boat. "He called to us and said 'Please fetch me'. When we took him on board, we tried to find out how it happened that they dragged anchor, but he was so stressed out, he could not tell us."

6. And Finally...

Many thanks to Andrew Charlton for passing on these reasons for why the English language can also be quite hard to learn:-

1) The bandage was wound around the wound.

2) The farm was used to produce produce.

3) The dump was so full that it had to refuse more refuse.

4) We must polish the Polish furniture.

5) He could lead if he would get the lead out.

6) The soldier decided to desert his dessert in the desert.

7) Since there is no time like the present, he thought it was time to present the present.

8) A bass was painted on the head of the bass drum.

9) When shot at, the dove dove into the bushes.

10) I did not object to the object.

11) The insurance was invalid for the invalid.

12) There was a row among the oarsmen about how to row.

13) They were too close to the door to close it.

14) The buck does funny things when the does are present.

15) A seamstress and a sewer fell down into a sewer line.

16) To help with planting, the farmer taught his sow to sow.

17) The wind was too strong to wind the sail

18) After a number of injections my jaw got number.

19) I shed a tear when I saw the tear in the painting

20) I had to subject the subject to a series of tests.

21) How can I intimate this to my most intimate friend?

There is no egg in eggplant nor ham in hamburger; neither apple nor pine in pineapple. English muffins weren't invented in England or French fries in France. Sweetmeats are candies while sweetbreads, which aren't sweet, are meat.

Quicksand works slowly, boxing rings are square and a guinea pig is neither from Guinea nor is it a pig. And why is it that writers write but fingers don't fing, grocers don't groce and hammers don't ham?

If the plural of tooth is teeth, why isn't the plural of booth beeth? One goose, 2 geese. So one moose, 2 meese? Doesn't it seem crazy that you can make amends but not one amend. If you have a bunch of odds and ends and get rid of all but one of them, what do you call it? Is it an odd, or an end?

If teachers taught, why didn't preachers praught? If a vegetarian eats vegetables, what does a humanitarian eat? In what language do people recite at a play and play at a recital? Ship by truck and send cargo by ship? Have noses that run and feet that smell?

How can a slim chance and a fat chance be the same, while a wise man and a wise guy are opposites? You have to marvel at the unique lunacy of a language in which your house can burn up as it burns down, in which you fill in a form by filling it out and in which, an alarm goes off by going on.

English was invented by people, not computers, and it reflects the creativity of the human race, which, of course, is not a race at all.

That is why, when the stars are out, they are visible, but when the lights are out, they are invisible..

Why doesn't "Buick" rhyme with "quick"?

BOW WAVE is published each week to around 8600 Readers in the transport,insurance,shipping and finance industries.

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