Part 2: Thinking Outside the Box on Cabotage

By Sandy Galbraith

(Part 2 of an extract from a speech delivered to the Australian Marine Pilots Institute at the Australian Maritime College, University of Tasmania by Sandy Gailbraith on November 20, 2014.)

Read Part 1 here.

The current Australian government has an excellent opportunity to put the correct settings in place to foster investment, development, cooperation and growth of the Australian shipping industry.

Coastal shipping needs to figure more prominently and be better integrated into both state and federal government transport and freight infrastructure plans. The limited view of the role of the Australian blue water fleet as ancillary to the domestic manufacturing industry needs to be broadened to include its economic and skills development contribution. Limited perception of the strategic importance of the coastal shipping industry is undermining political support for cabotage.

There are valuable lessons to be taken from the various jurisdictions which have recognised the importance of cabotage protections to their national interests.

Canada, for example, has increased the scope of activities included in the definition of cabotage and the geographic area to which it applies, as well as introducing a range of financial incentives for ship owners/operators engaged in coastal trading.

Brazil has turned around the decline of its domestic fleet by adopting a flexible cabotage regime which retains the requirement for coastal trading ships to be owned and operated by Brazilian based companies but allows major international lines (e.g. Maersk) to take a position in those companies and thus buy into the Brazilian shipping market. The Brazilian government also took advantage of the significant offshore developments off the coast of Brazil to introduce cabotage rules that have resulted in vibrant maritime clusters that contribute to the economic growth of the nation.

Various other jurisdictions have also introduced competitive taxation regimes to attract interest from ship operating businesses, which has resulted in the growth of their respective shipping fleets.

There is nothing that prevents Australia from exploring and adopting similar initiatives to improve the health of its domestic shipping industry. The possibility of adopting select elements (e.g. fiscal incentives, foreign participation rules etc.) of the Brazilian, Canadian or other cabotage regimes should be considered.

In addition to the opportunities presented by looking at lessons in other jurisdictions, there are also opportunities to be found in Australia that, with appropriate policy settings, can result in the growth of the Australian coastal (and international) trading fleet.

Carrier interests consider that, with the right framework in place, there is potential for several Australian ships to be registered on the Australian International Second Register, including bulk, multipurpose and project cargo vessels. These ships could engage in both coastal and international trading.

Coastal shipping of dry bulk can potentially grow in Australia. There may be potential for Australian vessels to be introduced to contest some of the dry and liquid bulk coastal trades that are currently handled by Temporary Licensed ships.

Several carriers have expressed an interest in introducing additional multipurpose vessels on to the Australian coast. The flexibility of the multipurpose vessel opens up many potential cargo markets, both in terms of cargo type and geographical placement.

Coastal LNG shipping is another area of potential with a number of large production development projects underway. The future of LNG shipping in Australia is only just beginning to be explored by related industry and represents a longer-term prospective development.

Perhaps most significant of all, there may be opportunity for Australian ships to take on a greater role in the coastal container trade, particularly with growth in containerisation of mineral and agricultural products from regional ports needing transshipment to international ports as well as the possibility of a hub and spoke port configuration developing in Australia.

The realisation of these opportunities should involve extensive industry consultation – including both carrier and cargo interests – to arrive at the most appropriate initiatives for improving the regulatory framework and the overall state of the Australian coastal shipping industry. It is easy to point the finger at government but they are not the only actors – unions, shipping companies and shippers must all coalesce to be part of a cohesive and cooperative solution backed up by a progressive and robust policy framework set by government with their direct input.

Where, not so very long ago, the container shipping industry was operating fleets with ships mostly in the sub-8,000 TEU range and talking of 12,000 TEU ships being about as high as we need go for some years to come; today, the majority of containership deliveries are in the 8,500 to 18,000 TEU range. We now have a significant surplus of ships, an associated surplus of cargo capacity and inevitably, a surplus of containership operators.

The shipping lines are in the midst of a crisis, seeking out alliances with others so as to reduce their mounting costs and losses. There will be some market failures – some shipping lines will go to the wall. Ultimately, when the dust has settled, there will be fewer shipping lines servicing the Australian market than there are today and those that remain will be looking to streamline their operations in the most efficient manner.

Some of the biggest container lines are discussing the prospect of hubbing in Australia; in other words, making one port call in the country instead of five, with boxes distributed around the country by related coastal shipping services. This is already starting to occur in the other southern trades – South America, Africa and New Zealand.

Currently, container ships on our major trades work in a cycle through the nation’s five container ports – (Brisbane, Sydney, Melbourne, Adelaide and Fremantle).

Policy makers here should not ignore what is happening in the global containership industry, which is dominated by the east-west/west-east trades – Asia to the US to Europe to the Middle East, back to Asia

The largest ships – the leviathans that are capable of carrying up to 18,000 containers will dominate those trades. Smaller vessels – though increasingly these days, that is a relative term – operate on the North-South trades: Asia to Australia/New Zealand, Europe to Africa and, Europe/North America to South America.

Several shipping lines have been signalling their intention to upsize the ships calling into Australian ports – and we are not talking about vessels of 6,000 TEU, which is what the port planners for years have been factoring in; that generation of container vessel was largely skipped in the rush towards gigantism post GFC. What we are talking about are vessels of 8,000 TEU plus. These are longer and wider than our ports had planned for and they will be filtering down into our trades much, much sooner than our governments and ports had anticipated.

Most ports have been working on the comfortable assumption that they have at least until the end of the decade to address the issue. They would be well advised to urgently rethink their planning models; for as more and more of those giant containerships come out of the shipyards to enter the east-west trades, the pressure grows on the big shipping lines to deploy the 8,000 TEU vessels in the north-south trades. We could see them in Australia within two years.

What has happened in recent times in the other great North-South trade, the South American trade, is worth noting. Drewry recently reported that in 2010 the average container ship size was about 4250 teu. Today, four years later, that number has changed to 6,700 teu, indicative of the flow-in of the larger box ships into that trade. And it is going to happen here too… and soon. Sooner than many people think.

To be continued…

Sandy Galbraith is director of Maritime Trade Intelligence, Australia. He has 40 years’ experience in the global maritime and transport industry in a career that has spanned international seagoing operational roles, senior editorial positions in the UK and Australia, maritime consultancy on major projects for governments, government agencies, industry organizations and the private sector, as well as industry education, media training and crisis management.

Source: Maritime Trade Intelligence