World shipping finally may be emerging from a decade-long melancholy. Despite lingering losses in individual major markets, there have been clear sightings of a silver lining. This may even become a stabilizing year during which optimism is matched by market outcomes. The annual review begins this year with the U.S. Merchant Marine because of a specific urgent situation, and global developments then follow.
U.S. Merchant Marine Is Part of Defense
The unique role of the U.S. Merchant Marine in peace and war remains grossly misunderstood by the public at large. The industry’s role during every crisis the nation has faced since its founding days is well documented, but it is either rarely recognized or often forgotten by the citizenry. Its increasingly vital national security role remains a complete enigma to the populace. That part of the Merchant Marine mission and its strategic role in global force projection, along with the maintenance of national security interests worldwide, must become much more widely known and recognized.
The Merchant Marine Act of 1920, which includes the Jones Act, clearly specifies that the Merchant Marine exists “for the national defense and for the proper growth of [U.S.] foreign and domestic commerce” (section 1). The need for a U.S. merchant marine “capable of serving as a naval and military auxiliary in time of war or national emergency” was further emphasized in the Merchant Marine Act of 1936, and later in the National Security Directive 28 implemented on 28 October 1989. To fulfill this mandate, 61 commercial ships are maintained on five-day readiness status by a skeleton crew at the behest of the U.S. Transportation Command through the Maritime Administration (MarAd) and the Military Sealift Command.1 These vessels constitute the logistics backbone for troop mobilization and force projection. During an emergency, they are supplemented by ships and crews from the U.S. commercial fleet. Routine maintenance might see to their technical readiness, but the equally important operational readiness of all the vessels is fully dependent on the availability of mariners with the appropriate Coast Guard credentials.
And yet there is, if anything, a shortage of about 1,800 mariners.2 Losing from the current fleet any more than two commercial ships and the mariners they employ will impact significantly the Ready Reserve Force’s (RRF’s) capability. Given the voluntary nature of mariner services and the likelihood of all future mobilizations being in a contested and hazardous operating environment, the assumption that all qualified mariners will report when called upon is simply unrealistic. A recent report to Congress identified the need for 13,607 qualified mariners for sustaining the mobilization and commercial operations concurrently under highly optimistic assumptions of no loss of life or property. The identified pool of mariners will therefore provide three to four months of force projection support at best, taking into account the necessary crew rotations.
This predicament stems from the rapid depletion of the U.S. commercial fleet size, particularly since 2012, when military cargo shipments to the Middle East began to decline and drastic changes were made to the carriage of foreign aid cargoes on U.S. bottoms.3 Any attempt to tinker with the Jones Act as it currently is articulated only will hasten a precipitous diminution of our indispensable surge sealift capability.
For a fast-paced world mesmerized by instant communications, autonomous vehicles, hyperloop movements, and space-age flight to Mars, vintage commercial shipping operations simply lack the pizazz. Shipping movements today are mundane; any attention they receive typically results from catastrophic human error, vessel failures, or settling political scores at opportune times. Much of the unusual attention received in 2017 falls squarely between first two of those. The U.S. Coast Guard as well as the National Transportation Safety Board released findings on the 2015 SS El Faro tragedy that cost 37 lives. Both reports include excellent recommendations that should enhance safety standards in shipping operations worldwide. By contrast, attention received after Hurricane Maria, which devastated Puerto Rico, was motivated by either sheer ignorance or a clever strategy to settle old political scores.
The post-hurricane relief activities in Puerto Rico ran into numerous logistical challenges and could have been executed far better. However, if there was one logistics sector that rose to the occasion and delivered a flawless humanitarian assistance and disaster relief operation, it was the U.S.-flag commercial ships that serve the U.S.–Puerto Rico trade and the MarAd-owned training vessels used by the Federal Emergency Management Agency to shelter its first responders.
In return, the maritime industry received not accolades but a barrage of misguided political attacks that were exquisitely timed and well-choreographed. The campaign painted indelible images of a crafty and villainous U.S.-flag commercial maritime industry that not only hampered the relief activities but also schemed to exploit ruthlessly the Puerto Rican economy. The false and misleading arguments used to make that case stretched from wild and fanciful pontification at one extreme to sheer ignorance at the other, in both cases focusing on the cabotage provisions of the venerable Jones Act (section 27 of the Merchant Marine Act).4
The argument that waiving Jones Act provisions will bring an immediate cure to Puerto Rico’s economic woes does not seem rational. Leaving aside all the national security interests, even focused economic studies have been inconclusive at best.5 The assumption that all cost factors would remain ceteris paribus in a world without the Jones Act is rather idealistic. A case in point is the recent decision by the U.K. government to mandate that mariners working in their waters must earn salaries equivalent to the British national wages regardless of the ship’s flag. It is inconceivable that in today’s political environment, such an initiative will not be instituted by other traditional maritime countries. This one move alone will wipe out any crewing-related cost advantage to the United States of a foreign-flag operator allowed to partake in noncontiguous domestic waterborne commerce transportation.
The Merchant Marine has also contributed to global societal welfare and an enhanced standard of living—accomplishments upon which it has also failed dismally to capitalize. Overall, the service urgently needs to emphasize its position as an essential component of the U.S. national-defense strategy, an element of which most Americans are not even aware.
Autonomous Vessels
With the development of driverless cars, the use of artificial intelligence in shipping operations has garnered considerable attention. Innovative companies including Rolls Royce, Kongsberg, Google, Wärtsilä, and Transas are laying the course for the dawn of autonomous vessels. The planned MV Yara Birkland, the world’s first autonomous, zero-emissions containership, was developed jointly by Yara International and Kongsberg Gruppen and is expected to move cargo between three Norwegian ports in sheltered Norwegian waters starting in 2020. Norway has designated a second autonomous vessel test area in another maritime cluster to be used by Rolls Royce, Google, and their partners. The U.K. Ship Register already has documented its first unmanned vessel, C-Worker 7 which can also operate conventionally, and Wilhelmsen and Kongsberg have announced their joint venture initiative called Maasterly, the world’s first autonomous shipping company that will begin operations in August of this year.
All these are spectacular developments in the maritime industry’s adopting of emerging technologies. However, the concept of commercializing of crewless ships to facilitate waterborne movement of the 10 billion metric tonnes per year now transported by cargo ships remains farfetched. Neither the littoral states nor the industry has reached acceptable risk tolerance levels that would permit free access to vessels laden even with harmless consumer goods, let alone with dangerous commodities such as petroleum or its derivatives.
There is no assurance that the level of sophistication and the risk avoidance capability of artificial intelligence-driven ships is anywhere close to the intricate mastery of maneuvers that a diligent watchkeeping officer often executes when navigating in the vicinity of a flotilla of small fishing boats or pleasure crafts, many of which are often too small to be detected by even modern radars. The uniqueness of an experienced mariner comes not from any extraordinary intellectual capability but from exercising common sense and sound judgment (referred to at sea as seamanlike behavior) built on years of exposure to the maritime environs, and the willingness to subject oneself to rigorous self-discipline. Autonomous vessel navigation in sheltered coastal waters can never be comparable to the skillful maneuvering of a fully laden very large crude carrier (VLCC) or very large containership (VLCS) in congested waters off the South China Sea or the Malacca Strait in a tropical rainstorm, or in the English Channel in thick fog with zero visibility.
Even if all the technical challenges were resolved, the economics of autonomous vessel operations remain unproven and the costs prohibitive. Ship owners who are highly cost-conscious, and make every effort to control it, barely make normal returns at best on their current shipping investments. Convincing them to switch over to another much more expensive and unproven system in a cyclical and often volatile market will be a Herculean task, at least in the foreseeable future.
There may indeed be a role for autonomous ships on short, sheltered coastal voyages, and for the military and perhaps even for certain niche port-to-port cross-border cargo movements between neighboring states, but their evolution as a superior alternative to traditional cargo ships, the proven contemporary workhorses, is far from commercial reality. These arguments are not intended to belittle the scope for increased automation and robotics on board ships; such innovations are essential and may help lower operating costs and boost profitability. However, even if the autonomous ship technology were available and the economics made sense at some future point, reaching global consensus on the legal framework required to facilitate trans-border or oceanic movement of commercial cargoes, regardless of the nature of those cargoes, is far off and unrelated to what are today acceptable levels of multilateral risk tolerance.6
Global Shipping Market
The 2018 World Economic Outlook estimates 3.7 percent growth in global output in 2017, surpassing its earlier revised projection by 0.1 percent. It also has revised upward its growth forecasts for 2018 and 2019 by 0.2 percent, to 3.9 percent. The global growth momentum is partly driven by tax policy changes in the United States but remains susceptible to faster-than-expected increases in core inflation and interest rates, as witnessed by the early February worldwide financial market corrections. Regardless, the International Monetary Fund (IMF) equates the current resurgence with evidence of the broadest synchronized global growth surge since 2010 in 120 countries. All major advanced and emerging economies are on an upswing, with strong consumer confidence and firm manufacturing activity ahead.
A corresponding uptick readily is visible in world shipping markets. The Baltic and International Maritime Council (BIMCO) refers to 2017 as the “year of change.” Ship-ordering activity, the perennial Achilles’ heel of ship owners and operators, remained subdued throughout the year for most ship types, and the backlog in ship construction fell below 200 million deadweight tons (dwt) for the first time since 2004. Moore Stephens, the global accounting and consulting company, found overall shipping confidence to be at its highest levels since 2014 based on periodic surveys, and projects an optimistic 2018 for the industry despite its predictable idiosyncrasies and geopolitical uncertainties. All three major shipping markets are now in a phase of cumulative net positive sentiments.
The confidence-boosting 2017 could not have come sooner for an industry that has been reeling under an unusually long downward cycle. Although none of the markets is truly out of its doldrums, in general ship owners and operators demonstrated remarkable self-discipline in sync with the growth in global gross domestic product and the corresponding increase in world trade volume, which the World Trade Organization estimated to be at least five index points over analogous periods in 2016.7
Although ship owners and operators often make seemingly irrational investment decisions, the industry itself is very cost-conscious and has made excellent progress in cutting down its expenses for at least three decades now. Yet the total operating cost for the worldwide fleet tracked by Clarksons Research exceeded $100 billion for the first time in 2016, the largest component of which was crew cost, at 43 percent. Clarksons estimates a $17 billion increase in operating costs since 2008, when the recession began. This escalation, combined with the $168 billion decrease in aggregate earnings for the world fleet of commercial ships during the same period, represents the ongoing existential dilemma of international commercial shipping.8
Dry-Bulk Market
China’s insatiable appetite for iron ore and steel production, along with its increasing soybean imports for animal feed, were the primary impetus for lifting this market off the bottom it reached in early 2016. The consequent growth in demand for dry-bulk shipping services exceeded expectations, but so did the increase in supply, which preliminary estimates place at 3.2 to 4 percent.9 The Baltic Dry Index (BDI) registered a six-fold increase from 297 in February 2016 to 1,702 in early December 2017, the highest it has been in past five years. Unlike the short-lived uptick in 2013, the 2016 recovery has endured, with average daily earnings reaching $10,986 in 2017—the highest level since 2011.10
The sustained decline in newbuilding orders for bulk carriers is now close to the historic low levels ordered in 2002, although the vessels on order now are significantly bigger in carrying capacity. Clarksons estimates that a total of 456 new vessels (38.4 m dwt) were delivered in 2017, about two-thirds of the peak levels reached in 2011. Also, the level of non-delivery remains high, with one-third of all projected 2017 new deliveries being either deferred to a later year or canceled. Correspondingly, the market value of the dry-bulk fleet tracked by VesselsValue registered a two-year net growth of $56 billion, matching the current tonnage value of the worldwide tanker fleet and surpassing the combined value of the global container and liquefied natural gas tonnages.
The recovery is still fluid, and the BDI losing one-third of its recent market gains in late February 2018 clearly demonstrates lingering volatility. Some analysts relate this to the lunar New Year slowdown, but others believe that China’s plans to address air pollution by curtailing steel production, combined with the proposed U.S. imposition of steel tariffs, will bring choppy waters in this market.
Tanker Market
The challenges engulfing the tanker market are extraordinary. An unprecedented supply surge from the United States, a non-traditional crude oil supplier, exceeded export volumes (measured in metric tonne-miles) of its traditional forte of oil products and reached more than 30 countries in 2017. The increase in U.S. crude exports during the first ten months of 2017 provided employment for the equivalent of 75 voyages by VLCCs, rising to the equivalent of nine VLCC voyages per month during the last quarter.11 By end 2018, the U.S. crude output is expected to reach 11 million barrels per day, and exports will exceed the equivalent of one VLCC (of two million barrels capacity) per day. The LOOP (Louisiana Offshore Oil Port) terminal is preparing for accommodating VLCC exports and has made its first export on such a large-size vessel.
The benefit of such shipments is a savings of $300,000 in direct costs and one to four days in cycle time.12 What is even more noteworthy about this trend, besides the obvious ease in shipping logistics and the diminishing role of oil traders, is where the oil is headed. With China buying about a quarter of these exports, a significant increase in vessel use (represented in metric tonne-miles) is matched by revenues for the owner. Another new customer is India, the world’s third-largest oil importer. Such developments would be expected to change drastically market fortunes, yet that has not materialized.
The supply of crude oil–carrying capacity increased through a surge in new ship deliveries during the year. In addition, because of the return of “backwardation” in oil markets, it is less desirable to store crude oil now.13 The Organization of the Petroleum Exporting Countries nations are trading off their stockpiled oil reserves, which then releases ships used for floating storage (mostly of the VLCC size) and adds to the number of crude tankers seeking new employment.
So cumulative tonnage supply growth exceeded the demand growth in 2017. Overall, the market for bigger crude oil tankers remained lackluster, especially in light of China’s anticipated cutback in stocking crude oil. A major uptick in tanker recycling toward the end of the year was not substantial enough to make a dent in the reported $50 billion decline in the value of worldwide tanker tonnage from 2015 to 2017, or the mediocre commercial outcomes.
Liner Market
In retrospect, 2017 was a good year for the liner market, with freight rates rising and many operators displaying uncharacteristic self-discipline. The ordering of new tonnage followed the restraint demonstrated in 2016 and led to 2.9 percent annual growth in deadweight capacity in 2017, as opposed to a demand growth estimated at over 5 percent for the year. The surplus capacity, built up over the years and kept inactive in recent years, was brought into service; simultaneously, the recycling of older ships also slowed in 2017. As a result, the Alphaliner charter index registered an unprecedented 46 percent annual increase for the year. Drewry, the U.K.-based shipping consultant, estimates collective year-end profits of $7 billion, a welcome change after losing $10 billion in 2016. This is evidenced by the increase in operating profit reported by Hapag-Lloyd, CMA-CGM, and others.
BIMCO notes that market conditions will remain balanced in 2018, and that future increases in profitability may come only through cost cutting and slow-steaming. The recent resurgence in ordering highly fuel-efficient VLCSs validates this, as does the increasing market consolidation and mergers among top operators.14 It is remarkable that the current fleet size in number of ships has gone up by only 109 since 2012, while the corresponding growth in nominal capacity has been 5.6 million 20-foot equivalent units—a 37 percent increase—and a 24 percent increase in the number of containers carried.
The efforts to embrace blockchain technology and crypto currencies are another testimonial to carriers’ desire to enhance transparency and efficiency within the liner-oriented global supply chain. At the same time, a recent McKinsey and Company finding that 20 years of surplus capacity in the industry have destroyed more than $100 billion in shareholder value is unnerving for investors. The top ten owner groups now own 46 percent of total gross tonnage, making the liner market second only to the cruise industry in market concentration; market share of the top five operators is expected to increase to 57 percent in 2018 (Fitch Ratings).
Cruise Market
Unlike the highly cyclical shipping markets, the cruise sector continued its steady growth in 2017 and registered a 4.5 percent year-on-year increase in the number of passengers carried. Cruise Lines International Association estimates the annual growth escalating to 5.4 percent in 2018. In 2017, 449 cruise vessels were in service, and 27 more will be delivered in 2018. The market itself is becoming highly niche-oriented, with unique cruise themes such as voluntourism, cultural immersion, extreme adventure, sustainability, skip-gen tourism, colder climate, and physical fitness.
Global Market Is back
The world maritime sector is on the cusp of a new era of optimism and enthusiasm, and there are several a priori indicators of favorable market conditions. While the U.S. Merchant Marine will benefit from the global rising tide, the undercurrents that shape its immediate future are more tenuous. Any course toward resurgence will, therefore, be laden with many complex obstacles and navigate far beyond commonly analyzed economic and market considerations.
The foreseen tangential benefits for the industry domestically must be weighed more against the multitude of shrewd maneuvers that percolate within the corridors of political power—whether related to the ascendancy of China, cyber warfare, anti–Jones Act machinations, or the declining commercial fleet size and mariner pool. Indeed, to draw on the vision of author Paul Valéry, the future is no longer what it used to be.
1. MarAd maintains 46 of these ships and MSC, 15. For details, see http://marad.dot.gov.
2. Department of Transportation. “Maritime Workforce Work Group Report.” Report to Congress, FY 2017 Pub. L. No 113-328, Section 3517. Washington, DC: DOT, 23 January 2018.
3. The total number of U.S.-flag ships of the size that employs mariners with unlimited credentials has declined from 281 in year 2000 to 181 by end 2017. About 50 vessels departed the U.S.-flag after the legislative changes in 2012 and the falloff in military cargo shipments to the Middle East.
4. For a good discussion of various misinformation related to the Puerto Rican relief activities, see Mark Ruge, Sarah Benson, and Elle Stuart, “Facts Still Matter,” Maritime Executive Newsletter, 25 February 2018.
5. See U.S. Government Accountability Office, “GAO Report to Congress: Puerto Rico—Characteristics of the Island’s Maritime Trade and Potential Effects of Modifying the Jones Act,” Washington DC, March 2013.
6. For example, see the global outcry following the Prestige casualty (“Court Awards Spain $1.9B for Prestige Spill,” Maritime Executive Newsletter, 15 November 2017); the general reluctance of coastal states to open a port of refuge for foreign vessels in distress; or the protracted 16-year discussion that preceded the adoption of the 2004 Ballast Water Management Convention and the ongoing challenges with its final implementation.
7. World Trade Organization and UNCTAD, “Latest Quarterly Trade Trends, World Merchandise Trade Volume Developments."
8. Clarksons Research Blog (19 May 2017), “Cost…OPEX Tops $100 Billion,”.
9. BIMCO estimates fleet growth of 3.2 percent in 2017 versus Clarksons’ estimate of 4 percent.
10. The average daily earnings since 2011 is $9,475 per day and had dropped to $7,077 per day in January 2013. For details, see Clarksons Research Blog (2 March 2018), “Getting Airborne: Time to Fly,”
https://clarksonsresearch.wordpress.com. The BDI itself underwent a structural change on 1 March 2018 when it became an exchange traded fund. Handysize bulk carrier segment will not be represented any longer in estimating the index value whose composition will be reallocated among the other three bigger ship sizes.
11. “U.S. Crude Exports Exceed Oil Products Exports,” Maritime Executive Newsletter, 12 December 2017.
12. “Supertankers Sailing from U.S. to Cut Time, Money and Traders,” Bloomberg News, 26 February 2018,
13. This financial term used in the oil futures market implies that the market anticipates near-term prices to exceed those in later months.
14. The latest 20,600 TEU vessel delivered for CMA-CGM in late January 2018 will have a daily fuel cost of about $70,000 compared to the typical $94,000 daily expense of other VLCS in use today. “CMA CGM Slashes Fuel Costs on New Flagship,” The Loadstar, 30 January 2018.
Dr. Kumar is a Master Mariner, Fulbright Senior Specialist Fellow, and professor emeritus of International Business and Logistics. He sailed for more than a decade before entering academe and is now in his 32nd year of leadership and educational services to the maritime community. This is his 15th Merchant Marine annual review published by the U.S. Naval Institute Proceedings.