Friday, 30 August 2013

Why 'green' logistics must not be ignored

Environmental issues are moving centre stage in business strategies so it is only logical that 'green' logistics  will dominate corporate thinking because of its huge carbon footprint. Any moves, therefore, to cut conventional electricity, alone responsible for 30% of Britain's carbon emissions, and other toxic fuels, will be welcomed but what are some of Britain's leading logistics companies and retailers doing to achieve that? To find out, readers could attend, or otherwise follow, the second Green Logistics Summit,* part of the Logistics Leaders Network, on September 17 at the B & Q Centre, Worksop, Nottinghamshire.

The theme will be how companies can profit from 'green' logistics strategies by saving money and helping the environment. Jaguar-Land Rover will be talking about their fleet improvement strategy reducing CO2, partly through lower mileage. B & Q will discuss steps it is taking to reduce the environmental impact of the supply chain, while others will be talking about reducing energy in the warehouse, reverse logistics, recycling and re-use of materials and fleet management, trucks, tyres and trailers. The keynote address will be all about the latest EU pronouncements on 50% of journeys within its borders not being eligible for going by road by 2030. Following the conference, there will be a tour of the large B & Q distribution centre, all of which is powered by one 2 megawatt capacity wind turbine, with enough energy left over for some local houses. The turbine reduces annual carbon emissions by 1,599 tonnes.

Whatever misgivings some may have over alternative clean power sources like wind and solar, owing to costs and their taxpayer subsidies which hit the poor much harder than the rich, the long-term cost of relying heavily on fossil fuels should convince most that there should be a hastening of clean, reusable, energy options adoption, as will become clear. However, there are other promising developments less painful to taxpayers' pockets These include dual-fuelled, gas-powered HGVs using a mixture of bio gas from waste food and liquid natural gas.

A leading pioneer in this work is the British company, Gasrec, who claims that an HGV fleet operator who seeks to lower his fuel costs and decarbonise the fleet will discover that Bio-LNG provides the optional solution. By their nature, HGV operations cover the highest mileage and use the most fuel in the logistics sector, accounting for over one third of all costs. Claimed benefits for the Gasrec  fuel are impressive. These include 25% cheaper fuel, up to 70 % cut in CO2 emissions and at least 85% in NOx. There is a 90% cut in particulates which all add up to the company's claim that environmentally speaking it is more advantageous than any other commercially available fuel.

Barriers to its adoption, like availability of vehicles, quality and availability of the fuel, are all being removed. Volvo and Mercedes are the dominant manufacturers, with Cleaner Power and Hardstaff providing conversion technology. Payback calculations for conversion can be difficult but Britain's leading food retailer, Tesco, claims a payback on converted vehicles in just over two years. Other leading Bio-LNG fuel users are B & Q, Coca-Cola, Sainsbury, UPS and DHL. Currently, Gasrec is building the UK's first refuelling network, enabling its customers to access the fuel from multiple locations on the UK road network.

Time, alas, is running out in the race to ameliorate the impact of global warming, and as indicated in my last report: "Nature threatens port centric logistics," even if the burning of all fossil fuels ended tomorrow "future generations have been irreversibly committed to a warmer world and rising seas." The cost of going 'green' may seem high for some but the cost of not doing so on a meaningful and timely scale will be incalculably higher. As hurricane Sandy showed last Winter, a perfect storm left defenceless New York with a US$19 billion damage bill but the legacy costs seem almost certain to be much more. Pity the unfortunate householders from Louisiana to New York (with west coast cities to be added by 2016) asked to raise their homes or suffer huge hikes in insurance premiums thanks to FEMA's redrawing of the country's flood maps in anticipation of future storms. But it is not just about storms. It also encompasses a combination of rising sea levels and storms. The former has risen eight inches over the last 100 years owing to global warming but the rate of rise began to accelerate over the last two decades. The consensus is that by the end of the century it will rise between 27 inches and six feet, provided the Damoclean sword of the huge Thwaites glacier in West Antarctica does not breakaway, a prospect rising sea levels enhances, for that alone would raise sea levels by 10 feet. Then the sparks would fly upwards.
*Further details from: Peter Acton, Tel: 01737 457002. Email:

Saturday, 24 August 2013

Nature threatens port centric logistics

Momentum is gathering pace to change the supply chain map of Britain, evinced by a switch to port centric logistics, but is a key factor being overlooked that could make the move disastrous without environmental preparedness? The economics of re-basing logistics parks to port vicinities look cogent. They can eliminate many return empty container trips and allow containers to be fully loaded, and so reduce transport costs and carbon emissions.  But a new, insidious threat, incalculably damaging, beckons, albeit still hedged by uncertainties --- rising sea levels.

By the nature of coastal ports they must be at sea level but the port assets, like wharfs and dock cranes, can at least be placed high enough above high spring tide levels so as to make them unlikely to flood in the next 100 years. The problem is their hinterland. These areas around the new London Gateway terminal, due to open this November, Tilbury, further up the Thames, Felixstowe, Southampton and Portsmouth are all low- lying and mostly marshy. There is nothing much that can be done with existing ports, though where they incorporate huge logistics parks, like that at London Gateway, effective bunds may be needed to counter future flood risks and any future ports might need to consider substantially raised roads and railway banks that connect them to the inland sites so that they will not leave the ports marooned by flooding.

Is the risk from rising sea levels, however, strong enough to galvanise authorities around the world into more forceful and inevitably costly action? A look at the facts leaves little room for complacency. For 2,000 years global sea levels barely changed. Then they began to rise in the late 19th century as the Earth started to warm, helped by industrialisation and its consequences for CO2 emissions and other greenhouse gases. At an eighth of an inch a year sea levels are rising twice as fast as they were a few decades ago, and there is no comforting reason why this rate of acceleration should not quicken. Over the past century the planet's temperature has risen one degree Fahrenheit and the sea level by about eight inches. Only in last May the concentrations of carbon dioxide in the atmosphere reached 400 parts per million, the highest in three million years.

Clearly there is a need for a global effort to cut greenhouse gas emissions but even if we stopped burning all fossil fuels tomorrow the existing greenhouse gases would continue to warm the Earth for centuries, so future generations have been irreversibly committed to a warmer world and rising seas. Even so, that does not negate the case for more stringent gas emission controls because without them the future would be even more intolerable. It must be admitted that in the short-term scientists are still uncertain about how fast and how high seas will rise. Estimates vary between 23 inches and six feet by 2100 and the US Army Corp of Engineers recommends that planners consider a high scenario of five feet. But what is certain is that past estimates have been too conservative, and there is a joker in the pack. This is the huge Thwaites Glacier in West Antarctica, underpinned by a 2,000 ft undersea ridge, slowing its slide into the sea. If a rising sea allowed more water to seep between the ridge and glacier the latter could detach. Such a breakaway would be enough to raise sea levels by 10 ft.

To an extent, the damage is done, and a foretaste of things to come was New York's hurricane Sandy storm surge last year that inundated a defenceless city, killing 43 and leaving a US$19 billion bill. Many coastal cities are now at significant risk, including even those like London which have built hitherto effective barrages. If one uses a conservative estimate of a 20 inch sea level rise then according to the OECD estimates some 150 million people in the large port cities will be exposed to risks from coastal flooding, along with US$35 trillion worth of property. The consequences of doing nothing more effective than at present are too nightmarish to contemplate. Rapidly developing countries like China and India who are spending huge sums on military expenditure and who have the most to lose from rising sea levels should abandon such inessentials and redirect their revenues to meet the inevitable, natural calamities to come.

Thursday, 15 August 2013

Shipping's regulatory framework shames the industry

It would not be unreasonable to ask if now is the time for the International Maritime Organization (IMO) to be administered an effective enema, such has been their egg-bound deliberations on certain maritime safety issues, which continue to exact their lethal, heavy toll. In releasing its findings on the sinking of the general cargo ship, Swanland, in the Irish Sea on November 27, 2011, Britain's Marine Accident Investigation Branch, (MAIB) commented that concerns surrounding safety and high loss rates on similar ships had been repeatedly raised at the IMO. "However, progress to address the problems appears to have been slow," said the report. It is a tardy record that over 2002-2011 saw 248 general cargo ships foundering worldwide with the tragic loss of over 800 seafarers. Some 226 of those vessels were 15 years old or more, and 139 at least 27 years old. But this is not the only issue where the IMO's apparent tardiness has been disturbing.

Structural failures on ships in heavy weather, for example, affects container ships and the key problem here is deliberate overloading of containers to save freight costs and import duties that probably amount to over £1 billion a year. The solution is a simple one and has been under IMO's consideration for some years. Making the weighing of containers mandatory at all ports is the simple solution but the lack of effective, timely action by the IMO adds daily to the risks, which can only worsen as container ships become ever-more leviathans with 18,000 TEUs or more on board.

Yet a third disturbing lack of action concerns the need to overhaul SOLAS regulations regarding lifeboat capacities on cruise ships. The wrecking of the Costa Concordia was a wake up call that seems to have fallen on deaf ears. As this column commented in previous blogs and elsewhere on shipping sites over the last six years, there is a serious shortage of lifeboat places on most cruise ships, averaging 25%, when allowance for rapid listing is factored in. It is not unusual for cruise ships to list quickly and so prevent lifeboat launching on the opposite side of the list. Almost as disturbing is the cost-cutting means cruise lines use by making use of much cheaper inflatable life craft that would be almost useless for senior citizens in a raging sea, especially if they had to jump 50 ft or so and then struggle to get on board. Had the Costa Concordia foundered many miles from shore in a hostile environment the death toll could have far exceeded the Titanic's tragic loss.

The problem of general cargo ships is clearly a regulatory one. As the International Transport Workers Federation (ITF) commented on the Swanland report: "The ITF condemns the lack of effective regulations and control in the international shipping industry that allowed the tragedy to occur. The MAIB report reveals how negligence and cost-cutting led to the sinking of the general cargo ship, Swanland.... with the loss of six Russian seafarers." ITF, therefore, is calling for:

A wholesale review of the general cargo ship safety,
Stricter enforcement of all the existing regulations,
Additional checks and safeguards to guard against the potential, precarious safety of all general cargo ships.

The Swanland sinking shows, as in many ship losses, that there was a cocktail of reasons that became lethal, almost all of which were man-made and without which even in the roughest of seas the vessel would have survived. At 2 a.m. the 34-year old Cook Islands-registered general cargo ship, (1,987 grt) experienced a structural failure when heading directly into rough seas and gale force winds (Beaufort scale 8-9) when on a passage from Llandulas to Cowes, Isle of Wight, with a 2,730 ton cargo of limestone. An underwater survey showed that the upper structure on the upturned vessel had failed in the midships region on both the port and starboard sides.

The investigation found that the major factors contributing to the structural failure were:
1) The limestone was a high-density cargo that had been effectively loaded as a single pile within the central section of the hold. As a result, significant stresses were generated in the vessel's midship section.
2) The stresses in the midship section were exacerbated by the rough seas in which the wave lengths were similar to the length of the vessel.
3) Swanland's longitudinal strength had probably weakened significantly over the previous 2.5 years through corrosion and wastage ("the maintenance and repair of the vessel had lacked focus and oversight and no structural repairs had been undertaken since 2009"), said the report.

Other contributing factors include non compliance with the International Maritime Solid Bulk Cargo code; insufficient loading information; a lack of effective safety management; poor quality of survey and audit; lack of oversight of the classification society by the flag state; and the financial pressure of operating this type of vessel in the current economic downturn. The investigation also identified several safety issues concerning the immersion suits and life jackets on the vessel and sadly none of these issues is new.

Financial exigences can also contribute to the lamentable shipping losses and the Swanland was no exception. Such pressures are common within the shipping industry and the scale of the problem is disturbing.

Swanland was only one of thousands of general cargo ships operating on small profit margins that, as they become older, they also become increasingly costly to operate. Its trading pattern was driven by the spot market, plying around the UK, northern Europe and the Baltic, carrying various cargoes like limestone, salt sand, slag and grain. In 2003 Swanland had been fitted with a self-discharging conveyor and moveable carriage to support a tractor and excavator on the port side of the main deck. Although the vessel's mortgage had been paid off it had not made any profit since 2006 and had incurred a £1 million loss since then. The pressure to cut costs, therefore, was high and so the main reason for switching its classification society from Lloyds Register to the International Naval Survey Bureau was to reduce the classification society's fee by 30%. But as MAIB pointed out, while the savings made on the cost of surveys and audit fees would have been immediate it is recognised that many ship owners also enter their vessels with non IACS societies, expecting their audit  and surveys conducted would be less robust. In effect, significant, long-term savings are possible through reduced costs of repairs and rectification of deficiencies. "It is apparent," goes the report, "that general cargo ships tend towards being entered in class and registered with lower performing societies and flag states as they near the end of their service life." This is what the ITF means when it commented: "The fact that at the time of the accident Swanland had been certified as being in accordance with all applicable statutory requirements makes a mockery of the existing regulatory framework."

Recommendations have been made to the International Naval Survey Bureau to improve the quality of their classification survey, audit and training regimes. Recommendations have also been made to Swanland's managers, Torbulk Ltd, that are aimed at ensuring solid bulk cargoes are safely carried on all its vessels and that crews are familiar with and well drilled in the use of life-saving appliances on its vessels.

MAIB says that there is no justifiable reason why the safety record of general cargo ships should be allowed to lag behind other vessel types such as bulk carriers without vigorous attempts being made to redress the imbalance. In summing up its recommendations, MAIB says: "It is hoped that the loss of Swanland and her six crew will be a catalyst for the work already being undertaken by the IMO to tackle the global issue of general cargo ship safety." If the IMO's history is any guide such a hope seems forlorn and so seafarers around the world will needlessly continue to die and for that the IMO should ask if its hands are spotless.       ------------------------------------------------------------------------------------------    

Monday, 12 August 2013

Will shipping herald next credit crunch?

All is not well in the shipping world, and by extension, the banking industry, as freight rates tumble, shipping companies enter bankruptcy protection and bankers tremble at their multi-billion pound exposures to non-performing shipping loans. The root causes include huge tonnage capacity increases, based on unrealistic world trade growth projections, at a time when the global credit crunch began to bite in 2008. The fall-out of that credit crunch and its body blow to shipping continues to restrain economic recovery today as banks struggle to clean up their balance sheets first before expanding lending to pre-crunch levels.

The ship owners desperately need a boost to world trade, partly because of collapsing freight rates but also because new accounting standards by 2017 are expected to force them to place bareboat charters and time charters exceeding one year on balance sheet, increasing liabilities/debt ratios and causing them to be in default on loan covenants. But how realistic are hoped-for boosts to world trade and, by implication, shipping freight rates? Not much, as we shall see, given the new forces at work which could stymie or weaken any recovery in freight rates long enough to pose a serious threat to world banking almost every bit as bad as the 2008 credit implosion. These forces are impossible to quantify because the future always defies certitude. Before we examine them, however, how parlous is the current shipping-banking partnership?

A perfect storm gathering?

Alarmingly, dud shipping loans are not the only worry for banks. In Britain, in particular, banks have still not come clean on their exposure to dud, multi-billion pound commercial property loans. On their own, these dud loans are containable, with patience, but when combined with huge shipping loan losses yet to be openly declared the fear is that a perfect storm is gathering in the financial markets, and all it would take to ensure it is a mismanaged exit from quantitative monetary easing, a euphemism for electronic money printing.

There is, admittedly, a glaring lack of detailed information about banks' portfolios of shipping loans but what facts can be gleaned make disturbing reading. Most of the banks heavily exposed to shipping loans are north European, including German, Scandinavian and British, and the fear is that most of them are in denial about potential losses. "It is probably the most serious commercial problem that the banks have," opined Paul Slater, chairman of the consultancy firm, The First International Corporation, of Naples, Florida. According to him banks are saying: "Give it time and it will work out," but it is not going to do that, he adds. He is almost certainly right, though for some reasons that he may not have perceived.

So how big are the shipping loan risks? German banks' exposure to them is estimated at US$129 billion, more than double the value of their government debt holdings in Greece, Italy, Ireland, Portugal and Spain. Commerzbank, Germany's second largest, has a shipping loan exposure of Euro 18.9 billion, of which the non-performing part is estimated at Euro 4.5 billion. Its second quarter profits in 2013 crashed 84% on the same period last year owing partly to a Euro 110 million loss on bad loans to build ships. The company is reportedly anxious to cut its shipping loans by 40% but it seems the bids received so far are so low that the necessary write-down would imperil Commerzbank's equity. This exposes all banks' double whammy from shipping loans --- non payment of interest and asset values far below the loans to finance the ships. According to some shipping specialist estimates, large vessels that might have sold for US$150 million in 2008 fetch only about $40 million today. Half of the cargo ships on the high seas, it is estimated, may no longer be worth as much as the debt they carry.

Another German bank, HSC Nordbank, of Hamburg, although only a mid-size lender, is the biggest lender to the shipping industry, with reportedly more than £39 billion  in outstanding loans. Other big players in shipping finance include the DNB Group in Norway, Nordea in Sweden and Britain's Lloyds Banking Group and Royal Bank of Scotland (RBS). Overall, it is estimated that global shipping loans amount to £350 billion and the growing fear is that some of the lenders have yet to confront the scale of potential losses.

The recent decline in freight rates brought on by the glut of shipping and weak global trade is alarming and has even spilled over into the oil tanker market. Rates for non-liquid cargo are half or less than the level needed for shipowners to break even, according to consultants, KPMG. Rates for the biggest crude oil carriers tumbled 68% in the past two weeks. A very large crude carrier holding 2 million barrels could expect only $7,954 a day on August 2nd, having risen to $24,493 as recently as July 12th, according to Clarkson, the world's biggest ship broker. This comes on the heels of America's largest tanker operator, Oversea Shipbuilding Group, filing for bankruptcy in November 2012.  

New constraints on sea-borne trade?

Global trade will strengthen but that does not necessarily mean a concomitant growth in freight rates that shipping and banking so desperately need to keep that sinking feeling at bay. Some of the factors holding back growth are obvious enough, like the uncertainty about banks' true financial health which fosters mistrust among institutions, making them reluctant to lend to each other, and is partly responsible for a shortage of credit for businesses and consumers. Other reasons, however, are less obvious, impossible to quantify but which only the foolish would ignore. These include:

1) Development of inter-continental, rail-based land routes
2) Super-sized container ships whose economies of scale will undermine smaller box ships
3) Trends to re-shore manufacturing back to homeland countries or nearby
4) Green issues, which in part could spawn hybrid gas/sail vessels.
5) Technical developments like 3D printing and very much cheaper assembly robots
6) Shale oil developments in major oil-importing countries.

Good examples of continental, rail-based cargo transport are the German rail operator, Deutsche Bahn AG, which has started another direct train link on the Europe-China trade route, extending its reach into a domain dominated by shipping companies like Moller Maersk and Hapag-Lloyd AG. The journey takes just 15 days compared with the 30-40 days container ships need on the Asian-Europe route. This has two significant advantages for businesses. Ships should be viewed as floating warehouses and like all warehouses they put money to sleep. If the transit time can be drastically cut then that means stock can be converted into sales so much quicker. The second advantage is that electronics and automotive companies, particularly, find that the value of goods lost during the longer sea journeys is relatively high.

The super-sized container ships of 18,000 TEU or more coming on stream add further to the container shipping glut but because of their economies of scale they are likely to undercut much smaller box vessels and drive them into the breakers' yards.

The trend to re-shore manufacturing may only be a trickle so far but it is gathering momentum and now has new allies to bolster it. In the rush two decades ago to outsource manufacturing to the Far East where labour rates were much lower, certain hidden costs, if perceived, were ignored. These include rampant, intellectual property theft, natural calamity risks that severely disrupt JIT supplies, inflexibility to react quickly enough to changes in demand, poor quality issues and long production runs. To these must now be added rapidly soaring labour costs in China which can now make even the cost of high end apparel cheaper to produce in Britain than in China.

The new allies promoting re-shoring must now include developments like 3D printing and much cheaper assembly robots. These mobile robots will be able to perform basic assembly tasks and move around humans safely for a cost of about $25,000, compared with the $225,000 or so for welding and paint sprayer robots.

All these forces could restrain world growth based on ship-borne trade, and so depress freight rates for years to come but will that be enough to herald a second global credit crunch? Undoubtedly, the huge suspect shipping loans are a worry but when combined with heavy exposure to non-performing commercial property loans they put some big banks on a knife edge. Britain's tax payer-funded RBS and Lloyds Banking may show signs of recovery but it could be a false dawn. The UK commercial property market remains a major threat, with £38 billion of the £190 billion UK book in negative equity, and £93 billion on a loan to value ratio of more than 70%. RBS and Lloyds, according to Britain's Daily Telegraph in November 2012, have the largest exposures of £69 billion and £64 billion respectively. These banks are now under regulatory pressure to come clean on their dud property loans. Meanwhile, Commerzbank has dumped the UK commercial property market by selling Euro 5 billion of holdings.

The most likely scenario is that the first credit crunch will continue agonisingly for a few more years, along with rock bottom interest rates which are key to propping up the shipping industry, domestic and commercial property. What can be in no doubt, however, is the hell that awaits shipping lines and, perhaps, ship building yards. Soon, an inevitable financial cleansing will require the financial institutions to cease hiding the real value of their assets and that, in turn, could force governments into more bail-outs. Then, as the ancient Chinese curse goes, they will live through interesting times.