Sunday, 16 February 2014

JIT shipping costs face price hike threat

Shipping insurers will have good cause to feel weak-kneed if a Tokyo court case against Mitsubishi Heavy Industries, brought by Mitsui OSK Lines, succeeds and which by extension could force a rethink of just-in-time (JIT) shipping issues. The case concerns the loss of the MOL Comfort container ship in the Arabian sea last July on a voyage from Asia to Europe, the biggest loss in container shipping history. The reason for concern is that a successful claim would far exceed the loss of a ship and its cargo because it could open the floodgates to thousands of other claims related to the 2008-built ship which was loaded with 4,382 containers.

The MOL Comfort was built to a new design , along with six other sister ships in the Mitsui fleet, and Class NK inspection of these found "buckling type deformations" on the bottom shell plates. These ships were the first classified by the Class NK to utilise ultra high strength steel with a yield of 470 MPa (the unit of stress pressure) in the hull structures to reduce the steel weight of the ship by avoiding extreme plate thickness. The sister ships' hulls have now been reinforced to twice the level required by Class NK.

Included in the claim will not only be the cost of strengthening six sister ships made by the same shipbuilder, it will also include all the consequential losses of action having to be taken to fulfil the JIT contracts related to the lost containers. Ordinarily, the loss of even a large cargo ship would not raise eyebrows much but the MOL Comfort loss could prove a huge exception with ramifications far beyond the shipping insurance circles. For a start, Misui will be claiming compensation for the cost of strengthening its six sister ships. On a much greater scale will be the claim for all consequential losses involving action having to be taken to fulfil JIT contracts owing to the lost containers. One Japanese electronics giant, who reportedly lost six containers, had to upgrade its factory output to airfreight the entire replacement stock to Europe at considerable cost or otherwise fail to fulfil its contract. This company would not be alone in doing whatever it took to ensure its supply chain commitment was not broken owing to the MOL Comfort's loss.

Insurers could be in for another shock. Cargo insurance underwriters normally work on the value of a container's contents of around US$50,000 but many of the Comfort's containers would have been packed with high value consumer goods and these would normally be valued at selling price rather than cost price. The Japanese company which lost six containers reportedly valued the contents of each of its containers at $450,000. The cargo losses, therefore, will far exceed the $66 million hull and machinery policy, and the latest estimate for claims points to well over $500 million.

The loss of the Comfort is a warning shot across the bows, for insurers, the shipping lines and their customers. Depending on any future shipping loss claims, it could also force the trend to re-shore outsourced manufacturing to the Far East back to Europe, a trend that is already underway for a host of reasons. The insurance risks will rise, and consequently premiums, because container ships are becoming ever larger, the latest now able to carry over 18,000 TEU 20 ft boxes. There are, of course, economies of scale from growing bigger that would bring down unit shipping costs but the downside would be the crippling losses stemming from sunken leviathans filled with high-value consumer goods which could ultimately run into many billions of pounds in payouts per ship lost.

It would be wrong to finger the causes of Comfort's loss, which in all likelihood may never be known, but as in so many losses at sea there is usually a combination of factors. The weather the Comfort contended with was rough, but not so bad that it should have broken the back of a modern container ship built by a reputable shipping yard. On possible causes the smart money is on the longitudinal stresses  induced by deliberately under-declared container payloads, a practice which shippers routinely refuse to take seriously. Compounding this shame is the very common sloppy container packing practices. Without accurate container payload data and responsible container packing it is impossible for dock cranes to load ships so that they have a safe, loaded profile In this respect the IMO may have cause to regret its decision to water down amendments to SOLAS regulations which would have made container weighing at all ports mandatory. It was a great missed opportunity and, perhaps, a glaring case that when money and safety issues clash it is money that prevails.

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