INDUSTRY OPINION: Aussies at a disadvantage with coastal bulk trades by Peter Bremner

THE Strategic Marine Group (SMG) recently undertook an evidence-based analysis of coastal dry bulk and liquid bulk movements on the Australian east coast in order to provide its client, the Maritime Union of Australia (MUA), with an accurate commercial snapshot of how different commodities flow from port-to-port and on which ships they sail. 

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Photo: Chris Mackey

The backdrop to the report is the shipping activity on the east coast after the introduction of the Coastal Trading (Revitalising Australian Shipping) Act 2012 (CT Act 2012).

While reviewing more than 8000 Temporary Licence (TL) voyages performed by foreign ships carrying cargo on the Australian coast, SMG revealed evidence of how prominent business entities seem to be exploiting loopholes in the current shipping legislation while the department running the licencing scheme appears under-resourced to adequately monitor any such manipulation.

However, the overriding concern was that the current legislation, coupled with draft amendments to that legislation outlined to date by the Coalition Government, would further entrench foreign control of Australia’s maritime supply chain, with the economic benefits of our huge trade going offshore rather than helping to sustain a viable merchant shipping fleet and the wide variety of technical and commercial skills associated with it.

The study also brings into question many of the claims made by prominent commodity groups, proponents of an open coast policy, who maintain that ships represent an enormous component in supply chain costs.

Australia is dependent on shipping, with 99% of international trade volumes transported by ship and Australian ports managing 10% of the world’s seaborne trade. As the world’s largest island nation, Australia will always be dependent on the maritime industry for the transport of goods.

The five SMG executives who worked on the study all have considerable commercial and operational experience at senior management levels in the Australian and international maritime industry.

The team concluded that with the correct policy settings and importantly, bipartisan support in Parliament – so crucial for an industry that has to take multimillion dollar ship investment decisions over long periods of time (usually 20 years) – the Australian shipping industry can be rejuvenated. There are windows of opportunity to be found and these have been identified in the report.

SMG’s objective was to deliver practical research and advice to support representations to shipowners and shippers in key coastal commodity trades. The study’s intent was to identify ship supply configurations that optimise ship utilisation, deliver commercially sound shipping services and create new opportunities for Australian-crewed ships.

The research was carried out and conclusions reached, during May 2016, using government data available up to the end of April 2016.  SMG continues to monitor new data as it becomes available.

The study methodology focused on identification of the shippers, operators, cargo volumes, frequency of voyages, principal ports and terminals and the types of ship licence used to facilitate the trade.

The analysis showed that coastal commodity movements remain significant in all trades. It is apparent that there are sufficient volumes being moved to justify the use of dedicated Australian vessels.

Notwithstanding this, the number of Australian General Licenced (GL) and Transitional General Licenced (TGL) vessels is declining. Indeed, foreign-flagged and crewed ships are being introduced on a quasi-permanent basis (e.g. in the cement trades). General and Transitional General licences are held by Australian crewed ships operating in the coastal trade except those operated intrastate by Rio Tinto between Queensland ports where no licence is required. These are Singapore flagged and Australian crewed. The operation of these ships raises questions about Customs decisions on “importation” of foreign ships trading for protracted periods on the Australian coast.

It appears the Australian-crewed GL and TGL vessels are being replaced for the following reasons:

  1. Financial - primarily due to the additional cost of Australian crews (an average of $4.7 million per annum is used in this report).
  2. Competition between the various shippers dealing in the same commodity, where freight is a differentiator on the end price (though the coastal cement trade appears close to having a potential monopoly shipping provider).
  3. Despite the economies of scale and lower environmental impact, coastal seaborne trade bears the cost of its infrastructure in and around ports, whereas its road and rail competitors enjoy infrastructure access at a much lower price.
  4. Following structural change in domestic industries such as steel, petroleum refining, and sugar, shipping simply is no longer a mainstream business for the majority of Australian shippers and cargo interests.  It’s now a shipper’s market.
  5. Broadly speaking, there are few Australian-domiciled pure shipowners with sufficient capital or financial capability to acquire ships with which to challenge the issue of TLs under which foreign-crewed ships enter our coastal trade. Toll Shipping and SeaRoad are the exceptions but apparently on the basis of their provision of a sea-highway connecting Tasmania to the mainland.
  6. There is little incentive for shippers to utilise GLs other than the indirect taxation benefits of the Shipping Reform (Tax Incentives) Act 2012.
  7. There is no centralising coordination group to identify cross-trades and other logistic and supply chain opportunities for exploitation. The shippers tend to work independently of each other despite the fact that the ACCC will grant approval for competitors to jointly coordinate the purchase of shipping capacity.

Although the summary of the findings was considered on a commodity-by-commodity basis, overall there are an average of 163 voyages conducted per month on the east coast using Temporary Licences (TLs). It was noted that a number of separate voyages might be conducted under one single TL.

In addition to vessels operating under a TL, as of February 2016, there remained 49 vessels holding a General Licence (GL). The majority of these are issued to smaller vessels such as landing barges in Queensland and the Northern. These are rarely challenged by foreign-flagged, foreign -crewed Temporary Licence holders.  There were also six vessels operating under a Transitional General Licence (TGL).

It was noted that the majority of the vessels that were originally issued a TGL, have not used them to transition to a GL and have subsequently surrendered the licence. Vessels operating under a TL essentially now cover the trade that the TGL vessels were originally in. There is a noticeable trend for both GL and TGL vessels being replaced by a TL.

Notably, 90% of the TL voyages were controlled by a limited number of shippers (14 or, 30% of all TL applicants). This represents a comparatively high concentration of applications by a few and suggests that reform by optimisation, better scheduling and purpose built ships could be readily managed.

In the case of dry-bulk trades various trade routes were considered.  From these the higher volumes (tonnes) trades were identified for further consideration.

The principal cargoes shipped are bauxite, iron ore, manganese, clinker, cement, alumina and mineral sands.

Rio Tinto Marine (RTM) controls the intrastate bauxite trade between Weipa and Gladstone. Licences are not required in intrastate trades and RTM uses a mixture of its own purpose-built ships and chartered-in “foreign-flag” TL ships. Its own ships, although Australian-manned, are Singapore-flagged. RTM chooses to ignore the opt-in provision of the CT Act. This would require chartered-in ships to hold TLs and its own ships TGLs. In the case of its own ships, presumably the benefits of Singapore registration outweigh those of the CT Act. In the case of the chartered-in ships, presumably the decision is purely commercial. Overall, SMG estimated about 40% of RTM’s bauxite task is performed by its own vessels as described above.

Alumina is mainly shipped from Gladstone to Newcastle and Bell Bay. A significant number of TL voyages were undertaken on both these routes to supplement the CSL Melbourne, which was operating under a GL.  There is a potential opportunity to introduce a dedicated vessel into this trade, providing a cross-trade contract can be agreed between the various participants.

Vessels controlled by Incitec Pivot dominate the fertiliser trade. Analysis of the various fertiliser-shipping routes did not readily justify a dedicated vessel. The introduction, however, of a Handysize geared bulk carrier able to carry fertiliser and some of the other secondary bulk commodities, might be commercially viable.

During the period under review, liquid bulk (petroleum) shipments occurred against a background of refinery closures, increased imports from Asia and an increase in east coast storage capacity. The trend is reflected in a decrease in the number of General and Transitional General Licenced vessels, offset by an increase in the number of TLs issued. The TL voyages cover both direct imports with multi-port discharge and coastal voyages delivering products from domestic refineries yet to close.

Analysis indicates coastal commodity movements remain significant in all trades. It is apparent that there are sufficient volumes being moved to justify the use of dedicated vessels. Notwithstanding this, the number of GL and TGL vessels is declining.

The majority of these barriers can be, at least, partially offset by system improvements. Costs can be reduced by using specialised, custom trade-built ships, altering present manning arrangements and offsetting freight cost by using backhauls and cross-trades.

Overall logistics chain efficiencies might be gained by the use of a centralised coordination body. The Hunter Valley Coal Chain Coordinator might be a good model. This would almost certainly require ACCC sign-off and if a shipper’s costs under GL remain higher than under a TL (even after improvements were realised) it would be counter-intuitive for the ACCC to support such a position.

However, the introduction of legislation to produce a more commercially attractive Australian International Shipping Register (AISR) may well produce a more equitable answer to this conundrum. A legislative solution that provided a three-tier priority for coastal cargoes based on GL with first priority, AISR for second and TL for third would be an optimal outcome in this respect.

Volumes shipped in the coastal trades are growing moderately. The shipping freight task (tonne-kilometres) performed grew by 1.85% and 0.9% in 2012-2013 and 2013-2014 respectively (BITRE, Australian Sea Freight 2013-2014, Canberra 2015).

In conclusion, despite the decline in the use of General Licenced vessels in the east coast trade, opportunities exist for their return. Success will require intensive and creative thought, willing and open collaboration and goodwill from all parties. The gap remains challenging.

Article by Peter Bremner - Sydney

Originally posted here