High costs and piracy keep ocean carriers away

An increase in operational costs due to the global economic downturn and piracy on the Gulf of Eden has forced two container ocean carriers to suspend their operations to East African ports.

According to the Kenya Shipping Agents Association, two other liners are also contemplating similar action after recording huge losses in the past financial year.

The association executive officer Capt Frederick Wahutu says the two liners, while weighing their options to give the region a wide berth, had each incurred $1 billion and $500 million losses respectively.

“The trend is so bad that we fear that other liners could also follow suit,” said Mr Wahutu.

If this happened, Capt Wahutu said, ocean freight costs in the region will go through the roof.

This development also comes at a time when the Kenya government has slapped value added tax on marine services, ostensibly increasing the cost of calling at the port of Mombasa by 16 per cent, with effect from September 12.

The move has already been opposed by cruise ship liners, which have threatened to call off their planned visits to Mombasa next year.

The liners have already written to the Kenya Ports Authority, warning that they will give Mombasa a wide berth if the government does not rescind its taxation decision.

It is, however, not clear whether the threat by the liners will also affect their container carriers.

“When the reorganisation of the global shipping industry continues like this, it is very difficult to predict what liners might decide on particular routes, but if the cost of operation is going to increase then be assured that more vessels will quit,” said Mr Wahutu.

He adds, “Even with the present pressure for liners to lower their freight rates, it would seem logical that Kenya should start to look for ways of encouraging the entry of ship owners rather than discouraging them further.”

“Container ocean transport to and from the port of Mombasa is split over approximately 12 carriers ranging in size from global to niche, and no carrier has a greater than 40 per cent market share in any lane, and if we view Maersk Line and Safmaine as independent carriers, then Maersk has more than 25 per cent, and if some lines suspend their operations then the demand for their services will increase,” said Mr Wahutu.

He said that competition among the carriers was healthy in keeping the freight rates down, adding that between March 2008 and 2009, the rates had dropped by 30 per cent, though signs are that the trend could start to change.

This is the balancing act that Capt Wahutu fears could tilt towards the advantage of the liners that will remain in the route hence increase the cost of freight.

Piracy, according to shipping experts, has forced most shipping lines to opt for the longer Cape of Good Hope route to avoid the pirate infested Gulf of Aden. According to recent statistics released by London-based shipping consultants Drewry Shipping Consultant, approximately 20,000 vessels that use the Suez Canal annually have opted for the longer Cape of Good Hope route, which means that they are spending more on fuel at a time when bunker oil prices are not stable.