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Wednesday, November 07, 2012
Jones Act Shipbuilding Burdens Hawaii, Alaska, Guam, and Puerto Rico
By Michael Hansen @ 9:58 PM :: 8140 Views :: Jones Act

Jones Act Shipbuilding Burdens Hawaii, Alaska, Guam and Puerto Rico

by Michael Hansen, Hawaii Shippers Council

While residents of the noncontiguous jurisdictions of the United States – Alaska, Guam, Hawaii and Puerto Rico – face higher shipping costs due to scarce and expensive U.S.-Built ships required by the Jones Act, the price of new ships built outside the U.S. continues to fall lowering shipping costs around the world.

The business news service, Bloomberg, reported on Halloween Day, October 31st, that the “prices for new ships have fallen to an eight-year low” and may be pushed down another 15 percent.

Referencing an authoritative report from Clarkson PLC, one of the world’s largest shipbrokers, Bloomberg further noted “Global ship orders dropped 53 percent in the first nine months of the year (i.e., 2012) to 31.1 million deadweight tons. The shipbroker’s ship price index, which tracks the value of all vessel types, has dropped 7.9 percent this year to 128 in September. That’s the lowest since February 2004.”

“The average price for container ship has dropped 39 percent this year to $11,682.45 per 20-foot box space in October, according to Clarkson. For bulk ships, prices are down 7.6 percent to $462.87 a ton.“

The three largest shipbuilders in the world today are South Korean. In order of size they are: (1) Hyundai Heavy Industries (HHI), (2) Daewoo Shipbuilding and Marine Engineering, and (3) Samsung Heavy Industries Co. Hyundai is by far the leader with as much shipbuilding capacity as the other two combined and they can build 20.6 million deadweight tons of ships per year across 13 dry docks.

To put these international trends in context for the hard-pressed residents of the noncontiguous jurisdictions, it is useful to look at the four most recently built mainline containerships in the Matson Inc. fleet. Those four ships are currently employed in Matson’s U.S. West Coast / Honolulu / Guam / China service. A comparison of their construction cost to the current market price for containerships operating internationally produces illuminating results.

Matson built their newest containerships at the Philadelphia Shipyard during the 2000’s. The yard is operated by a Norwegian company, which was initially known as Kvaerner, and subsequently by the successor company name Aker.

The following chart shows the original U.S. construction price for Matson’s four most recently built containerships varies from 3.5 to 5.5 as a multiple of their current international market value.

Name of Ship Year Delivered Container Capacity Actual U.S. Build Contract Price Actual Build Price Per TEU Current International Market Price

 

 

 

 

 

Original U.S. Build Price as a multiple of the Current International Market Price

       
(in TEU) (Millions US $) (US $ / TEU) (Based on US $11,682.45/TEU)
MANUKAI 2003 2600 $110 $42,307.69 $30,370 3.6
MANUWILI 2004 2600 $110 $42,307.69 $30,370 3.6
MANULANI 2005 2600 $157 $60,384.61 $30,370 5.2
MAUNALEI 2006 2500 $157 $62,800.00 $29,210 5.4

The first two Matson ships benefited from direct subsidies from local, state and federal governments that were granted to revive shipbuilding in the former Philadelphia Naval Yard. The second two Matson containerships were built with less subsidy and their price more accurately reflects the actual U.S. shipbuilding cost. Because of the heavy subsidies for construction of Matson’s first two Philadelphia-built ships – the Manukai and Manuwili, the costs and multiples for the second two – Manulani and Maunalei – are a far more accurate gauge of the construction cost differential.

Previous to the construction of the four containerships in the 2000’s, Matson’s last mainline ship was the R. J. Pfeiffer (2,229 TEU) delivered in 1993 by NASSCO, San Diego, at a reported price of U.S. $160 million.

The multiples shown in the table above are between the original U.S. build cost for Matson’s ships and the current market price if they were to be sold as internationally flagged containerships. Although they are an exact comparison, it is a good indication of the magnitude of the differential between Jones Act and international ship construction costs.

These ship cost multiples are important because they clearly demonstrate just how much higher Jones Act ship costs really are. The capital cost for the primary asset of a shipping company – i.e., it’s mainline ships – translates directly into higher freight rates and less competition as the high cost of Jones Act shipbuilding is a barrier to entry and hence competition to the noncontiguous trades.

The Bloomberg article also provides another way to view U.S. ship construction costs. They reported Hyundai Heavy Industries earlier this year did “a $1.2 billion deal for 10 container vessels from Enesel SA” for which “the shipbuilder charged about $120 million each for the 13,800-box capacity ships.” In other words, Hyundai is building a series of new 13,800 TEU containership which are more than five (5) times the size of the latest Matson ships for U.S. $37 million apiece less than Matson paid for its last two ships seven years ago.

Alternatively, on a capacity cost basis, the Hyundai ships cost US $8,685.65 per TEU as compared to $60,384.61 per TEU for Matson’s last two Philadelphia-built ships. Again this is not a perfect comparison as the Hyundai contract involved a series of 10 significantly larger ships, but it highlights the stark difference in ship construction costs between the U.S. and the major Asian shipbuilding yards.

Many have asked why is not possible to revive shipbuilding in the United States along the lines of Henry J. Kaiser’s shipbuilding enterprises during the Second World War when various private shipyards under the U.S. Emergency Shipbuilding Program from 1940 through 1945 that constructed nearly 6,000 ships for the war effort?

In fact, it would be very difficult to revive large scale deep draft shipbuilding in the U.S. There are currently eight major U.S. shipbuilding yards primarily engaged in naval construction for the U.S. Government. Since the termination of the federal Construction Differential Subsidy Program in the mid-1980’s, fewer than three deep draft merchant ships have been built in the U.S. per year to meet the limited requirements of the Jones Act market.

To significantly boost the production of deep draft merchant ships in the U.S. it would be necessary to make U.S. shipbuilding industry internationally competitive as they would have to build for export and sell most of their ships in the international market to achieve the required economies of scale. The export imperative exists because no single domestic shipping market in the world – including the U.S. Jones Act market – is sufficiently large enough to support a world-class shipbuilding industry.

Three countries build over 90% of the world’s deep draft ships: China, South Korea and Japan. Even Japan, with the smallest production, builds on average around 200 deep draft ships per annum – approximately twice as many oceangoing ships in the existing Jones Act fleet of 98 ships.

It would be necessary to develop U.S. ship exports in the face of global over-capacity and established and highly competitive shipbuilding industries in China, South Korea and Japan.

An example of the magnitude of the foreign competition is Hyundai Heavy Industries with a 20 million deadweight ton annual shipbuilding capacity which would allow them to construct nearly 70 Matson-sized containerships per year.

The noncontiguous jurisdictions must insist that they be exempted from the U.S. build requirement of the Jones Act to take advantage of the international shipbuilding industry and lower ocean freight rates and increase competition in the noncontiguous trades.

---30---

Bloomberg: Ships at Eight-Year Low Seen Falling in Hyundai Price War

HAWAII SHIPPERS COUNCIL

STATUS OF THE ACTIVE MAJOR U.S. SHIPBUILDING YARDS

(01/13/2012)

NO

SHIPYARD

LOCATION

PARENT COMPANY

PRIMARY PRODUCTS

LAST LARGE MERCHANT SHIP

(Date Delivered)

COMMERCIAL ORDER BOOK

(Scheduled Delivery)

OUTLOOK

1.

Bath Iron Works Corporation

Bath, Maine

General Dynamics

Corp.

Large Surface Combatants

(Destroyers)

FALCON CHAMPION (12/21/1984)

None

Continue Large Naval Surface Combatants

2.

Electric Boat Company

Groton, Connecticut

General Dynamics Corp.

Nuclear Submarines

None

None

Continue Naval Subs

3.

NASSCO

(National Steel & Shipbuilding Co.)

San Diego, California

General Dynamics

Corp

Large Naval Auxiliaries Tankers Containerships

Product Tanker EVERGREEN STATE

(12/07/2010)

None

 

Continue Naval Auxiliaries – Seeking commercial biz

4.

Newport News Shipbuilding

Newport, News, Virginia

*Huntington Ingalls Industries Inc.

Aircraft Carriers Attack Subs

BRENTON REEF

(06/21/1999)

None

Continue Naval Carriers & Subs

5.

Avondale Shipyards

New Orleans, Louisiana

*Huntington Ingalls Industries Inc.

Large Naval Amphibians (LPDs)

POLAR ENTERPRISE (06/29/2006)

None

Closure 2013

6.

Ingalls Shipyards

Pascagoula, Mississippi

*Huntington Ingalls Industries Inc.

Large Naval Amphibians (LPDs)

PRESIDENT JOHNSON (01/04/1974)

None

Uncertain – naval contracts in question

7.

Aker Philadelphia Shipyard Inc.

Philadelphia, Pennsylvania

Aker ASA (Norwegian)

Containerships Tankers

Product Tanker OVERSEAS TAMPA

(04/29/2011)

2 x 47,000 dwt Product Tankers

(2013)

2 x 111,000 dwt Crude Carriers (2014)

Uncertain – after current orders delivered

8.

VT—Halter Marine Inc. Pascagoula Shipyard

Pascagoula, Mississippi

ST Engineering (Government of Singapore)

Tugs, Barges & Offshore Service Vessels

Ro/Ro

JEAN ANNE

(03/04/2005)

Combo Ro/Ro MARJORIE C (2013)

Continue tugs, barges & OSVs

*Huntington Ingalls Industries Inc. (HHI) formerly Northrop Grumman Shipbuilding, a division of Northrop Grumman Corp., which was spun-off as an independent company on 03/04/2011.

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