Matson Fires Shot Across Consumers’ Bow  

by Michael N Hansen, Hawaii Shippers Council 

As a naval captain would order a warning artillery shot to be fired across the bow of another vessel signaling an impending action, Matson Inc. figuratively fired a shot across the collective bow of consumers in Hawaii and Guam warning of increased future ocean freight rates that will result in higher cost of living in the islands.  

Matson’s warning was contained in a news article, which ran in Hawaii’s major daily, the Honolulu Star-Advertiser, on November 25, 2012, informing the public that Matson is planning to acquire, within the next five (5) years, two (2) new mainline ships for the extravagant price of U.S. $400 million.  

The release of the information was somewhat unusual because Matson did not issue a press release to announce their plans, apparently they gave the story exclusively to the Star-Advertiser reporter, Andrew Gomes, and the article did not name a source at Matson with the exception of mentioning Matson’s president Matt Cox’s remarks made earlier this year in regards to vehicle carriage.   

In addition, the description of Matson’s newbuilding plans were vague.  The article did not indicate what type of ship that would be built, what their cargo capacity might be, nor what shipyard might build them.  It left the choice of ship type undecided, suggesting perhaps a cellular containership or a combination Ro/Ro (roll-on/roll-off) vehicle and Lo/Lo (lift-on/lift-off) container carrier similar to the Pasha Hawaii Transport Lines’s Majorie C currently under construction at VT Halter Marine in Pascagoula, Mississippi, might be built.   

The cabotage provisions of the Jones Act require vessels carrying cargo in domestic coastwise trades be built in the United States.  The Star-Advertiser reporter rightly noted the U.S.-build requirement makes Jones Act ships far more expensive than if they had been built in one of the three countries that build more than 90% of such ships in the world – Japan, South Korea and China.   

The Hawaii Shippers Council (HSC) recently analyzed the construction cost of Matson’s recent four (4) containerships built at the Philadelphia Shipyard during the 2000’s. We found that cost was a multiple of five (5) times what the current market price for comparable internationally flagged ships.  While current newbuilding costs for a similar-sized 2600 Twenty-foot Equivalent Unit (TEU) containership would be on the order of approximately $40 million – in comparison to Matson’s estimates for their proposed U.S. newbuildings at $200 million apiece – again a multiple of five (5) times.   

As ships are typically the primary asset of a shipping company, the enormously inflated capital cost for new U.S. built ships has a number of real world consequences for the noncontiguous trades of Alaska, Guam, Hawaii and Puerto Rico.  It creates a very high barrier to entry into the trades curtailing any potential competition, rendering the market essentially uncontestable and resulting in monopoly-like conditions.  It leads directly to high freight rates as the Jones Act shipowner must recover the high cost of the ships, which they can do because of the lack of contestability in the trade.  It results in inefficient ageing ships operating well past what would be the end of their useful life in international trade because they are too expensive to replace in the U.S. on the usual cycle followed outside the U.S.; as the article mentioned, Matson disclosed their older ships cost 25% more to operate than their younger ones.  Together these factors have led to a higher cost of living in the noncontiguous jurisdictions, which are completely dependent on ocean carriage for interstate surface transportation.   

The need for higher freight rates in the noncontiguous trades to support high U.S. shipbuilding  costs was made clear by  Mr. Peter I. Keller, President, Sea Star Line, a subsidiary of Saltchuk Resources Inc. (also the parent company of Young Bros. Ltd.), who said to the American Shipper on February 6, 2012, “rates in the U.S.-Puerto Rico trade need to improve if carriers are to be able to reinvest in new equipment for the trade.”   Sea Star operates three Ro/Ro Trailerships that average 37 years of age, which they need to replace but will have to see significantly higher freight rates in the trade to pay for new ships.  

This issue with ageing fleets is a common problem for all the noncontiguous domestic trades where the deep sea common carriers operate fleets that average around 30 years of age (see table below).  In contrast, in the international trades containerships average 11 years and most are retired by 22 years of age.

HAWAII SHIPPERS COUNCIL
SUMMARY DATA
U.S. DOMESTIC NONCONTIGUOUS COMMON CARRIER FLEET
Including Deep Draft Self-Propelled Oceangoing Ships and Large Oceangoing Barges
(01/16/2012)
LINE	TRADES	NUMBER VESSELS	AVERAGE AGE
Horizon Lines Inc.	Alaska, Hawaii & Puerto Rico	15 Ships	35
Matson Navigation Company Inc.	Hawaii & Guam	13 Ships	25
TOTE Maritime	Alaska & Puerto Rico	8 Ships	28
(Formerly American Shipping Group)
Part of Saltchuk Resources Inc.
Crowley Maritime Corporation	Puerto Rico	8 Barges	36
Trailer Bridge Inc.	Puerto Rico	7 Barges	18
Pasha Hawaii Transport Lines	Hawaii	1 Ship	7
Totals		37 Ships	28
		16 Barges	26
		53 Ships + Barges	27

The ageing fleet problem is greater for Horizon Lines Inc., which is operating a fleet of 15 ships that averages 35 years.  Over the past several years, Horizon has suffered very low earnings and three years of outright losses leaving them without sufficient resources to fund a new ship building program and without relief will likely face a dim future. 

The HSC believes the solution to this problem is to exempt the noncontiguous domestic trades from the U.S. build requirement for deep draft self-propelled oceangoing ships.  This would allow the use of significantly lower cost foreign-built U.S.-flag ships in those trades.  We have made a formal proposal of this very limited exemption to the Jones Act that would not change the requirements for U.S. crew and U.S. ownership. 

Our proposal for the noncontiguous trades is not unlike the situation that currently exists with respect to 96 ship U.S. flag international fleet that is virtually all foreign-built.  The Military Sealift Command (MSC) relies on these foreign-built U.S.-flag ships to carry military cargoes to and from overseas operations.  

Matson is giving the consumers of Hawaii and Guam fair warning that they intend to proceed with constructing new mainline ships in the U.S. despite the enormous cost that they will have to pay for  new ships.   The resultant freight charges Matson will inevitably have levy on the cargo will be passed along to the consumers in the form of a higher cost of living.  

If consumers in Hawaii and Guam wish to avoid these higher future costs they must advocate for an exemption to the U.S.-build requirement of the Jones Act in the noncontiguous trades.   

Matson’s plans are also a warning to the people of Alaska and Puerto Rico that expensive U.S.-built ships are likely to be ordered for their trades which will foist higher consumer costs on them too. 

UPDATE November 29, 2012

I wrote on Monday that Matson Inc. was planning to spend $400 million to build two mainline ships that should cost far less than that and this would increase the cost of living in Hawaii and Guam.  My missive was posted here.  It was in response to an article written by Andrew Gomes that appeared in the Honolulu Star Advertiser on Sunday, November 25th.

At the time of writing, I was unaware there was a reference to Matson’s shipbuilding plans on their website.  It was not in the form of a  press release but rather in a slide presentation listed in the events section of Matson’s website.  The slides were part of a talk given by Matthew J. Cox, President & CEO, Matson Inc., at the Stephens Fall Investment Conference on November 14, 2012.

On Slide #14, one of the bullet point entries stated, “Strategic re-fleeting plan calls for 2 new Jones Act containerships in next 3 - 5 years for approximately $200 million each to replace/retire existing older vessels.”   Obviously the Star-Advertiser reporter was able to obtain more information from an named Matson source to write his article.

Two national transportation publications posted articles regarding Matson’s plans and our response.  Those articles are shown below.  Both reporters contacted Matson spokesperson Jeff Hull and obtained some additional clarification.

American Shipper Magazine:  Matson plans to build new ships

Journal of Commerce:  Matson Plan Touches a Jones Act Nerve