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Wednesday, December 12, 2012
Jones Act U.S.- build requirement is a sham
By Michael Hansen @ 8:30 PM :: 8991 Views :: Jones Act

Jones Act U.S.- build requirement is a sham

by Michael Hansen, Hawaii Shippers Council 

A leading Jones Act shipowner said last week they will build two containerships in the United States that were designed by a foreign shipbuilder and will be fitted with foreign manufactured components at a cost approximately five times what it would have been if they had ordered the same ship directly from the foreign shipyard.  This sham will impose an additional cost of at least $300 million over the life of each ship on Puerto Rican consumers where the new ships are to be deployed.  

On December 5, 20012, TOTE Inc. announced they ordered from General Dynamics’ NASSCO shipbuilding yard in San Diego, California, two Liquid Natural Gas (LNG)-fueled containerships with the capacity of 3100 Twenty-foot Equivalent Units (TEU) each for delivery in 2015 and 2016 to be employed in their subsidiary Sea Star Line’s  common carrier service between Florida and Puerto Rico.  TOTE has  contractual option to order three additional sisters from NASSCO, but they did not disclose where the additional ships might be employed.  

There is no doubt that TOTE’s Sea Star Line service to Puerto Rico needs new ships.  Their current three ships average 37 years of age, which is well past the international containership fleet age profile that averages 11 years and attenuates at 22 years by which most are scrapped.  The respected shipbuilding expert, Tim Colton, noted, “This is excellent news, not just for NASSCO, which needs the work, but for U.S. domestic trade in general, and for the Puerto Rican trade in particular, which is where TOTE plans to put them, and which is where the oldest and most embarrassing Jones Act ships now operate.”   

The following table describes the ageing Sea Star Line fleet.

Sea Star Line Current Puerto Rico Service Fleet  

Name of Ship 

Ship Type 

Capacity (TEU)  

Year Built 

Age  

El Morro 

Ro/Ro Trailership 

1,300 

1974 

38  

El Faro  

Ro/Ro Trailership 

1,300 

1975 

37 

El Yunque 

Ro/Ro Trailership 

1,300  

1976 

36 

                                                                   Average Age of Fleet 

37 

However good this news may be for the Jones Act industry and appealing lower emission LNG-powered ships might seem to the public, the issue is the cost of U.S. deep draft merchant ship construction.  It is typically five times more expensive in the U.S. than in the big three shipbuilding countries – Japan, South Korea and China – where 90% of the world’s deep draft ships are built.  This great difference between U.S. and foreign built ship construction costs should give pause to those residents of Puerto Rico who must pay the freight.  

Approximately 28 of the 35 containerships – which average 27 years of age -- currently operating in the noncontiguous trades – Alaska, Guam, Hawaii and Puerto Rico – need to be replaced.  To pay for new U.S.-built replacement ships, Jones Act shipowners will have to extract significantly higher freight revenues over time from all the noncontiguous jurisdictions.  

Importantly, this issue of ageing ships and high cost U.S. construction is not limited to the containership sector and for example affects domestic tanker and dry bulk shipping too.  And disproportionately impacts the noncontiguous jurisdictions because about one-half of the 98 deep draft Jones Act ships are employed in those trades.   

The primary reason TOTE choose to build LNG-fueled containerships for the Puerto Rico trade is to comply with North American Emissions Control Area (ECA) that came into force on August 1, 2012, and the authorizing international regulations under Annex XI of the International Convention for the Prevention of Pollution at Sea (MARPOL) administered by the International Maritime Organization (IMO), an agency of the United Nations. 

TOTE said they have committed more than US $350 million for the construction of their two LNG-fueled containerships – which would mean a minimum cost of $175 million apiece or $56,451.61 per TEU.  This pricing is similar to Matson Inc.’s recent revelation that they are budgeting $400 million to build two 3000 TEU Jones Act containerships in the U.S. for their Hawaii service sometime over the next three to five years – a cost of $200 million apiece or $ 66,666.67 per TEU.  

In comparison, the cost of building these ships in Japan or South Korea would be approximately $35 million each or about $11,666.67 per TEU --  approximately one-fifth the cost of U.S. construction.  The large disparity between domestic versus foreign construction costs will make a huge difference in the amount of revenue the shipowners will have to achieve over the life of these ships. 

The Jones Act requires vessels be built in the U.S. to carry cargo between two points in the United States and prevents the shipowners from ordering much less expensive ships from an Asian shipbuilding yard.  Despite the vastly higher U.S. ship construction costs, virtually all the Jones Act shipowners support the U.S.-build requirement of the Jones Act because it creates a very high barrier to entry that keeps new entrants out and makes the market much less contestable, allowing them to avoid competition and extract monopoly-like economic rents.  They rely on consumers to pay the difference.  

To relieve the noncontiguous jurisdictions from this onerous freight burden, the Hawaii Shippers Council has proposed that the noncontiguous trades be exempted from just the U.S. build requirement of the Jones Act for deep draft self-propelled merchant ships.  The other cabotage requirements of the Jones Act – U.S.-Flag, U.S.-crew and U.S.-ownership – would remain the same and will not threaten any jobs in the noncontiguous jurisdictions.  

The tradeoff for exempting the noncontiguous trades from the U.S.-build requirement would be a loss of jobs for mainland shipyard labor where the deep draft merchant ships are built.  TOTE states in their press release that construction of the two ships at General Dynamics NASSCO is “expected to sustain 600 American shipyard jobs in Southern California.”  As these jobs will last for around two years, it may be assumed construction of a single deep draft ship in the U.S. provides approximately 300 U.S. jobs for a period of two years. 

Paradoxically the TOTE announcement informs that their new U.S-built ships will be entirely designed by a foreign shipbuilder, the main engine supplied by a foreign engine builder and the ship’s LNG storage tanks may also be foreign manufactured.  

The General Dynamics NASSCO press release stated, “The ships will be designed by DSEC, a subsidiary of Daewoo Shipbuilding & Marine Engineering (DSME), located in Busan, South Korea. The design will be based on proven containership-design standards and will include DSME's patented LNG fuel-gas system and a MAN ME-GI dual fuel slow speed engine.”   

The main engine will be supplied by the German firm, MAN Diesel & Turbo.  Their press release said, “Unveiled at a major event at MAN Diesel & Turbo’s Copenhagen Diesel Research Centre in May 2011, the ME-GI engine represents the culmination of many years’ work that began in the 1990s with the company’s prototype MC-GI dual-fuel engine that entered service at a power plant in Chiba, near Tokyo, Japan in 1994.  Depending on relative price and availability, as well as environmental considerations, the ME-GI engine gives shipowners and operators the option of using either HFO or gas – predominantly natural gas but also, eventually, LPG.  MAN Diesel & Turbo sees significant opportunities arising for gas-fuelled tonnage as fuel prices rise and modern exhaust-emission limits tighten. Indeed, previous research indicates that the ME-GI engine delivers significant reductions in CO2, NOx and SOx emissions. Furthermore, the ME-GI engine has no methane slip, and it is therefore the most environmental friendly technology available.” 

Finally, the U.S. Coast Guard ruled recently in a letter dated November 11, 2012, “that foreign fabrication of the LNG fuel tanks will not jeopardize the coastwise eligibility of the vessels provided that those tanks are assembled into the vessels in the United States.”  This will allow the LNG storage tanks for U.S. built Jones Act ships to be fabricated overseas and imported for installation in a U.S. shipyard.  

Essentially, all the technology for TOTE’s new ships is being supplied by foreign companies and the U.S. shipbuilding yard NASSCO is not making any technical contribution to the project.  This is the same arrangement for all the deep draft merchant ships built in the U.S. over the past twelve years; the ships have all been built under license to a foreign shipbuilder.  As the U.S. shipbuilding industry is no longer designing new deep draft merchant ships and U.S. engine manufacturers no longer build large engines for them; therefore, it does not make sense to continue any longer the sham of the U.S.-build requirement for these ships.   

The Jones Act’s outmoded U.S. build requirement should be reformed to relieve the noncontiguous jurisdictions from paying $300 million additional costs over the life cycle of each new containership deployed in their trades.

---30---

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