Regulations pose new challenges for shipping

By Laura Syrett
Published: Monday, 25 November 2013

Pollution controls frustrate shippers, while greater scrutiny pushes banks to exit market and the EU proposes more rights for European seafarers

With over 50,000 merchant ships in circulation transporting around 90% of the world’s internationally-traded cargo, regulating the global shipping industry is a vital but complicated business.

In 2013, the industry is still in the throes of what is arguably its worst ever peace time crisis with many shipping firms struggling to remain afloat. The global recession in 2008, combined with the collapse of the commodity supercycle in 2011, have left shippers feeling bruised and rueful of decisions made when the going was good.

It is therefore not surprising that the prospect of more stringent regulation of the way the industry operates is receiving a frosty welcome from shipowners.

The International Maritime Organisation (IMO) regulations on sulphur emissions from fuel oil have faced particular hostility, with many ship owners claiming that the rules are confusing and frustrating.

During the Red Sea and Gulf Bunkering Conference (RESCON) in Dubai this September, a number of industry figures complained of the uncertainty surrounding the International Convention for the Prevention of Pollution from Ships (Marpol) regulations.

Marpol Annex VI - the prevention of air pollution from ships - sets limits on sulphur oxide (SOx) and nitrogen oxide emissions from ship exhausts and has seen the introduction of a number of designated emission control areas (ECAs).

Marpol slammed at RESCON meeting

The SOx Marpol regulation 14 states that outside an ECA, a limit of 0.5% m/m (percentage of total mass) SOx and particulate matter emissions will be introduced on or after 1 January 2020. However, depending on the outcome of a review to be concluded in 2018 into the availability of the required fuel oil, this date could be deferred to 1 January 2025.

Uncertainty about the outcome of the 2018 review, together with the costs and short timeframe required for infrastructure upgrades to refineries, storage, ports and vessels if the 2020 date is confirmed, caused RESCON participants to voice concerns.

“How are we going to meet and comply with these regulations and how is it going to pan out? The simple answer is I don’t know. It’s going to be an interesting and game changing set of circumstances that we face in the very near future,” said Chris Hunt, director general at the UK Petroleum Industry Association.

Morten Dehn, general manager for the bunker department at MUR Shipping, agreed: “I have to say from a ship owner’s perspective, it is extremely frustrating.”

“There is so much uncertainty and we cannot get any clear answers. It is a gigantic game changer. Why are we having regulations that are clearly not going to be enforced?,” he said.

Whenever the new regulation comes into force, what is certain is that most ships that operate both in and outside the ECAs will need to operate on different fuel oils in order to comply with the new limits.

Captain Farhad Patel, general manager at Sharaf Shipping Agency, questioned whether, in the event of a recovery in shipping, there will be enough ECA-compliant fuel to go around.

“I personally believe in the next two years, once the shipping market bounces back, there will be a heavy demand for fuel. Where are we going to get that additional fuel oil from?,” he said.

Greater transparency in shipping finance

In what is arguably a less contentious change for the shipping industry’s regulatory climate, increasing pressure on the banking sector to de-risk its investment holdings is leading to a number of “permanent adjustments” in shipping finance, according to one influential banker.

Speaking at the 7th City of London Biennial Meeting at the IMO headquaters in London in November, Michael Parker, industry head for global shipping and logistics at Citi said that banks had been kicking the can down the road when it came to dealing with ship owners who breach industry regulations.

Such breaches include falsifying the seaworthiness of vessels, mis-describing cargoes and overloading.

“We have now reached the end of that proverbial road,” Parker said, adding that shipping finance was having to become more transparent in order to satisfy new levels of regulatory scrutiny.

“Shipping debt has long been mispriced for the risks being taken,” he observed, noting that many European lenders are abandoning or scaling back this part of their business as regulators seek to make banks safer after the 2008 global financial crisis.

“These [banks] are unlikely to return soon, if ever,” he said. “We will continue to see more focus by regulators and we will continue to see the shrinkage of those banks that have announced their scale backs.”

“I think the capacity of those banks to do more will be a function of the comfort of their regulators, the quality of their portfolios and their own broader addressing of capital issues as banks,” Parker told Reuters earlier this year.

Banks including France’s BNP Paribas, the UK’s Lloyds Banking Group and Germany’s HSH Nordbank are lending less to shipping as they shrink their balance sheets to reduce risk and tougher regulation requires them to hold more capital, making loans less profitable.

Parker, long-time head of Citi’s transport and logistics practice, oversaw the purchase of $2bn-worth of French bank Societe Generale’s $6bn portfolio in June 2012.

EU Labour laws

In mid-November, a proposal to include seafarers within the scope of five European Union (EU) labour law directives was presented by the European Commission (EC) as part of the EC’s better regulation policy.

If passed, the proposal would give boat crews the same information and consultation rights in all 28 EU member states as on-shore workers in cases of collective redundancies and transfers of undertakings.

“Offshore and onshore workers should have equal rights, in particular when it comes to such a fundamental right as information and consultation,” said Laszlo Andor, European Commissioner for employment, social affairs and inclusion, on presenting the proposal.

“This proposal would improve the living and working conditions of seafarers and so help to attract more young people to work in the maritime sector,” he added.

Although EU labour law generally applies to all workers in all sectors, until now certain labour directives allowed member states to exclude seafarers from their right to information and consultation. This has led to seafarers being treated differently in several member states.

The new proposal would amend five labour directives in order to give seafarers the same rights as their colleagues onshore.

As there are differences between the 28 member states in terms of the nature of their maritime sector and the extent they made use of the possibility to exclude seafarers, the proposal includes a transition period of five years for the member states.

The goal is to offer sufficient time to implement the proposal into the national legislation and practice.