London-based maritime lawyer and a ship broker, Mr. Adekanmi Abayomi, tells John Iwori that investments in ship building and recycling was key to driving Nigeria’s prosperity apart from oil and gas in the years ahead. He talks about other issues in the industry
Cabotage Fund and Proposed National Carrier
Iconsider the reported proposal of Nigeria’s Minister of Transportation, Mr. Rotimi Amaechi to divert the Cabotage Vessel Finance Fund (CVFF) into the establishment of a new national carrier highly contentious. As a matter of fact, it is illegal and inequitable. According to Section 42(2) of the Coastal and Inland Shipping (Cabotage Act 2003), the purposes of the fund shall be to promote the development of indigenous ship acquisition capacity by providing financial assistance to Nigerian operators in the domestic coastal shipping. Undoubtedly, Section 35(b) of the NIMASA Act empowers the minister to grant national carrier status to a shipping company if – the vessel owned by the company operates on international route, the deep sea and not in Nigerian coastal or inland waterways. It is clear from a combined reading of these two provisions that CVFF is absolutely and specifically meant to provide financial assistance to Nigerian operators in our domestic coastal shipping and not to operators on international route. Having a national carrier could be interesting but it will be unfair for Federal Government to use the sweat of these private ship owning companies and shipping companies to establish a national carrier. In as much as the idea of a public–private partnership national carrier looks captivating, I am of the view that we are not yet ripe for a national carrier because I do not see Nigerians benefiting from this arrangement. Our human capacity is still extremely poor in both bulk shipping operation and management. Seriously, how many Nigerian operators can trade in FFA market? How many Nigerian shipping companies are actively operating on international routes? If you ask me, having a national carrier now will only further consolidate foreign dominance in our shipping. Rather than investing in any national carrier, we should be investing in capacity building, increasing efficiency at the individual port level, adapting with current trade flows and increased ship sizes. Government should focus more on pressing issues like piracy and other maritime crimes at our sea. According to UN Security Council, Nigeria is losing about $1.5 billion monthly due to the vulnerability of our sea. More than 35 maritime crimes have been recorded in the first quarter of 2016 alone. To be factual, Nigerian Navy has been responsive but we need a robust rule of law, constructive governance structures and more hands in our coast guard to solve this problem.
Non-involvement of Nigerian shipping companies in trading in our wet market is not only as a result of NNPC’s unpatronising attitudes but, unfortunately, our fleet of bulk wet ships is nothing to write home about. This Cabotage Fund needs to be disbursed judiciously and quickly to save our industry from dying of extinction. Frankly, we are not only facing challenges with disbursement of Cabotage Fund and ships acquisition scheme but government programme designed to refurbish our old vessels is also a complete mess and government keeps voting millions of naira into it every year. Federal Government of Nigeria loses about 1.7 trillion naira every year for not transacting with indigenous ship-chandlers. Like I have said on several occasions, we need to adopt Government Guarantee for disbursement and management of Cabotage Fund. I had previously proposed Nigerian National Guarantee Fund (NNGF) that will power the loan scheme, provide credit risk and financial security to the shipping companies wanting to either buy or sell vessels thus, helping them to mitigate the financial risks involved in the investments.
State of Shipyards in Nigeria
Despite our maritime position in Africa, we can count the number of shipyards in Nigeria on the tip of our fingers and the few we have are not even comparable with what is obtainable in Senegal, South Africa and Cote d’lvoire. As Nigeria battles with scanty shipyards, China has over 90 established shipyards – building a wide range of vessels’ sizes and types and about 30 major new shipyards are warming up. South Africa, on her part, is not relenting in striving to be among the world’s top 35 maritime nations, she is taking the expansion of her shipyards very dutifully. South African Transnet National Ports Authority’s Chief Operation Officer – Phyllis Difeto said last year that a total of around 2billion South African rand (ZAR) will be spent over the next five years to refurbish existing ship repair facilities in South Africa, while an estimated 13 billion ZAR to 15 billion ZAR will be invested in creating new repair facilities at the South African ports.
Surely, both Niger Dock Nigeria Plc and Continental Shipyard are trying but Niger Dock is quite expensive for our ship owners and their delivery pace is slow while Continental Shipyard has limited space to serve the market. Starzs Limited has considerably done well in the area of its shipyard’s expansion at Onne but more efforts are still required in areas of expansion and technology.
Nigerian ship owners prefer to take their vessels to Dakar in Senegal for repair without being mindful of the distance and the cost of going there. Currently, Nigeria does not have a dry dock capable of maintaining large crude tankers. According to Tony Okonedo, spokesperson of Nigeria Liquefied Natural Gas Corporation (NLNG), large carriers sailing to and from Nigeria have to go to South Africa for dry-docking. This is a major drawback for Nigeria. However, it is commendable that Nigerian Navy is now ready to open up its dockyard for maximum utilisation.
Badagry Ship Repair and Maritime Engineering Company’s proposed $1.5billion Badagry Dockyard project is an investment at the right direction. Let me use this avenue to implore the management of BSMEC to structure a developmental programme for Nigerian trainees. BSMEC needs to emulate the good job Starzs Limited is doing in accommodating our trainees in its shipyard. Kudos must also be given to Nigeria Liquefied Natural Gas Company for prioritising capacity building in shipbuilding and repair.
Investment Opportunities, Shipbuilding and Recycling Sectors
Shipbuilding and recycling remain investment hubs of Nigerian state prosperity. It is time we started demonstrating strong political will towards local building of ships and recycling in a commercialised form and stop complaining about the floating price of crude oil. For how long are we going to allow the international cabal frustrating us with crude oil price? We should rather look inward and make things happen for ourselves. We stand a chance of revolutionalising our shipping industry with massive fleet of ships by investing in these sectors.
Like oil and gas, shipping is also a huge project. It requires the right quality of human capital to run the ports, the shipyards and the ships. This is widely considered as the most critical success factor. Looking inwardly to create employment is healthier to our economy than importing expatriates to run our ports, shipyards and ships.
Though, ocean shipping industry still faces tough time, especially the dry bulk market. Despite 12-year low new building prices offered by the shipyards, only four new building orders were registered in the first 12 weeks of 2016. But the recent reduction of bunker price has given the industry a glimmer of hope – bunker fuel price currently at around $150 – $200 per mt, a level not seen for nearly a decade. However, much of these gains from lower operating cost are being absorbed by conforming to low sulphur emission regulations. 2015 was a year that many in ocean shipping, except tanker owners, would love to forget quickly. Last year was actually the best year for tanker sector since 2008, Very Large Crude Carrier (VLCC) rates at the end of 2015 were short of $100,000 per day. While it was a dark year for dry bulk sector, it is not the case in others. New contracts for dry bulk ships have been on a path of decline in the last year and a half, currently culminating at a level that resembles a standstill. The four orders, made between January and March 2016, amounting to 267, 000 deadweight (DWT) is less than a tenth of the 2.8 million DWT placed by the end of February 2015.
As a matter of fact, the New Year is not off to a great start for the dry bulk shipping industry as the Baltic Dry Index (BDI) reaches a new all-time lowest. BDI dropped by five points in January 2016 reaching 468 points since its previous record low of 471 points posted in December 2015. Lowest level was recorded at 290 levels on 10th February 2016. All these could be worrisome including decline in new orders and the growing labour unrest in China, Japan and South Korea. But despite these challenges, the market still remains strong. According to Alphaliner, the weak market did not stop ship owners ordering more containerships in 2015. A total of 225 containerships was ordered with a total capacity of 2.34 million TEU.
Despite the low ordering of new dry bulk carriers, there is still a large order book for future deliveries. As it is evident from the fact that 13.2 million DWT of new tonnage was delivered in the first two months of 2016, a slight increase compared to last year’s 11.6 million DWT.
Reduction in dry bulk new building orders is a blessing to ship recycling market. 144 dry bulk ships have been scrapped so far this year, equivalent to 11.9 DWT. The fact that so much has been scrapped in the first two months of 2016 alone supports experts’ prediction that 2016 will be the busiest year for breaking of dry ships ever. Only in January and February 2016, 111 dry bulk ships were scrapped, equaling 9.3 million DWT. This represents a 42 per cent rise compared to the 6.6 million DWT scrapped in the two first months of 2015 and in the first half of the same year, a record of 30 million DWT was scrapped. Besides, containership scrapping is also anticipated to escalate in 2016. According to BIMCO’s Chief Shipping Analyst, Peter Sand, the increased recycling is taking place despite the fact that the scrap steel prices offered to owners wishing to sell their ship for recycling are run down by a low demand for scrap steel.
Ship recycling market in Nigeria looks buoyant and full of potentialities but unfortunately it is gravely crying for investments. The scattered ship wrecks, on our waterways, have created gaps for investment. According to the President of Association of Marine Engineers and Surveyors (AMES) in Nigeria, Charles Uwadia, Nigerian water is littered with large number of abandoned ships. I am of the opinion that instead of spending almost N25billion proposed by Lagos State to remove just the wrecks such sum can be invested in providing facilities to recycle the shipwrecks in Nigeria. Investing in this will save investors/ship owners a lot of money from towing shipwrecks abroad for recycling. It is also pertinent to state here that investors also stand to gain from our energetic and affordable labour which is a big factor in the business of recycling. Even Mr. Andrew Tan, Chief Executive of the Maritime and Ports Authority of Singapore described Nigeria as the new destination for future maritime investments. If we must key into this gap, we really need to step up our game because we have South Asian countries like Bangladesh, India and Pakistan to compete with. With the aim of making dirty profit, ship owners prefer to break their vessels on South Asian beaches because of their ship recycling sharp practices. Ship recycling yards in this axis are known to be non-compliant of fundamental labour rights, international waste trade law and other international environmental protection standards. However, more international attention is needed to solve these problems. Out of 768 large ocean-going vessels that were recycled in 2015, 469 were broken on the beaches of Pakistan, India and Bangladesh. And 79 per cent of ships sold for recycling in the first quarter of 2016 ended up on the same South Asian beaches. Having said these, if Nigeria can put her economies of scale and maritime positioning into perspective, we stand a chance in this industry.
The rate at which ships are being scrapped now also tends to increase newbuilds, though new building market has its own challenges. The Baltic and International Maritime Council (BIMCO) reported that international dry bulk shipowners are scrapping ships aged eighteen years or older, while some Chinese owners have scrapped ships that were even younger than that. Nineteen ships out of twenty-eight ships built between 1998 and 1999 got demolished between 2013 and 2015. 40 million of dry bulk tonnage is to be scrapped in 2016 and will be sold for recycling during 2016, making this year the busiest year on record for ship breaking and recycling. Also, Virtual shipbroker said that scrapping of old ships will continue nicely and by 2018-2019 we might see an upturn. As a matter fact, a rise in ship recycling has contributed significantly to BDI reaching a mark of 704 points as published in April 2016.
This year 2016 is a good time to invest if we can harness our finance appropriately with a credible business plan. According to Richard Greiner of Moore Stephens, increasing ship recycling in 2016 will not only restore the balance in dry bulk sector but it will also stop the world from mis-judging and blaming China’s insufficient demand for the new lows of the Baltic Dry Index.
It is not only the commencement of US shale gas boom and Russia’s Yamal LNG project that has prompted surging demand for LNG and LPG carriers but Iran’s 40 million metric tons of LNG a year is also a factor influencing a turnaround in the market of new LNG tankers. On this basis, there is nothing stopping Nigeria from capitalising on the partnership agreement she recently signed with Germany on effective supply of Liquefied Natural Gas (LNG) to consolidate Nigeria Liquefied Natural Gas Company’s perception of shipbuilding which centers on construction and maintenance of LNG and LPG tankers. This will help us to build up a stronger capacity to engage domestic ship owners in exporting our 22 million metric tons of LNG per year and ultimately position our chances of earning foreign exchange from both the products and freight rates.
In 2013, Daewoo Mangalia had 18 new orders worth around $1 billion. By the end of the first quarter of 2016, Daewoo Shipbuilding, Hyundai Heavy Industries and Samsung Heavy Industries have order book of 118 ships, 95 ships, 81 ships respectively. Also in 2013, Hanjin Heavy Industries and Construction Subic yard in the Philippines secured orders worth around $2 billion for 26 container vessels and 8 LPG vessels, while Hyundai’s Vinashin yard in Vietnam diversified from its focus on bulk carriers into new business areas such as tankers in the same 2013, with a 50 per cent increase in its order book. One interesting thing about shipbuilding market is that it serves all the markets; Tanker, Containership, Ro-Ro, Dry Bulk, Multipurpose etc. so it can easily switch to where there is a demand. An example is the sudden return of interest in Aframax crude carriers. No less than 57 new orders were placed in 2015. This was the highest number of Aframax crude oil tanker orders since 2006 when 101 were ordered.
Tanker market, being the most profitable sector of ocean shipping industry at the moment, is still expected to experience a further rise but IHS Maritime and Trade believes that the tanker industry could have already seen its peak. Thus, as long as demand for oil stays high and consumption increases in developing countries, the industry will remain healthy. With all the predictions, demand for crude oil tanker keeps suggesting massive investment in new building. According to BIMCO, crude oil tanker market is expected to grow stronger in 2016, with projected fleet increase of 4.3 per cent. Crude oil tanker new building market was busy throughout last year. Some 35 million DWT was ordered, out of which 66 were VLCCs. Again, significant growth of the tanker fleet was recorded at the beginning of the year as almost 40 new bunkers, bitumen and asphalt carriers came into service in January 2016. According to IHS, out of these new vessels which range from a few thousand tonnes to 300,000 DWT, eight crude oil tankers with a combined tonnage that make up two-thirds of the total were handed over in January this year. A total of 18 chemical tankers were delivered, while ten MR2 tankers, 486,000 DWT were handed over to their owners in March 2016.
Also, the commencement of sulphur emissions rules within certain geographic zones (Emissions Control Areas or ECAs) and the Energy Efficiency Design Index (EEDI) for new buildings to a 30 per cent reduction in emissions by 2025 are indications towards a low sulphur shipping industry in the future. It is significant to say that the introduction of global sulphur caps in 2012 has become a major driver in ship design. Therefore, the global 0.1percent sulphur content limit intends to also increase demand for new vessels
Positively, there are rooms for new players in this industry. Germany is also launching a comeback into shipbuilding. New private equity owner of Nordseewerke is strategically plotting return to shipbuilding sector. Nordseewerke is one of the biggest and oldest shipyards in Germany. It is pertinent to point out that shipbuilding industry has a changeable history. According to Martin Stopford in his book (Maritime Economics, 3rd edition) – a century ago, shipbuilding was dominated by Great Britain but gradually Continental Europe and Scandinavia squeezed Britain’s share down to 40 per cent and by 2005 Britain’s market share of shipping had fallen below two per cent and merchant shipbuilding was limited to very small ships. In the 1950s Japan overtook Europe, achieving a market share of 50% in 1969. South Korean shipbuilding output grew rapidly in the 1980s and this posed a challenge to Japan’s dominant position. China also joined the party by the early 1990s, achieving a 14 per cent market share in 2006. Today, South Korea, Japan and China are the Mecca of shipbuilding.
Despite Japanese shipbuilders’ edge in safety technology, their production capacity is still limited but South Korea, on the other hand, has the biggest orders but labour related problems are affecting their yards from functioning maximally and this impedes new LNG orders.
According to OECD 2013e, the shipbuilding industry is part of a sophisticated marine cluster with upstream and downstream links as well as connections to other clusters including logistics and electronics. The shipbuilding value chain is composed of many different activities from design to post-sales, and the high degree of modularity in the industry means that production can be fragmented across different production units and, indeed, countries, in a global value chain.
One important domestic link to shipbuilding is that of steel industry. Availability of steel is very perspicacious to ship construction. There is no doubt about the fact that Nigeria is capable of being one of the world largest producers of steel but local demand for Nigeria-made steel is still very low and this is affecting the growth of our steel industry. The Manufacturers Association of Nigeria (MAN) lately said that many steel plants in Nigeria are currently operating below 30 per cent of their production capacity. MAN’s Director General, Mr. Remi Ogunmefun said four companies have shut down and some others are on the verge of closing shops as a result of low patronage. In the same vein, the Group Executive Director, African Industries, Mr. Uche Iwuamadi, said steel companies are now operating two weeks per month and are closed for the remaining two weeks due to lack of demand. One of the mega ways in which our steel can be patronised locally is through shipbuilding because it is a huge consumer of steel. According to KOSA (2013), shipbuilding has been a major driver of steel consumption in Korea. As much as 77.6 per cent of Korean steel plate shipment went for shipbuilding.
Investing in shipbuilding also tends to resuscitate Nigerian marine equipment and ship spare parts industries. Around 80 per cent of Korea’s marine equipment output is produced by members of the Korea Marine Equipment Association. KOMEA companies recorded production worth $11.9 billion in 2011 and still growing. Again, due to Algeria’s heavy investments in port capacity and skills development, Algeria has jumped straight into the 10 fastest-growing ship-parts trading nations. Through her proximity to the European Union, soaring energy trade and developing relations with China have also helped.
The labour unrest in China, Japan and South Korea has made a lot of shipbuilders to start strategising on how to expand their production sites to other labour-friendly countries. As a matter of fact, China is not only expanding production sites outside her shores but also exporting money into other economies. It takes a smart nation to key into this market gap. Negotiating a strategic partnership with these nations to expand production sites in Nigeria will not only afford millions of Nigerians the opportunity to acquire modern and technical skills of building ships but this will transform the level of our fleet. Recently, such a strategic relationship was cemented in Saudi Arabia. Saudi Arabia’s Saudi Aramco and South Korean shipbuilding conglomerate – Hyundai Heavy Industries (HHI) signed an MOU in November, 2015 to develop shipyard in Saudi Arabia. This comes with a comprehensive business cooperation framework in areas such as engineering, procurement, construction (EPC), downstream and development of a casting and facility. According to the President/CEO of Saudi Aramco, Amin H. Nasser – the partnership will add greater value to the Saudi Arabia’s economy, boost localisation efforts and help to create jobs for Saudi nationals.
Japan and South Korea are doing brilliantly in shipbuilding as a result of a planned industrial programme and a robust subsidy arrangement. Nigeria is endowed with every ingredient of a maritime nation – largest market in Africa, natural resources, human capital with abundant young and energetic workforce.
Cost of labour has always been one of the ruling factors in the business of shipbuilding. The fact that the cost of living in some countries is considerably lower than in others and so they can produce certain items at a much lower cost is not far from how shipbuilding moved away from Northern Europe and USA to Asia. Modishly, Japan, South Korea and China capitalised on this and were able to industrialise their shipbuilding with the help of cheap labour, until recently that their workers began to seek higher wages. The availability of enterprising labour forces, strategic planning coupled with loans contributed to their successes in shipbuilding. Nigeria should not hesitate to tap into this gap created by the labour unrest and turn it into our commercial advantage. According to Eme Essien-Lore, the Country Manager for Nigeria, International Finance Corporation, the dynamism of our population is that it is relatively young and it can be regarded as a working population.
Shipbuilding is one of the major industries we should invest in especially when other oil producing nations are intently planning towards post-oil era. Saudi Arabia is presently planning to invest $2 trillion for a post-oil economy. Nigeria stands to gain massive revenue from shipping if she capitalises on her strength in international trade, huge market and labour cost. Nigeria is still a middle income nation with a per capita income of $2,640 while South Korea and China are $27,000 and $8,000 respectively. Mr. Innocent Chuwuma, Group Chairman/CEO of Innoson Group, said one great advantage he has over his international competitors is that the cost of labour in Nigeria is relatively cheap.
Our relationship with shipping and trade is tremendous. NPA General Manager – Public Affairs, Captain Emmanuel Iheanacho, reported that in the first quarter of 2015 alone, the total of 5,139 oceans going vessels called at Nigerian Ports. Definitely, there is an immediate market for Nigerian shipbuilding industry especially in crude tanker and LNG tanker segments. Nigeria has the potentiality to join the league of shipbuilding nations. Our maritime domain is not only quite vast to strategically accommodate modern dry docks, yards and large vessels but we are also blessed with working population, access to funds, raw material such as steel and active private sector.