Marine Newsletter

OBAMA RANSOM ORDER RAISES CREW SAFETY FEARS

            The US is expected to come under pressure at the International Maritime Organization’s maritime safety committee meeting next month to explain in detail moves by the Obama administration to crack down on ransom payments to pirates.  International Chamber of Shipping marine director Peter Hinchliffe said several countries had already indicated their disquiet at the move because of the potential impact on seafarers currently being held or who were subsequently taken hostage.  He did not identify the countries by name but said they were jurisdictions whose nationals had already been held hostage by Somali pirates or where there was concern about the impact on seafarers’ safety.  This could include the Philippines, India and Thailand.  Mr. Hinchliffe said similar unease voiced by some countries had stopped the US from seeking approval through United Nations to outlaw ransom payments.  He said countries would not support the US proposal either because so many seafarers were involved or because there was no direct evidence that piracy was linked to terrorism.  Mr. Hinchliffe thought the US had left the wording of the executive order “deliberately vague” to cause uncertainty about whether companies would be breaking the law if ransoms were paid.  Insurers have felt at particular risk from the executive order and Mr. Hinchliffe said the ICS had held one meeting with representatives from the London insurance market.  But he added that ultimately “it was a government-to-government issue”, which was why it was likely to be raised at the security committee meeting that starts in London on May 12. Measures to enhance maritime security are already on the agenda.  (Lloyd’s List, 4/28/2010.)

RIG OWNERS TO PAY THE PRICE FOR BLAST

            Owners of offshore drilling rigs are facing potentially higher insurance premiums and additional safety procedures in the aftermath of last week’s deadly rig disaster in the US Gulf of Mexico.  The world’s largest rig owner Transocean lost its $560m Deepwater Horizon semi-submersible rig when a suspected well blowout led to an explosion that killed 11 offshore workers and eventually led to the sinking of the rig.  The well continued to flow oil from the seafloor into the US Gulf this week at a rate of around 1,000 barrels per day, causing a slick 30 miles off the Louisiana coast as a flotilla of offshore vessels tried to contain the spill.  British oil major BP, which hired the rig to drill the Macondo exploration well in Mississippi Canyon block 252, moved to contain the spill using 69 vessels and a third of the world’s oil dispersants to minimise the damage, while investigations into the cause of the accident began.  While this work gets under way, the national and state authorities are questioning how the deadliest offshore disaster in the US since 1968 could have happened on a rig that industry insiders described as a “first-class unit with a first-class operator”.  The Department of the Interior and the Department of Homeland Security started a joint inquiry into the explosion and sinking this week. Independently, the US House of Representatives committee on energy and the Senate committee on energy and natural resources have begun investigations.  (Lloyd’s List, 4/29/2010.)

TRADE GOALS FACE DOUBTS

            President Barack Obama’s goal of doubling U.S. exports over the next five years will be difficult to meet, business leaders and economists say, because of the lack of momentum on demolishing trade barriers and the shift by more American companies toward producing overseas.  American firms say stronger action by the federal government could substantially boost prospects for U.S. exports.  Christina Romer, chair of the White House Council of Economic Advisers, calls the administration’s export target “an ambitious but reasonable goal,” she added.  We are just starting the concrete steps in terms of what we can do to lower the fixed costs associated with exporting through trade promotion and commercial diplomacy.”  White House officials are counting on trade and business investment to fuel the economic recovery because American consumers aren’t likely to resume their free-spending ways of the past decade.  But the shift by more U.S. companies toward producing goods overseas is one of the factors that makes doubling exports tougher.  American businesses say they must contend with a long list of disadvantages, from higher tax rates than in many countries to rising costs for benefits such as health care. U.S. producers also say an artificially low Chinese currency makes Chinese goods especially cheap in foreign markets and therefore tougher competitors for American goods.  (The Wall Street Journal, 4/29/2010.)

CARGO THEFT

            A sophisticated gang of thieves made off with $76 million worth of prescription drugs from an Eli Lilly and Co. warehouse on March 14 in what is considered the largest known cargo theft in U.S. history.  Determining the extent of cargo theft is difficult because there is no consistent method for reporting such crime or a single repository for collecting incident reports.  The insurance industry, security firms and different law enforcement agencies all compile their own fragmented information, and estimates on the total economic impact of cargo theft widely vary from $5 billion to $40 billion.  Traditionally, the highest rate of theft comes from truck stops when trucks are left unattended.  Security professionals attribute the rise in highway and warehouse thefts to the recession, greater realization among criminals that cargo is a soft target, and the growing value of truck shipments.  Criminals are looking for anything that has a street value and can be sold.  The economic downturn has encouraged people to steal things they can quickly unload and created a bigger pool of those looking to get merchandise on the cheap.  Stolen merchandise often makes its way to online retailers, where consumers can get great deals but have no way of verifying whether the sellers are legitimate.  The hardest hit commodity sectors are electronics, tobacco, food and beverage, building supplies, and pharmaceuticals, all of which are targeted by criminal gangs because of their high resale value.  Criminals like to operate on weekends, when loads typically are left idle in a truck yard, distribution center lot or truck stop and fewer people are around.  Areas with high cargo throughput and warehouse concentrations, such as Los Angeles, Miami, Dallas-Fort Worth, Atlanta, Memphis, Indianapolis, Louisville and the I-95 corridor in New Jersey, are most prone to cargo theft.  Getting a firm handle on the extent of the problem is complicated by the fact that until recently there was no specific category in the FBI’s criminal statistics for cargo theft.  Local police may report stolen cargo as burglary, auto theft, larceny, robbery or petty theft.  The National Cargo Theft Task Force, created after 9/11 by private sector groups and law enforcement, successfully lobbied for the 2005 Patriot Act reauthorization to include cargo theft as part of the Uniform Crime Report database, but the FBI has been slow to implement the change. In January, it said it would begin accepting test filings of the new data element.  And while the FBI is mandated to collect cargo theft data, state and local law enforcement agencies

are not required to report it to the national database.  The FBI is encouraging local law enforcement agencies to update their software to incorporate the new data element, a process that could take up to two years.  (American Shipper, 5/2010.)

FDA URGES INDUSTRY TO TAKE ADDITIONAL STEPS TO PREVENT CARGO THEFT

            The U.S. Food and Drug Administration sent a letter to companies and a wide range of other key stakeholders detailing the agency’s concern over cargo and warehouse thefts of FDA-regulated products.  The products stolen have included prescription and over-the counter medicines, medical devices, and infant formula.  In its letter, the FDA seeks to: raise awareness among industry about each firm’s responsibility to review and strengthen their security practices; inform industry of the actions the FDA will take when the agency becomes aware of a large-scale theft, and outlines steps that firms should take; emphasize the importance of notifying and informing members of the supply chain and the public after thefts occur.  The FDA believes every company should have a clear plan developed on how to respond to these incidents, since swift action is essential.  The agency believes prevention of cargo theft is critical.  To help achieve that goal, the FDA will continue to work closely with manufacturers and wholesalers to find ways to better secure the nation’s supply chain, which protects the public health.  (http://www.fda.gov, 4/28/2010.)

CGL POLICY’S LHWCA EXCLUSION INAPPLICABLE

            Bayou Steel Corporation, et al. v. Evanston, 2009 WL 3753538 (5th Cir. 11/10/09).  A steel manufacturer arranged for the transportation of certain steel bundles by barge from Louisiana to Illinois, where an employee of the stevedoring company was badly injured during efforts to unload the cargo. He sued the steel manufacturer and its insurers. The steel manufacturer’s primary wharfinger insurer accepted coverage and defense but the wharfinger’s excess insurer, the primary general liability insurer and the excess general liability insurer all initially denied coverage.  Eventually the excess wharfinger insurer agreed to fund a substantial portion of the settlement of the employee’s claims and took an assignment and subrogation of the insured’s claims against the other two insurers. Their denial of coverage had been based upon an exclusion within the primary policy for “claims made or suits brought against you or any indemnitee pursuant to the United States Longshoreman & Harbor Workers’ Compensation Act.”  The coverage issue was submitted on cross-motions for summary judgment.  The assured and the excess wharfinger insurer contended that the employee’s claim was not brought “pursuant to” the LHWCA, but rather was a claim “grounded in negligence under the general maritime law.”  The primary and excess general liability insurers countered that the plaintiff’s claim could only have been brought under Section 905(b) or Section 933 of the LHWCA and in this situation, the employee had chosen not to pursue a 905(b) claim, only a Section 933 claim.  The Fifth Circuit first distinguished an earlier Fifth Circuit decision raised by the Defendants, Beaumont Rice Mill, Inc. v. Mid-American Indemnity Insurance Co., 938 F.2d 950 (5th Cir. 1992), as the exclusion in that matter dealt with any losses arising out of injuries “covered under” the United States Longshore & Harbor Workers’ Compensation Act, not “pursuant to” as in the case at bar.  The Fifth Circuit also found that the employee’s claim was actually based upon the general maritime law and did not arise under the LHWCA. More specifically, the Court held that Section 904 of the LHWCA “makes it clear that the longshoreman’s general maritime law claim against third parties is unaffected by Section 904,” as that section simply “preserves” all claims

against third parties. For these reasons the exclusion did not apply.  The Court then concluded that the excess wharfinger insurer was properly subrogated under Louisiana law, and could therefore recover from the other two insurers.  (MLA Committee on Marine Insurance and General Average, Spring Newsletter.)

CALL FOR MORE INVESTMENT IN AFRICAN PORTS

            Speakers at a recent seminar in Cairo focusing on public-private partnerships called for greater levels of private investment in African ports.  Infrastructure Consortium for Africa co-ordinator Alex Rugamba said: “Africa’s ports system needs to be enhanced in order to accommodate growing trade volumes and provide better regional transport links.  The objective will be to reduce the current high costs and delays in the port system.  The ICA will continue focusing on facilitating infrastructure financing in Africa, including private-sector investment.”  However, APM Terminals’ business development director for Africa, Middle East and India region Thomas Hougaard argued that the operational expertise private operators brought, as well as their finance, was equally important.  “Once a safe and secure working environment is achieved, operational advancements can be pursued, which means increased capacity through heightened productivity levels without the need for expensive construction,” he said.  (Lloyd’s List, 4/28/2010.)

IMO – ANNUAL REPORT 2009 ON PIRACY

            The report summarizes and analyzes acts of piracy and armed robbery reported to the Organization in 2009.  The total number of reported incidents was 406, an increase of 106 (24.6%) over the figure for 2008.  The area’s most affected in 2009 were East Africa and the Far East, in particular the South China Sea, West Africa, South America and the Caribbean and the Indian Ocean.  The total number of incident of piracy and armed robbery against ships, reported to have occurred or to have been attempted from 1984 to the end of December 2008, has risen to 5,227.  (Wiggin and Dana.)

UN MULLS SPECIAL COURT FOR PIRACY PROSECUTIONS

            A meeting of the UN Security Council has adopted a Russian proposal to consider the creation of a new regional court to prosecute pirates attacking shipping off the Somali coast.  A unanimous vote of the 15 Security Council members called on UN secretary-general Ban Ki-moon to report within three months on options for a “regional tribunal or an international tribunal and corresponding imprisonment arrangements.”  This move follows Kenya’s indication that it will cease prosecuting alleged pirates detained under earlier agreements with several countries, including the US, China and EU countries, whose navies are patrolling the area off the Somali coast.  The scale of the task and associated cost is proving a major burden on the country’s justice system and Kenya claimed that it has not received promised funds to support this process, though it remains unclear whether it will refuse to host further prosecutions altogether.  (Lloyd’s List, 4/28/2010.)

CONTAINER TRENDS LAID BARE

            First, the good news. In summary, the recovery is under way and is sustainable. The bad news is that the boom days are over and the recovery will be slow and lacking the double digit container volume growth that marked the euphoric years prior to 2008.  The key speakers at the Birmingham NEC Exhibition Centre were two longstanding maritime data analysts: Mike Garratt of MDS Transmodal and Ben Hackett of Hackett Associates.  Their central argument is that the traditional forecasting tool, using global gross domestic product to predict container volumes, is now rather blunt and that there exist sharper measuring instruments.  In his presentation, Mr. Garratt said that in the 13 year period between 1996 and 2009 global trade volumes recorded 3.8% annual compound growth in tonnages compared with a 3% figure for global GDP. Overall, for that same 13 years, GDP grew 46% while container traffic doubled, with the “China effect” a main contributory factor.  Mr. Hackett, in a presentation entitled ‘The illusionary effect of economic statistics on freight transportation’, used the 2003-2009 period for the US and Germany to indicate the apparent lack of statistical linkage between GDP and teu.  It was suggested from the podium that a better method may now be to follow the historical trend of country by country and country by commodity volumes to forecast future volumes. Add to that other matrices, such as the value of house prices, which indicate the ability/likelihood of consumers to borrow more money in order to feed their spending habits.  Mr. Hackett also drew attention to the importance of foreign direct investment as a handy reckoner.  “One of the things to look for in explaining why China was booming in exports was foreign direct investment,” he said.  “Most economists had missed this huge surge of FDI into China in the mid-1990s.  Typically it takes three to four years after an investment is announced, before anything is produced.  (Lloyd’s List, 4/30/2010.)

DESIGN TEAMS HOLD KEY

            Establishes shipyards with larger research and development capabilities will gain most from increased future demand for fuel-efficient vessels once the newbuilding appetite returns.  Seoul-based Mirea Asset Management has reported that yards with the ability to quickly adapt to meet the expected demand for fuel-efficient tonnage are likely to flourish.  The report focuses primarily on the potential of five of Korea’s main shipyards: Hyundai Heavy Industries; Hyundai Mipo Dockyard; Daewoo Shipbuilding and Marine Engineering; Samsung Heavy Industries and Hanjin Heavy Industries.  Despite the political stalling at the International Maritime Organization and with the debates of other UN bodies, particularly the UN Framework Convention on Climate Change, the report author, analyst Sokje Lee, believes the drive to build energy-efficient ships will begin within the next three years.  Market pressures will force less energy-efficient tonnage out of the market and lead to a permanent change in how new vessels are contracted, he has predicted.  A steady climb in fuel prices, the development of some kind of market-based measure to reduce the carbon emissions of ships and the IMO’s work on a potentially mandatory energy efficiency design index will also see fuel efficiency become a permanent feature in ship design, something that will substantially change the shipbuilding market, Mr. Lee said.  (Lloyd’s List, 4/21/2010.)