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Marcon International, Inc. Ship Sales & Charters Consultants

Inflation and the Marine Industry

By John Braden, Broker

Marinelog Tugs & Barges Conference & Expo

May 2008

Marcon International, Inc. Vessels and Barges for Sale or Charter Worldwide

www.marcon.com

P.O. Box 1170, 9 NW Front Street, Suite 201 Coupeville, WA 98239 USA. Telephone (360) 678 8880 Fax (360) 678-8890 E Mail: [email protected] http://www.marcon.com

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Inflation and the Marine Industry We have all heard the reports of rising consumer inflation, with “core” inflation (excluding food and energy) remaining tame. Moderate “core” inflation has allowed the US Federal Reserve to justify substantially reducing short-term interest rates within the past 9 months in order to ease the consumer credit crunch and stave off recession (many may disagree with the Fed’s stance). Although the marine industry relies on the health of the overall economy, it does not operate directly in sync with the general economy. The marine industry is at times influenced more by prices for energy and commodities, as well as trade and shipping volumes. Contrary to the current US economy, the marine sector does not seem to be nearing a recession. Although certain sectors are slowing down, the overall industry remains healthy with high utilization and day rates. Some of the current disconnect between our industry and that of the overall economy can be explained by strong oil and commodity prices in balance helping us, yet hurting the general economy. We hear more complaints about inflation than a slowdown. The high level of investment within the marine sector, coupled with high commodity prices, has produced greater inflation pressures within the marine industry compared to the general economy. Although there are some fears within the international maritime community of overbuilding or a pull back in financing, the US domestic marine industry remains stable. Of course, if the slowdown or recession in the general economy is severe, it will eventually impact the marine sector due to lower trade volumes and decreased demand for energy and other commodities. Over the last 4 years or so, inflation has dramatically impacted prices for newbuildings, second-hand vessels and barges, crewing costs, and fuel costs. Investment and availability of financing within the marine sector continues strong. The culmination of a strong oilfield market (kicked off by Hurricane Katrina), a move to higher tech vessels in various sectors, the regulatory replacement of single-hulls, the impact of new crewing rules, along with other factors, have come together to create the situation we face of high inflation. This is not limited to the US, but is also affecting companies around the globe.

Newbuilding…. Demand for newbuildings worldwide has fueled unprecedented inflation in prices for engines, thrusters, steel, paint, wiring, and all the other products needed to construct a vessel or barge. Yards in the US are busy building azimuth drive tugs, inland river push boats, deepwater OSVs and DSVs, double-hull tank barges and inland river hopper barges. Yards worldwide are busy building similar tonnage in addition to an all time high number of orders for various size tankers, bulk carriers and container ships. This building frenzy has helped to create a global surge in demand for steel, machinery, and all the basic materials needed to construct vessels and barges. Shipyard capacity and experienced labor are also in short supply, further driving up newbuild costs. In general, prices in the US have escalated

Marcon International, Inc. Inflation and the Marine Industry – May 2008

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50% or more over the last 3 to 4 years. “Rules of thumb” for estimating newbuild costs that had been good for years have been thrown out the window. Tugs built by US or European yards prior to 2002/2003 could be “ballpark” estimated to cost about USD 1,000+/- per BHP depending on their final outfitting (i.e. a basic 4,000 BHP shipdocking tug would run around USD 4m+/-). This figure has recently climbed from USD 1,500 to 1,600 to 1,700 and above for US yards. Turkish yards that delivered 5,000 BHP / 65 MT BP azimuth tugs at around USD 6,800,000 (about USD 1,360 per BHP) in 2005 are now charging around USD 10,500,000 (USD 2,100 per BHP) for the same vessels. This amounts to a 54% increase in price, due mainly to strong demand, but also the devaluation of the US Dollar vs. the Euro. In Euro terms, the price at Turkish yards went up about 28%. Bear in mind, these Turkish yards (along with most yards worldwide) are usually building vessels with US or European machinery. Regardless of the location of the yard, they are typically building designs with the same engine and thruster makers. One European owner building in Southeast Asia is seeing prices for their new 60 ton bollard pull shipdocking tugs approx. 35% higher than paid in 2004/2005. His main engine and thruster prices increased about 8 – 12% per annum plus there are considerable increases in steel, winches and nautical equipment. It all adds up to a higher end-cost for the owner/operator, but the demand for tugs, barges and OSVs is still high, which currently covers the higher initial cost. He expects, and we agree, that newbuilding tug prices will continue to remain high and increase for at least another five years as the demand continues at a faster pace than shipyards (and diesel engine manufacturers) can supply.

Double-hull tank barges have seen similar price inflation. Prices for newbuild ocean-going, non-heated, clean product barges with simple systems could be estimated at about USD 115 per barrel in 2001 (for a medium size barge) based on construction in the US. This same barge would now cost around USD 175 to 200 per barrel or more (an increase of about 50 to 70% over seven years with the majority of the increase coming in the last 3 or 4 years). Unless demand slows or steel and materials costs decrease by a substantial amount, it seems the best scenario is a leveling off of prices. Most yards are now only signing building contracts that fix the cost of steel, with any cost over that level to be paid by the buyer.

Recent updates from various foreign yards indicate that engines and azimuthing drive unit lead-times are the main culprit holding back speculative building with manufacturers having lead-times of two to three years and thus further driving up prices that seem to go up every day. One Chinese shipyard just advised that they still have the capacity to build a 65mt bollard pull azimuthing tug within 10 months, but due to CAT and Schottel delivery times, the earliest they can deliver a finished boat is mid-2010. If a buyer already has the machinery, they can still provide a 10 month delivery, but few buyers have the equipment. We have heard of at least one yard that ordered dozens of engine and thruster sets in anticipation of the tight market and demand for newbuilds. A “Gray Market” has developed for these ordered, but


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uncommitted, machinery packages at prices much higher than available direct from the machinery makers, but with more reasonable delivery times. Caterpillar Inc. recorded their fifth straight year of record sales and revenues and the fourth consecutive year of record profit (in 2007). North American sales for marine applications increased 30%, with increased demand for workboats, commercial oceangoing vessels and cruise ships. In Asia Pacific sales for marine applications increased 47%, with continued strong demand for workboat and offshore shipbuilding. Large diesel demand grew in the offshore and general cargo applications. In 2008, Caterpillar expects another record year with sales and revenues increasing 5 to 10%. Caterpillar is forecasting 2008 to be the sixth consecutive year of record sales and revenues driven by strength in the economies outside North America, strong worldwide engine demand and a slight rebound in on-highway truck engine sales. 2008 economic growth in most of the world outside the US is expected to be slightly slower than ‘07. CAT expects growth in the US to remain weak, with recession a definite threat. Marine demand, though, should benefit from increased world trade and favorable freight rates with Shipyards are already contracting for ‘09 and later berths. The capacity to increase production of the large 3500 series engines is expected to increase in ‘08.

In their April 30, 2008 earnings report, Cummins Inc. reported significantly higher revenues and net income for the first quarter of 2008. Cummins showed strength across all its business segments, both in the US and in key international markets. Particularly strong performance in international markets - which accounted for 57 percent of Cummins’ sales in the quarter - helped offset rising commodity prices and sluggishness in some US consumer-related markets. Cummins’ engine segment sales of USD 2.21 billion were 25 percent higher than USD 1.77 billion for the same period in 2007. In addition to sales gains in the heavy- and medium-duty markets, sales to the commercial marine engine market rose 77 percent from 2007.

According to Metal Bulletin Research of London, who regularly analyzes global metal markets, steel markets in the US remain buoyant despite worries about the current economic predicament. Market supply continues to tighten as both imports and inventories remain low; and this has given producers of some steel products room to raise prices. Dongkuk Steel of Korea announced a price hike of 23% in April ‘08 for steel plate due to their rising costs of slab, the raw material for producing thick steel plate used in shipbuilding. Posco (also of Korea) increase its prices by 11% in February ‘08 and another 20% in April 2008 for thick steel plate. In Europe, like the US,

Steel Mill Products - Producer Price Index

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the financial crisis has yet to make a significant impact on steel markets and a tight market is adding strength to prices. Chinese exports surged in the final quarter of 2007, as producers and buyers sought to close deals before the change in export taxes. As a result domestic prices have risen in January as domestic supply has tightened, providing welcome relief to producers. Overall, demand has been strong enough in the first quarter of ’08 for producers to pass on higher raw material and energy costs through higher prices. Nevertheless, the threat posed by the worsening economic environment should not be understated.

Second-hand Vessels… . In order to understand second-hand vessel and barge price inflation, we need to consider the marine industry’s history. Even with all the current newbuilding activity, we still have an average US fleet age of around 34 to 36 years. Up until the 1980s, many owners regularly put their equipment on the market for sale as it reached 15 to 20 years of age, opting for newer or newly built vessels. This created a fairly regular cycle of renewing towing and OSV fleets. But during the 1970s, the overly optimistic outlook for the market created a construction boom that resulted in an overabundance of tugs, OSVs and barges not

only in the United States but also abroad. Then came the 1980s, when the oversupply of tonnage drove rates so low that many operators could not survive. Second-hand prices plummeted, as out of work vessels were sold at liquidation prices. As a result of the 1980’s downturn, the building of new vessels and barges came to a virtual standstill. From 1975 through 1982 the marine industry in the US built an average of 59 harbor, anchor handling, integrated and conventional ocean tugs per year – plus probably close to 150 inland river towboats and smaller tugs. This peaked in 1981 when over 400 towing vessels of various types were built. The number of ocean tugs constructed in the US dropped to 22 in 1983 with only 7 built in 1984. There was no demand, so there was no need for a supply of newbuilding vessels and barges. Construction of tugs in the US remained at this low level up until about 1989-90 when 14 tugs were on order as of January 1990. Foreign operators also went through a similar, although, not as dramatic, downturn.

U.S. FleetNumber of Tugs/Towboats By Year Built

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Credit: US Coast Guard Database 01-2008


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Today we are still affected by the boom and bust of the 1970s and 1980s. The demand /supply equation finally reached balance around the late 1980s, followed by further demand growth which started the overall up trend in second-hand prices. There have been fluctuations along the way over the last 20 years, but these have only impacted certain sectors, rather than across the board. As the market recovered, most operators (who survived the ‘80s) were reluctant to move quickly to meet new demand. Rather than building new, they repowered and/or rebuilt older boats or converted existing barges. When they did build new, it was generally one vessel or barge at a time, rather than a series. Many boats and barges were built with alternate trades in mind. The general caution of the market up until the late 1990s proved to be a restorative process by which the industry renewed its long-term outlook. Even with the downturn in the late 1990s in the oilfield market, although difficult for many, few operators went under. It hasn’t been until the last 10 years or so that

operators have again focused on new construction. Although there have been many tugs and barges built since the late 1990s, they have typically been substantially different designs than the equipment they replaced. Azimuth drive tugs have replaced many twin screw shipdocking tugs due to demand for greater maneuverability and bollard pull. Double-hull barges have replaced single-hulls due to new regulations. Although the older second-hand vessels and barges where displaced by newbuilds, they have readily found new jobs within the US and foreign markets.

25 Largest Sea-Going Tug Fleets According to HP Sorted By Age

Ranking Flag Total BHP % Worldwide Fleet No. Tugs % Worldwide Fleet Avg. BHP Avg. Age

1 United States 4,237,482 13.99% 1,446 11.58% 2,930 34

2 Indonesia 2,288,828 7.56% 1,445 11.57% 1,584 15

3 Japan 2,337,627 7.72% 817 6.54% 2,861 17

4 Singapore 1,596,986 5.27% 662 5.30% 2,412 8

5 Unknown 679,320 2.24% 477 3.82% 1,424 33

6 Korea, South 1,053,940 3.48% 419 3.36% 2,515 23

7 Malaysia 622,359 2.06% 328 2.63% 1,897 12

8 Panama 1,072,541 3.54% 325 2.60% 3,300 29

9 Russia 793,923 2.62% 323 2.59% 2,458 24

10 Italy 841,199 2.78% 312 2.50% 2,696 27

11 India 630,330 2.08% 273 2.19% 2,388 18

12 China, PRC 815,657 2.69% 270 2.16% 3,021 24

13 United Kingdom 651,306 2.15% 243 1.95% 2,691 23

14 Spain 594,122 1.96% 201 1.61% 2,956 24

15 Canada 476,079 1.57% 191 1.53% 2,493 39

16 Australia 530,494 1.75% 174 1.39% 3,049 21

17 Iran 290,678 0.96% 154 1.23% 1,888 26

18 United Arab Emirates 384,137 1.27% 150 1.20% 2,561 20

19 Venezuela 284,643 0.94% 146 1.17% 1,950 26

20 Turkey 316,367 1.04% 145 1.16% 2,182 23

21 Mexico 442,349 1.46% 144 1.15% 3,072 25

22 Brazil 377,522 1.25% 140 1.12% 2,736 24

23 Saudi Arabia 400,806 1.32% 132 1.06% 3,036 21

24 Netherlands 330,567 1.09% 130 1.04% 2,543 23

25 St Vincent & The Grenadines 365,046 1.21% 123 0.99% 2,968 20


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We updated the Marcon Average Tug Sale Prices Per BHP table (see below) for this Conference to compare dollars per horsepower paid for all of the tugs sold by Marcon since 2000. This table includes US and foreign boats, all ages, as well as various designs (i.e. z-drives to single screws). It does not include dedicated ATBs (unless the tugs can easily work separate from their barges). The table reflects our impression of the market. Prices made a significant jump from 2005 to 2006, advanced further from 2006 through 2007, and have now reached a plateau. Our price/BHP for 2008 is higher, but the average age is significantly lower. The 2008 numbers includes a newbuild 3,300 BHP Turkish ASD, a 90s built 4,000BHP Japanese ASD, and a fairly new Chinese built 3,200 BHP twin screw, which reduced the average age. Also included are three other older medium to higher BHP tugs. We excluded two 5,750 BHP single screw ATBs sold this year.

Marcon Average Tug Sale Prices Per BHP

2000 2001 2002 2003 2004 2005 2006 2007 2008

Actual Sale Price / BHP $352 $222 $202 $296 $372 $340 $502 $645 $774

Average Age 33 37 36 33 30 36 36 29 21

We believe the strong up-trend in second-hand prices over the last few years has reached or is very close to reaching a plateau. Although there remains a scarcity of good equipment for sale, prices have leveled off during the last 6 to 12 months. In order to analyze this further, we’ll look at select second-hand markets.

Conventional twin screw tugs in the 4,000 to 6,000 BHP range continue to be in high demand. With the growth in demand for ATBs, both coastwise and on the Great Lakes, there is high demand for boats to mate with barges. Some of the barges may be newbuilds and others may be converted Lakers. The 6,500HP, 150’ “Pete” (ex-Mr. Pete) sold by McAllister to K-Sea last year through Marcon is an example. The desire to obtain better fuel consumption and lower operating costs will continue to create a market for this type tug to push large dry bulk and tank barges in the Great Lakes and coastwise. The demand for ATBs and a good general towing market should help maintain the second-hand values of this class of tug.

Mid to lower horsepower range tugs in selected trades or geographic areas could suffer more from a deep and long-lasting slowdown in economic growth or recession. We do not see a 1980s style downturn on the horizon. Utilization may slip and with a lower utilization there could be a softening in Fair Market Values from the present plateau. There are such a low number of decent tugs available for sale in this group; many would have to come on the market at once to significantly impact prices. Some owners may


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decide that it is a good time to try and sell select assets at a profit while still near the peak of the market, while others may decide it more prudent to hold onto the tug (or barge) due to the difficulty and high cost of finding or building a replacement in case the vessel is needed in the future. The market is still tight and there are no bargains to be found. Second-hand barges are a mixed bag. Most large single-hull petroleum barges are already legally obsolete in the US. Their smaller counterparts will follow the same path up until 2015. We have recently had prices for these barges increasing due to foreign demand for clean product lightering. Certain areas, such as West Africa, continue to allow large single-hulls, so there has been a relatively strong demand for these barges. Smaller single-hulls are slowly coming on the second-hand market and finding homes either in foreign tank service or US domestic deck service.

Ocean and coastal deck barges continue to be in short supply and high demand. As of the writing of this article, we have zero US flag ocean deck barges over 250’ “officially” for sale on the US West Coast (the last being sold to Canadians during Fall 2007 – the exception is one large house barge that could be converted to deck service). Even if there is a softening in demand for ocean/coastal deck barges, there still won’t be many barges available. Although there have been orders for a few ocean deck barges, most are for dedicated services or replacing much older barges that have become non-economical to repair.

Oilfield Platform Supply Vessels (PSVs), Anchor-Handling Tug Supply Vessels (AHTSVs), Dive Support Vessels (DSVs), Fast Supply/Crew Boats, and a variety of research and other niche vessels and barges remain in high demand with high second-hand prices. There has been an extensive building boom for all oilfield vessels over the last 4 years or so. The last major cycle slowly started in the early 1990s and ended with the Asian flu in 1998. A malaise followed through 2002/2003. After oil and gas prices recovered, newbuildings and second-hand sales picked up then went through the roof after Katrina in 2005. In the 1990s cycle, most expansion focused on the shelf market with the smaller / lower BHP vessels. At that time, we sold many older vessels back into oilfield service (even to first tier operators) that had left the industry in the 1980s (into fishing or cargo, etc.). This time, although the shelf market was strong from 2004 through 2007, it’s now cooling. The hottest market remains in deepwater with the larger DP and higher BHP vessels. As with the profits of the large oil companies, the fortunes of the oilfield sometimes are inversely related to the overall economy. With oil and gas prices at all time highs, oilfield vessels worldwide, large and small, are earning high rates and commanding very high second-hand prices. In many cases double or triple pre-Katrina prices. Deepwater vessels generally chase the highest bidder in various world markets, so rates in West Africa, the North


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Sea, Brazil and deepwater US Gulf are all historically high, mirroring each other. The oilfield is historically the most cyclical of the marine industry. It is also a “swing” industry for some other markets (such as offshore towing) as boats may work or be sold into alternate markets if the oilfield slows. If anyone can predict where the price of oil and gas will be, they have a better shot at predicting this market, as opposed to looking at the general economy. We see inflation remaining high in this sector until if/when this current cycle subsides.

Inland River Push boats and Barges continue to enjoy high utilization. The market for new construction is strong with dozens of push boats and hundreds of barges on order. Much of this is due to the aged fleet, desire for more fuel efficient boats, and some expansion. Newbuild typical US inland river hopper barges have gone from less than USD 300,000 to about USD 550,000 within the last 3 or 4 years. Yards have extensive backlogs. There are many high BHP push boats under construction. Second-hand older push boats have enjoyed strong resale prices

either within the US or to South American buyers. Some 4,000 to 5,000 BHP boats (around 30 to 40 years old) have sold for region USD 3.5m to 4m (given they are in good shape and repowered in the 1980s / 1990s). This would have been close to newbuild cost just 5 to 7 years ago for the same BHP boats. The inland fleet in South America continues to grow and has been a strong buyer of US tonnage. Scrap prices have also aided in the high values for 30 year old hoppers, reportedly now reaching around USD 90,000 per barge. Inland tank barges also remain in high demand. Many are highly specialized, so costs cannot be easily compared. An economic slowdown may affect this market, but many other factors are also at play. The second-hand vessel and barge market in all facets of the marine industry has witnessed incredible inflation in recent years. Will these values hold? As discussed, in many cases, the answer maybe yes, but in others there may be a easing of values as more older tonnage comes on the market due to replacement by newbuilds and/or softening in day rates. Crewing…. Regardless of whether overseas or in the US, operating costs continue to increase. One small domestic Gulf of Mexico tug operator reports high inflation across the board for all consumable supplies, fuel and especially labor. The rising cost for manpower is compounded by many factors, not only the shortage of qualified mariners. He feels that the US Coast Guard license ruling requiring that Tug Officers now hold “Master” or “Mate” of Towing Vessels has cut the labor pool significantly. A US tug owner can reportedly no longer hire a Mate that has years of OSV service to cross over and serve in the towing industry. This has created a “crunch” that all towing companies face and is just one more factor causing labor rates to “skyrocket”. He now pays USD 550 per day for a Captain and USD 400 a day for a Mate on a 2,800HP tug and admits that this is still just below industry standards. Small tugs now have to pay just about equal to what the larger boats in the 4,200HP range pay for their crew. Overall crew costs for one 2,800HP tug are roughly USD 45,000 per month, which


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cannot be absorbed without consistent utilization – and if an operator lays up a boat, for any reason, for any period of time they risk losing their crew. It makes it difficult for small companies to stay competitive – whether they are towing or operating in the “oil patch”. We heard similar information from a US crewing agency with additional background information. Captains with towing endorsements can earn about USD 550 per day or USD 500 per day without the endorsement (working aboard OSVs). Mates are at around USD 350 to 400 per day, while licensed engineers are earning USD 450 to 500 and ABs are at about USD 225 to 250 per day. All these current rates are about double compared to rates paid by employers in 2004. These also exclude benefit costs such as health insurance, which have also increased substantially. The most common reason cited for inflation in crewing costs is shortage of properly certified personnel. There have been many new requirements that have come into effect over the last five years. In previous cycles, mariners that had been laid-off or left the industry may have returned during good times, but in this cycle those persons that have been ashore have a much more difficult time reentering the workforce, often required to take many courses just to bring their licenses and/or mariner documents up to date. Other factors include the growing number of vessels requiring crews and older workers retiring with very little growth, if any, in the overall number of workers. Although the problem in the US is bad, the problem exists worldwide. In the North Sea some owners believe newbuild OSVs and AHTSs may be tied up due to lack of trained crews. Although the slowing general economy may help to induce new workers or previous workers to join the marine sector, education, training, and experience requirements will slow the process. People, or the lack thereof, will have a dramatic affect on the marine industry and vessel design in the future. We have an aging workforce and a critical shortage of marine personnel. This is a long-term problem and although crew wages are rising, the problem cannot be solved with only increased wages. Along with the population as a whole, the US labor force is getting older. The Bureau of Labor Statistics projected the median age of the US worker next year to be nearly 41. Over 40% of the workforce will be 45 and older in 2008 and the number of workers 25 – 44 years old will actually decline. Shipyards are also facing the same shortage of experienced labor and high average age of their workforce.

Fuel….Today’s fuel costs are probably the highest expense faced by an operator and many times exceed the tug’s daily hire (at times by a factor of 2 to 3). While the cost of fuel is generally passed onto the charterer, barge owners are now less likely to re-locate equipment for convenience and move only when they have to. As of May 5, 2008, according to Bunkerworld, MDO was ranging from USD 1,006.00/mt in Rotterdam to USD 1,029.50 in Houston and USD 1,077.00 in Singapore. This translates into about USD 3.60 per gallon

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Credit: www.bunkerworld.com


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on the Gulf Coast. During Fall 2005 when we wrote the “Marine Price Index” article for our Winter 2005/2006 Newsletter, MDO was averaging USD 495.70 for the three ports, so the price is now up over 100% since that time. Fuel costs are influencing many sale and purchase decisions, especially for older vessels and barges. Long distance towing costs for medium to larger deck or tank barges can now be a large percentage of the overall acquisition cost, making barges closer to the intended area of operation more attractive, but in most cases unavailable.

We recently received tow quotes from the GOM to West Africa for second-hand large single-hull tank barges. The quotes are around USD 1,500,000 lump sum based on using a 4,500 to 6,000 BHP tug. This represents anywhere from 60% to 100% of the cost of the barge itself. Depending on the efficiency of the tug, fuel is about 50 to 70 percent of these quotes, allowing little room for competitive bidding between operators. In years past, although always significant, towing costs were nowhere near this percentage of overall project budgets. During late 2007, we sold a Canadian company a 1970s built US flag deck barge. They could have bought a new Chinese barge for about the same price, but towing costs from China for a new 300’ x 90’ x 18’ deck

barge ranged from a low of USD 700,000 to a high approaching USD 2,000,000 (with a US flag single screw tug being the least expensive alternative….). Rather than pay the towing costs, the client chose to go with the older barge. Given the rise in fuel costs since late 2007, the costs would be even higher now. Back in the late 1990s, we sold multiple newer barges from SE Asia to a West Coast Mexican client. We arranged a tow for them at a cost of roughly USD 500,000 (which was a tandem tow). We are now seeing newer or repowered more fuel efficient tugs earning higher day rates given their ability to reduce charterers’ fuel bills. Some owners have decided to convert large line-haul tugs to burn IFO rather than MDO. One company invested around USD 1.5m to convert their 1970s built 8,000 BHP tug from MDO to a light grade IFO, substantially lowering the cost of fuel per ton and gaining slightly better consumption. This has become a viable option for vessels with the necessary engine room and tank space needed to handle IFO. Many engines can be converted to burn the heavier fuel, but purification systems, settling tanks, heating systems, etc. required to handle the fuel, make conversion not practical for smaller boats. High fuel costs weigh heavily on companies’ decision making.


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Money…. Marine credit markets have reportedly tightened, but seem to be holding their own. Trouble in the mortgage backed securities market has impacted other credit markets, including commercial marine finance to some extent. It seems banks and commercial finance companies are now more stringent with their underwriting criteria for new loans and may be more concerned about managing their existing portfolios than growing further. Banks and financial concerns are in some cases having to divert funds to cover losses on other portfolios outside the marine sector, so fewer funds may be available for new loans. With the number of lenders and supply of funds available for investment reduced, the cost of

borrowing may increase for some companies. At Marcon, we do not see any slowdown in financial institutions requesting our services to value individual vessels or fleets for new or existing financing. If anything, we are busier than ever on this side of our business. Currency fluctuations also play an important role with regards to inflation. As buyers around the globe compete for steel, machinery and various commodities, those buyers with a stronger currency can further bid up prices in an already tight market. Even in China where the government tightly controls their

(Weighted average exchange value of US dollar against currencies of other G-10 countries.

Source: Board of Governors, Federal Reserve System)


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currency in order to make exports more desirable, the slipping exchange rate between the US dollar and Chinese RMB (Yuan Renminbi) is further increasing Chinese buying power, but making their newbuildings less attractive. Over the last year, the dollar has slipped about 9% compared to the Yuan. Most other currencies have had much greater increases. Currency fluctuations have become a double-edged sword for tug, barge and OSV builders worldwide who have historically priced their newbuildings in US dollars. Even though US manufactured goods they use may now be priced more competitive for those buyers with stronger currencies, many shipyards cannot take full advantage of the situation as they are being paid in a weakening dollar (on terms of their existing newbuild contracts). They are also forced to keep adjusting their prices higher as they have to convert dollars into national currencies to cover their local costs for labor and materials. Several Chinese shipyards are following the lead of European and Turkish yards by starting to quote their newbuildings to Marcon in Euros instead of US dollars. Some yards had taken early steps to hedge their currency risk, but for many it’s too late to avoid losses. The weak US dollar also creates difficulties for US owners operating large fleets of offshore supply vessels overseas. The majority of day rates for OSV operators outside of mainland Europe are still earned in US dollars, but local costs such as repairs, drydockings, consumables, agents, etc. are normally paid in the local currency. This can only add further to an operator’s cost of doing business overseas, cutting into profit margins. As brokers, we see Canadian, European and other non-US buyers as now being more competitive buyers of second-hand tonnage due to their stronger currencies. This comes at a convenient time for certain US owners looking to sell surplus equipment, such as single-hull tank barges and older tugs. Conclusion…. Inflation continues to be a hot topic within the marine industry. There are many factors at play which have brought us to this point. We believe companies will continue to adapt to this high inflation environment in a variety of ways. Like the airline industry facing high fuel costs, we anticipate more mergers within the marine industry in an effort to create greater efficiencies. There will continue to be a move toward more efficient vessel and barge designs and upgrading of older units. Whether or not inflation continues to be a prominent topic, companies will have to be more competitive in the future, while maintaining profitability.

marcon international, inc....marcon international, inc. inflation and the marine industry – may...

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