The secret of success – aiming to be No.1 and keeping a step ahead

JH: Yangzijiang Shipbuilding grew from a small shipyard into a group with several wholly owned or dominantly controlled shipbuilding enterprises and became a famous shipbuilding enterprise in both China and the rest of the world in the space of just ten years. In your opinion, what’s the secret of your company’s great success?

Ren Yuanlin: Yangzijiang Shipbuilding’s annual turnover was only about RMB 100 million in early 2000, and now the entire group is making an annual turnover of nearly RMB 30 billion. We could only build small river ships ten years ago, but now we have the capacity and capability to build post-Panamax bulk carriers, ultra large container vessels and VLCCs. We have achieved tremendous growth both in our corporate size and in financial terms within just ten years.

In my opinion, our success is based on the global transfer of manufacturing operations to China as a result of China’s reforms and opening-up, and also on Yangzijiang Shipbuilding keeping abreast with the world’s shipbuilding developments and remaining a step ahead of many other shipyards.

Firstly, we became the first shipbuilding enterprise to successfully restructure our operations in 2000. Secondly, we were one of the first to find our target market in Europe and America and grasp the opportunities. It was also good timing that American and European ship owners wanted to offer good ship newbuilding prices and we managed to build a stable and loyal client base. Thirdly, Yangzijiang Shipbuilding was the earliest listed shipbuilding enterprise in China and moved quickly into the fast track for capital expansion. We also keep a step ahead in building new shipyards and expanding our production capacity. We won a handful of orders before the financial crisis and plants that were built had already been put into operation and completed the run-in period. These great opportunities and the policy of “aiming to be No.1 and keeping a step ahead” have resulted in Yangzijiang Shipbuilding’s miraculous growth.

James Jin Huang, Deputy Regional Manager of DNV Maritime Greater China and Ren Yuanlin, Chairman of Yangzijang Shipbuilding. Photo: DNV

Core elements for corporate development – product positioning, talent management and capital operation

JH:  As an experienced and reputed manager of a shipbuilding enterprise in China who has the wisdom, courage and perseverance of modern entrepreneurs, and also based on your years of experience in the industry, what core elements do you think the Yangzijiang Group has when taking such huge strides in development?

Ren Yuanlin: The key to an enterprise’s success and development is the right product positioning. When the new Yangzijiang Shipyard had just come into operation and in the run-in period four years ago, we knew clearly that we had certain gaps in management experience, expertise, workmanship and labour quality compared to global leaders. Hence, we set a target of being strong in just one or two products, and the choice of products had to meet the market demand and be adapted to our own capabilities. To put it specifically, we chose 4,000 TEU-level container vessels as our leading product. This strategy has proven to be quite effective.

Another factor is staff recruitment and retainment. We have a unique incentive programme for staff management. We think that the fruits of corporate growth must be shared among our staff in order to fully explore our employees’ potential. We have distributed shares among our backbone staff through listing and outward investment and recruited a large number of technical experts and skilled workers that the Company was in urgent need of to build a stable team.

Moreover, it is quite important for the Company to resort to capital operation channels such as listing. This has an amplification effect and gives the Company funds to engage in technical reforms, expand its production capacity, build and develop its clients’ confidence and trust and attract talented employees. I think that these are three core elements for enterprise development.

JH:  You just mentioned that product positioning is quite important. Actually many other shipyards are also aware of this, but they often can’t find the right or steady position. As a corporate leader, you must have great insight into and experience of judging the market and making preparations with the entire team – such as through market surveys and the development of vessel types. In your opinion, how can we follow the market closely?

Ren Yuanlin: On the one hand, we need to make ample preparation in advance. On the other hand, we need to have a strong ability to adapt to market changes. When the market booms, the shipyard must focus on mainstream ship types and make them well designed and in longer series. When the market declines, we need to best meet the special requirements and expectations of our clients through customised products. Meanwhile, we need to continuously upgrade and optimise mature products to attract potential clients. In short, the enterprise must keep track of the market’s pulse.

To better tackle the market challenges – grasp the opportunities

JH:  What do you predict future shipbuilding market developments will be and what initiatives and efforts has Yangzijiang Shipbuilding taken to tackle the looming economic and market challenges and uncertainties and maintain and develop its position?

Ren Yuanlin: I don’t expect the shipping market to recover within a short period. The recession caused by the financial crisis in 2008 isn’t over yet. Efforts made by governments to save the market haven’t changed the situation fundamentally. In the current post-crisis era, ship owners have surplus shipping capacity, shipyards have surplus production capacity, costs are increasing, and freight and ship prices are dropping.

Despite an expected slowdown in newbuild orders, Yangzijiang Shipbuilding has maintained and achieved profits above 20% in 1H2011. This was primarily due to Yangzijiang’s ability to retain shipbuilding orders secured before the financial crisis that command relatively higher margins than current newbuilding orders. Yangzijiang has not experienced any cancellations, even during the financial crisis back in 2008. It has a healthy order book, and the continuous execution of these orders ensures positive growth in both the margins and earnings throughout 2012 and even in 2013.

To stay ahead of the competition, Yangzijiang is taking steps to augment its shipbuilding capacity. This will come to fruition when the firm’s new yards in three locations in Jiangsu province become fully operational in 2013. Although expanding the scale might lead to lower profits on a single project, Yangzijiang’s overall profit-making ability will be safeguarded and strengthened.

In addition, we are focusing on designing and building larger and more technologically complex vessels with environmentally friendly and energy efficient features in order to better capture market opportunities and improve our operating margins.

We are also working on diversifying our product structure into the fields of offshore engineering, large steel construction, ship demolition and metal logistics services. These are also measures we are adopting to respond to the surplus shipbuilding capacity by partial transformation. Since ship scrapping and metal logistics could offset the growing cost of shipbuilding, we need to improve both the scale and strength of our ship scrapping and metal logistics operations within a short period. To put it briefly, we still regard the shipbuilding business as our core business and will further expand and develop it while also building a new corporate pattern that has offshore structures, large steel structures, ship scrapping and metal logistics as new pillars.

Shareholders and ship owners have the same interests

JH:  Yangzijiang Shipbuilding has both shareholders and public investors following the restructuring and listing. The Company also needs to deal with ship owners. These parties have apparently quite different interests, or even conflicting interests in certain concrete matters. How can you coordinate their expectations?

Ren Yuanlin: There is no doubt that maximising the interests of shareholders is the primary target of a public enterprise. This target must be fulfilled under the precondition that the interests of ship owners must be protected. Without orders from ship owners, it is impossible to maximise the interests of shareholders. Therefore, we must have a batch of ship owners with which we cooperate well and share benefits.

Container vessel owners were the first to be impacted by the global financial crisis in 2008. More than 80% of our orders were for container vessels. At that time, we were one of the few shipyards without any ship cancellations. We stuck to one principle: we are open to any discussion provided the owner doesn’t choose to cancel its ship. We provided a lot of support to ship owners, including adjusting the price, helping ship owners to obtain finance, accepting a change of ship type and long-term postponements and allowing ships to continue berthing at our shipyard after delivery. These measures helped our ship owners to get through difficult times. We received a lot of short-cycle orders in the subsequent rebound of the bulk carrier and container ship markets by making best use of our slots. Since some orders for high-value-added container vessels have been postponed for two to three years, we are still maintaining healthy growth in our profits for 2011 and estimate that this will continue in 2012, while many shipyards are making no profits or are suffering from a serious drop in profits. I think that the two targets of maximising the interests of shareholders and protecting the interests of ship owners are actually the same from a macroscopic perspective. In fact, through sincere cooperation with ship owners around the world, Yangzijiang Shipbuilding has become one of the few listed shipbuilding enterprises that are making great profits for their shareholders.

Adding value to the relations with classification societies

JH:  How do you think classification societies, including DNV, could offer better support and service to Yangzijiang Shipbuilding?

Ren Yuanlin: I do expect and appreciate more support from classification societies to Yangzijiang in developing and making ship designs and products that are competitive in the market and of high quality, and a lot of effort must of course be made to achieve and realise the above. As one of the good examples, I would like to take the opportunity to thank DNV again for its strong and valuable support to us in the ship development work. In addition, classification societies are more knowledgeable about future technology and the development of regulations, which is an area we would like more cooperation in.

RA: Joe, thanks for the opportunity.  If you would, could you tell us a little bit about yourself?  What were some of the key career moves, or experiences you had that led you to your current position as President of one of the top shipbuilding companies in North America?

JR: Well, I’m a marine engineering graduate from the US Merchant Marine Academy at King’s Point.  Before that, I was enlisted in the US Navy as a nuclear Electrican’s Mate, so that gave me a good lead-in to go to the Academy.  The King’s Point experience really produces a well rounded background for the marine industry.  The military environment also familiarizes the graduate with the Navy  organization and the protocols, so you can fit in the commercial marine sector, or the defense sector, quite easily.  I sailed for several years after graduating and then came ashore and worked at Ingalls, starting in design engineering.   I ultimately ended up in the Program office for the LHD program where I learned about the non-engineering facets associated with shipbuilding.

I went back to the commercial industry at Alabama shipyard, (Atlantic Marine), where I became a program manager for the construction of two title 11 funded chemical tankers that were delivered to a Danish shipowner.  The first foreign ships built in the United States for export in 40 years.  These were the Danabrook tankers.  During my time at Alabama Shipyard, I got my MBA at Spring Hill College which obviously gave me some business acumen  along with my technical background.  I then moved to Jeffboat where I was the Vice President of Sales and Marketing.

This versatility across the spectrum of the business of shipbuilding from design, to construction, to programmatics, to sales, all came together to position me to first start as the Chief Operating Officer at Austal USA in October 2007, and then in August of 2008, President and COO.

RA: As someone who has clearly experienced a fair bit of success over your career, what’s your advice to young professionals as they begin their career in our industry?

JR:  My advice to anyone, including my own children, is the best investment you can make is investing in yourself.  You should never stop learning, and it’s important to get your education from the best possible institutions, with the best possible reputation, because that’s marketable, and that’s what you “sell” when you’re done.  It’s also important to make sure that you are challenging yourself in your job, and that you are always trying to do your best and expand your experience at what you are doing.  You need to focus on your job, and don’t wear your hunger for growth on your sleeve because that is an unattractive way to present yourself.  My focus has always been to do the best job I can, at the job that I am doing, for the job that I have.  And, I don’t spend a lot of time worrying where my next promotion is going to come from because good performance will be rewarded and will create opportunities.

USS Independence, LCS 2, image courtesy Austal USA

RA:  Austal’s trimaran littoral combat ship is a very cool looking ship, but clearly far different in design from the Marinette Marine version.  What was the biggest factor in pursuing a trimaran vice a monohull design?

JR: A multi-hulled high speed vessel has efficiencies that allow you to get higher speed with less installed ship’s horsepower, making the ship more efficient.  There is a reason why commercial high speed ferries are multi-hulled, and that is because they are driven by the economics of ship design.  That is what Austal is used to building, and that is what provides the most efficient hull design.  I’m not a naval architect, and it may be possible someone could come up with a mono-hulled design that could come up with towing-tank results that might rival a multi-hull, but I would like to see the results before I could accept that.

RA: Your ships are all aluminum from what I understand.  Where does the aluminum come from?

JR:  Alcoa is the principle supplier for our plate and we understand that a large amount of it is domestically sourced.  We use third party suppliers for our extruded panels and shapes.  When I say extruded panels, I mean sandwiched plate that has triangular vertical structure between the two plates to provide that inherent stiffness that you would otherwise have to weld stiffeners to.   It increases the efficiency in production.

RA: Global industry is pursuing more efficient supply chains and operations for both economical and environmental reasons, what are some of the ways that Austal is evolving to increase efficiency, and lessen the environmental impact of your operations?

JR:  Besides the inherent efficiencies built into the design of our hulls, the diesel engines we use are Tier II compliant, MTU 8000-series engines which are very efficient.

RA: But from a shipbuilding standpoint, do you have any unique processes in place that help increase the efficiency of your operations or reduce your carbon or waste footprint?

JR:  We’ve never been cited for any environmental infractions.  The one advantage of working with aluminum is that you don’t use plasma cutters, so you’re not cutting with a torch.  It’s all mechanical cutting.

So when we need to make all these different parts out of a plate of aluminum, we use a computer-controlled router table.  There’s no pollutants going into the air during this process.

RA: Mike Webster, the Chief Naval Architect on this project, mentioned you recycled all these aluminum shavings by sweeping it all up and melting it all down for reuse.  Is that right?

JR: Yes, we reclaim all our scrap and we have a third-party company who manages this recycling for us, and pays us for our scrap.  Additionally, 30% of the aluminum we use in our shipbuilding is actually from recycled products.

Image courtesy Austal USA

RA:  Welding aluminum is a unique skill, and one that was not prevalent in Mobile, Alabama before Austal moved to town.  How did you approach the task of assembling a skilled workforce to build your ships, and why were you ultimately successful?

JR:  Initially, Austal “seeded” the workforce with experienced welders from Australia.  That was in the very early days.   A lot of credit, in fact, needs to go to the state of Alabama.  Alabama has a program called AIDT, which stands for Alabama Industrial Development and Training, and what they will do is fund training for companies who are hiring people with a specific skillset.  AIDT has been a partner of Austal for probably 8 of the 12 years we have been in the United States.  They have since built a $16M maritime training center adjacent to our property  where we have two-thirds of that building for our unfettered use.  The state has also provided training reimbursement commitments to Austal of $32M against employment thresholds that we were meant to reach and maintain over a number of years.  In addition, the state has also provided construction and infrastructure grants of $10M to help us expand.  So the state has been a fantastic partner in helping us build up our work force.

The curriculum we’ve developed is done in our maritime training facility and pre-hire folks can go into the program, unpaid and on their own schedule, and in 6-weeks, they can test-out of the program to qualify to be hired at Austal.  The other thing is that there are a lot of maritime trades and a lot of shipyards on the US Gulf Coast and we were growing when other yards were contracting, so we were able to take steel welders and teach them the art of aluminum welding.  Those individuals with steel welding experience are well ahead of those who haven’t welded at all.

Image courtesy Austal USA

RA:  Shipbuilding in the United States has been on the decline for many years, however it seems to be plateauing a bit with the influx of foreign builders such as Austal, Fincantieri, and BAE Systems.  Why are these companies experiencing success where formerly American-owned builders have not succeeded?

JR:  It’s a two part answer.  First, commercial shipbuilding has been on the decay in the United States due to the differential in labor rates where ships are being built.  Looking at where ships are being built now… South Korea, China, Vietnam, Singapore… India may even get into it soon.  You can’t compete in a sophisticated industrialized market against countries that have lower labor rates and fewer regulatory requirements.  That’s the reality of it.

When it comes to Navy shipbuilding, it’s been a captive market here in the United States, and there aren’t many Navy shipbuilders to support that.  That’s a unique animal because it has a lot of oversight, it has a lot of documentation support governing requirements that burden the programs.  The emergence of foreign companies into the US I think is a manifestation of the fact that companies aligned with shipbuilding in those markets where commercial shipbuilding was able to be sustained have taken that experience and investment capital, and rolled it into the US to get a piece of the captive market that was Jones Act-restricted and/or US Navy.

The United States does not make it easy for foreign companies to build weaponry for them.  The Defense Security Service has requirements for the prevention of foreign ownership, control, or influence over classified programs.  So while a foreign company can invest in the US, and build their infrastructure, and stand up an organization, they are not allowed to tell that company how to operate.  And you can imagine how that would make you feel if you were putting money somewhere and running a business, but you were not allowed to tell them how to operate.  So it does create a hardship on foreign investors, but it does protect our national interests.

We think about a country like Australia, which is obviously very friendly to the United States and a close ally, so you’re less concerned about it, then you think well, there might be other countries that we wouldn’t want to be so closely aligned with, let alone build our Navy warships for us, even if they were here in the United States.

RA: How is the Eurozone crisis affecting your business?

JR: I guess the biggest risk is in currency exchange.  We’re looking at our hedging strategies on the Euro to make sure that we lock in the best rates.  We manage this so that we don’t get hurt by a big downside effect of currency exchange.  The other thing is that we do have some manufacturers that we buy from overseas, and we have to make sure that the health of their organizations is vibrant.  We have to keep an eye on our vendor base overseas.

RA:  A few southeast Asian shipbuilders such as (I think) HHI and Keppel FELS have diversified their businesses into the wind energy sector.  Do you see Austal making similar moves in the future?

JR: Yes.  In Perth actually, we just signed a contract to build a windfarm support vessels.

RA: But what about building the actual towers, nacelles, or possibly wind blades themselves?  Is that a market on Austal’s radar?

JR: There’s a possibility of that in the future, but we’re not actively pursuing that right now.

RA: I appreciate your time sir.

U.S. Navy photo by Photographer's Mate Airman Ricardo J. Reyes (RELEASED)

gCaptain’s Rob Almeida, along with Maritime Domain Awareness expert, Cesar Morales, were invited to the headquarters of US Naval Intelligence (ONI) for a meeting with CAPT William Bray, Commanding Officer of the Nimitz Operational Intelligence Center, and ONI Counter-Piracy Branch Chief, Brian Green.

The primary purpose of this interview was to gain some insight into their operations and the relationship this organization has with the global commercial shipping industry.

Morales:  Thank you for having us.  I wanted to start off by talking about ONI and its relationship to the maritime industry.  Specifically, first of all how would you characterize that relationship and what is it that ONI does for the maritime industry?

Bray:  We have a very good relationship with the maritime industry.  First of all, Brian and several other employees in the Nimitz [ONI] have backgrounds in the merchant shipping industry.  So, we need that detailed and experienced type of person here so we can really understand it.  We view the industry as a customer in the sense that strategic trade, maritime trade is an important national interest of the United States.  We don’t pick favorites.  We don’t do any sort of analytical intelligence work for any specific company or anything like that.  But we do provide a service on threats to the shipping industry as it pertains to general US interests as far as maritime trades goes.

Morales:  As far as products that are provided to the maritime stakeholder, what specific products does ONI provide?

Bray:  Well, we provide the Piracy Analysis Warning Weekly (PAWW), which is unclassified and goes out to a wide distribution including being sent out to the merchant community at large, which provides a statistical roll-up of piracy, crime on the high seas, threats to shipping, plus some unclassified analytical assessments in there.  That’s the primary product that ONI delivers to the merchant community on a regular basis.  We do, of course, communicate quite frequently and informally with these stakeholders via unclassified channels as we ask questions of them and they ask questions of us.

Green:  We have the PAWW, which focuses primarily on the Horn of Africa and Somali pirates, and then the other product is the Worldwide Threat to Shipping (WTS), which is a worldwide outlook on maritime crime and piracy, and then, as Rob is aware, from time-to-time, we may disseminate a special advisory which would indicate a Somali threat of some kind.  Once again, it goes out to a variety of entities, both military and industry recipients.

The watch floor at the Office of US Naval Intelligence

Morales:  And what measuring stick do you use to make sure that these products are actually meeting the needs of the maritime industry?

Green:  The analysts here are very talented, very dedicated, and highly motivated in what they do.  They very much have a passion for their work.  At the forefront of their minds is indications and warnings.   I think that’s at the heart of intelligence analysis and it definitely applies to piracy and maritime crime.  So I think the first measuring stick would be the analysts here being focused and dedicated to what they’re doing, and having a feel for what needs to be sent out.  And then the second measuring stick I would submit would be the feedback we get from the shippers.

Almeida:   What kind of feedback do you get?  Do ship owners call you directly?

Green:  We get quite a few thank you emails.  We’ve been told that some of the information that we provide to the shipping industry is the “crown jewel” for their monthly or weekly or quarterly reports.  I think it’s just the general feedback that we get, whether it’s from an email or a phone call, if we happen to go to a symposium or some type of event that someone may be at and they realize where we’re from, they’ll make it a point to say thanks.  And quite frankly, there’s a mutual respect there.  We very much respect what the mariners are doing on the bridge of a ship or in the engine room, like CAPT Bray said, moving that commerce, moving that cargo from Point A to Point B.  A lot of times it’s DoD cargo and we have a lot of respect for what they do.

Bray:  IMB’s Piracy Reporting Center puts out a lot of information on their broadcasts.  They get information from us and the UKMTO directly, and they have their own sources of information.  I actually visited them in Kuala a year ago and sat in there with Mr. Chong and his team, it’s a pretty small team, I mean it’s not a huge operation, but they have a 24/7 watch and I could sit there and they showed me how they got ONI’s information and how they turned it around and put it out there.  I think for the shipping industry, especially for the U.S.-flagged community and U.S. citizens, it’s of some comfort to know that the entire U.S. intelligence community’s capabilities can be brought to bear on an issue that concerns them.  That’s something that IMB cannot provide.  So depending on what the issue is and what is going on, they know that we have access to information and sources of information that are not accessible to the civilian community and we can bring it to bear.  And we have on obviously extreme cases like Maersk Alabama, the hijacking last year of the sailing vessel Quest, which ended tragically, and in many other cases.

So, while we can’t share that kind of information directly with uncleared personnel, our ability to assimilate that information informs the assessments we give to them.  So, they’re getting an all-source assessment.  They may not know why we think a certain way.  They don’t ask questions.  They don’t need to.

Morales:  Sir, that brings me to the next question.  How do you overcome the communication challenges faced in a relationship between an intelligence organization and the commercial maritime industry where there isn’t a large population of people with clearances?  How do you mitigate the challenges of getting them an effective product but still making sure that information meets their needs given their non-classified environment?

Bray:  Being able to what we call “down domain” assessments and information to share with foreign intelligence partners, or commercial stakeholders, is a standard practice.  It’s sort of in our DNA to understand how to go from the highest classification on a particular issue to a classification I can share with – pick a country – and then in many cases all the way down to an unclassified level.  We do that with the merchant customers all the time.

You think about what do they need to know.  What concerns do shipping companies, the owners, insurers and actual crews have.

Obviously, everyone’s concerned with safety.  Safety for life and limb, and property, is of foremost concern.  They’re also interested in trends.  They have to make business decisions about putting guards on, does it financially make sense?   So when we can give them trend analysis that can be – we can wash the classifications out of that through various means and just give them sort of an overall holistic assessment of what’s going on, that serves one need.   From the issue of protecting, indications and warning, that’s a fast-moving thing usually, and they don’t need to know how we know something.

Morales:  You mentioned indications and warnings (I&W).  What process is in place to ensure that indications and warnings, as defined by ONI, is the same as what is defined by the customer?  What’s their daily concern?  What’s their role between the two in that ONI has their own I&W that feeds the information?

Bray:  I don’t think that there’s really much of a difference.  If there’s an active threat that we know about we’re able to feed that information through, it gets out on the broadcast, we don’t need to reveal the source of that information.

Morales:  Regarding outreach and engagement with the maritime community, what branch of ONI focuses specifically on engaging with the stake holders and the customers?

Bray:  It’s definitely Nimitz.  Nimitz includes not just Brian’s team and the piracy analysts, but people who have an understanding of how the global merchant shipping business works and they use that understanding to serve a particular intelligence need.  For example,  I have counter-proliferation analysts and they’re studying about illicit weapons shipping or precursor materials that could service a WMD program, could be arms shipments in violation of a UN Security Council resolution.  In order to understand all that, you have to understanding how the shipping business works and about the cargo and transshipping.  They do that.  The same thing with counter-narcotics.  The whole counter-narcotics division, a lot of it is focused on how the merchant shipping business is used to illicitly to move narcotics, often unwittingly.  The shipping owners and crews don’t even know it’s being used.  Really, Nimitz is where all that interaction with the merchant industry takes place.

Morales:  From a maritime domain awareness perspective, achieving an effective understanding of the activities on the water, and again, tying it to the engagement, communication, the outreach to the stakeholder community, what does ONI do to ensure that there’s a continual effective understanding, given the dynamic nature of the maritime domain?  And I know we’ve sort of touched on a couple of these themes but to sort of wrap it up from an information sharing, a domain awareness perspective and addressing the needs of the stakeholder and the customer, where is ONI’s view on meeting these needs?

Bray:  Well, I could talk for a long time about MDA.  I’ve got to focus this a little bit.  Speaking for Nimitz in particular, I’ve read almost every MDA policy document I could get my hands on in the last couple of years, and I still don’t know what it is.

What is awareness?

We do intelligence.  We try to pinpoint threats, threats to the United States, threats to U.S. citizens, long term, short term, immediate, what have you, and that’s just good old fashioned intelligence work.  Having an awareness of what’s on the high seas, is, first of all, you never really know how much of it you have, and secondly you don’t have any sort of focused understanding of where the threat is.  There are 70,000 merchant ships at any time in the world, commissioned greater than 300 gross tons, you know there’s a lot of shipping flowing around the world constantly.  It’s a massive heart beat of commerce back and forth.  And those are just the big ships.  If you want to understand the threat to the United States, having some sort of awareness of what’s going on 200 miles off the coast of California, at that point it’s a little late in the game.  You’ve really got to understand the threat to the United States in tracking the people, the networks ashore that could interface with the merchant community in some way to use it to get to the United States.

It’s like the counter-narcotics folks.  They’re not watching a screen of shipping moving in the Gulf of Mexico or anything, they’re getting after the target by understanding the illicit networks through the traditional intelligence sources, whether that’s human intelligence, signals intelligence, whatever.  They’re trying to build an intelligence case and when it crosses that threshold into the maritime industry, you’ve already got an understanding of what the threat is and how it might be used.  You can direct then, some sort of legal authority, whether it’s the United States, Mexicans, to interdict and go and find that particular problem.  To us that’s MDA.  That’s what it is.  I don’t know another way to describe it.  I have seen lots of money spent to try to find some sort of technical solution to MDA.  Quite frankly, I don’t think it’s been well spent.  Its intentions were good but it has not delivered what it’s promised.

Morales:  Where is the drive for information sharing and information exchange occurring?

Green:  So we come here every day to do our job of counter-piracy intelligence analysis. We have to get information.  We receive information, analyze it and then disseminate it appropriately to a wide level of customers, everything from national level decision makers and policy makers, to leaders in the Pentagon, the fleet, inter-agency partners, coalition partners, and, as has been spoken at great length here today, the maritime industry.  How do we obtain our situational awareness on the water?  It’s through a variety of intelligence sources, I think we’ll leave it at that.  We appreciate mariners providing information, in concert with best management practices, about piracy events on the water.  This information enables us to understand  pirate activity with regard to tactics, procedures, with regard to the trends that we’re seeing.  In turn, we package this information into weekly unclassified products so we can, in turn, provide information to the industry for them to leverage for situational awareness.

Morales:  I appreciate the opportunity to talking with you and for your time.   Thank you for your service.

GG: The world is getting more complicated – and regulatory compliance is a significant challenge. New regulations, regional differences and higher fuel bills have created a new paradigm.  Shipowners are looking for solutions to high ol prices and the need to reduce environmental impact.

GG:  The IMO.  The International Maritime Organization is setting regulations because they want to make sure that it’s a logical, international program rather than one that is addressed on local levels, which can be a little bit more confusing and complicated.  That doesn’t mean that local states can’t decide to make things more stringent. They have been doing a very good job and they have some very difficult issues to handle, maintaining a level playing field and fair treatment for all.

Energy efficiency is very important and it’s a good focus because it not only makes companies more sustainable in the future, it also makes them economically sustainable in the short term.  It allows them to stay in business, save a lot of money and reduce their impact on the environment.

It’s not business-as-usual.

We’re not going to operate the same way we did five years ago, and it’s changing very quickly.  You have to be able to look five or 10 years down the road and say, ‘ok, do I want to develop and modify my fleet so that it’s competitive in five years, or do I want to do the bare minimum, making my fleet obsolete very soon because it won’t be able to compete with the more efficient vessels or comply with the demands of society’?”

GG: Possibly.

RA:  But we’re still in the gigaton range when it comes to the amount of CO2 emitted by the global shipping industry.

GG:  Yes, but you need to look at what your trade transport options are.  Merchant shipping comes out on top, of course, because it moves 90% of world trade by volume. In actuality, it emits a very low CO2 volume per ton-kilometre, which is a more accurate accounting of relative contributions to global emissions.  What shipping companies need to consider is: “is there a way to streamline my operations to make them more fuel efficient”?

If they are able to identify that and make appropriate changes, they will have a lot to be proud of.

RA: I understand you came from the cruise line industry over to Lloyd’s Register fairly recently.  One of the big topics in the commercial maritime industry is the use of LNG … are cruise lines looking at using LNG as a fuel?

GG: Nothing is off the table for anybody these days.  It’s of course very daunting to look at the infrastructure and some of the associated challenges of LNG propulsion and, also, what do your stakeholders really think about LNG on cruise ships?  So they need to look at that and balance it.  I think they are all looking at different options and they are willing to try a lot of different methods to be compliant.

LNGC Celestine River, Image courtesy K Line LNG

RA:  You have ferries that carry a couple hundred cars full of gasoline, and it seems ridiculous that people are afraid of having LNG on board considering it’s far less volatile than gasoline.  Where did this misconception come from and how do we get past this?

JF: I wish I could give you a pithy response, but the truth is that incidents in the past have allowed people with little knowledge of the industry to show pictures or make simple statements to the detriment of the industry.  In one case in the ‘40s, an LNG tank  in Cleveland collapsed due to the poor cryogenic strength of the steel.  The LNG ran into the sewers and the vapors rose into the homes.  Several fires ensued, killing many families and leaving the area looking like it had been bombed.  That couldn’t happen today because the sewer systems are designed differently and the metallurgy of the materials used in LNG tanks allows it to withstand the cryogenic temperatures it may be exposed to.

Right after 9-11, an enterprising reporter determined that the loaded LNG ship in Boston held the same amount of energy that was released by the Hiroshima atomic bomb.  The math was correct, but the time it would take to release of the energy — that was never mentioned — would be about a nanosecond for the bomb and maybe a month for the ship.  But, it was a quick answer and it stuck.

Despite the nay-sayers, the LNG industry will continue to use the best science and technical engineering for construction, the best risk-analysis tools for operation and the best training available.  The dedicated men and women that build and operate LNG facilities of all sorts are providing this country with a cleaner and more efficient energy [than heavy fuel oils].

It’s pretty hard to be against that.

LNG is an exciting fuel with great potential in certain applications.  It’s not necessarily the fuel of the future, but it’s certainly a fuel of the future.

Ginger Garte, Environmental Business Development Manager – Lloyd’s Register North America, Inc.

Ginger has been active in the marine industry for over 18 years.  She obtained her Geology degree from Virginia Polytechnic Institute and in 1994 was selected to serve as a U.S. Commissioned Officer with the National Oceanic & Atmospheric Administration (NOAA).  Upon completion of Officer Training School, Ginger served for five years onboard NOAA’s research vessels and at shore side laboratories. She worked as superintendent for seven years at Carnival Cruise Line’s in the Environmental Health and Safety Department and as the senior analyst for five years at Royal Caribbean Cruises Limited, within the Environmental Stewardship Department.  Now at Lloyd’s Register, North America, Inc., Ginger is primarily responsible for meeting clients’ environmental needs throughout the industry.

JM: The 800-pound gorilla in the room is China in these markets.  Has China played a significant role in the multi-purpose heavy lift sector up to now?  If not, do you see that changing?

AG: My own view is that the Asian countries support industry via shipping, and shipping isn’t necessarily structured in that area on the same economic principles as it is elsewhere.  I think that classically this is true of Japan and particularly Korea, which I think behaves in a very similar way to China in how it arranges some of it’s transportation.  More Korean companies are now taking more aggressive positions on moving cargos, which in many cases they are supplying.  They are quite often the EPC, the financial lender, and they often provide the labor as well.

The transportation piece is something they want to get involved in.

I think ultimately the Chinese are essentially in the same position, and yes they will continue to expand there.  They’ve started really in the lower-valued commoditized end of the multi-purpose sector, and I think that they will certainly continue to be an influence as they get pressure.  There are a lot of shipyards that have been built there over the past 15 years, some of them are closed, and will continue to close, because I think they over-did that, but nonetheless, employment is key for China.   They will continue to crank out ships and find ways to get them into the market.  Whether they do so directly, or indirectly, I think the net result is no different in my view from the KG system except that I think in the first instance, the pricing may be even more aggressive.  My view is that project cargos priced in Asia by the various carriers who are Asian-based are totally out of proportion to the cost of delivering those cargos, though my view is, I don’t forsee that changing.  I think that there is a lack of experience and understanding of the marketplace, and there are directives that trickle into the industry and essentially a faction of the industry starts to move certain kinds of cargoes, whether they have the experience or not, and yes, that will have an impact on the worldwide trade.

If you look across the entire multi-purpose sector, multi-purpose “tween-deckers” are usually the last ships to be scrapped because someone always thinks they can have a use for them somewhere.  In that sense, whether they trade in our trade lanes, or in some of the other more established trade lanes, it’s not so much the issue.   It’s the fact that they are still around and picking up a lot of the supply of cargo in other parts of the world where the only driving consideration is price, not related to risk, which includes the risk of environmental disasters.

Image courtesy Intermarine

JM: Another issue that has had a direct impact to mariners and shipowners around the world is piracy.  Have you had any direct affects of piracy on any of your vessels, and if so, how has that affected your operations?  Also, what are your thoughts on trading in some of the high risk areas affected by piracy?

AG: First of all, it’s not only mariners who are affected by piracy, everybody is affected by pirates.  This is not a localized issue anymore, frankly it’s a worldwide phenomena because international trade touches the coasts your talking about.  Piracy has proliferated on all coasts surrounding Africa and into the Indian Ocean now.

It’s become an accepted part of the business.

There are continuously more than 500 mariners in captivity held for ransom.  Piracy is a multi-billion dollar phenomena.  The violence has escalated, and will continue to escalate and get uglier.  Piracy in fact is increasing and is a fact of life.  Since our core trade lanes are in the Americas and we’re only out there on an occasional project basis, there are quite often mutual decisions between cargo and carrier as to what route to take and what cautions to take.  On the US-flagged vessels, without question, we put on armed guards on every one of them.  Safety to crew is a top priority in this case, the same is true of the foreign-flagged vessels as long as the owners are in agreement.

It’s a very troublesome part of our business.  I would say today it’s very difficult to avoid the pirates, and there are all sorts of initiatives regarding how to protect your vessel, lining up in a convoy and so on, nonetheless, there are a lot of ships trading in areas where pirates are, and it’s an organized “business.”  Pirates are not a couple of guys around a camp fire who decide to go out in a boat and jump on board a vessel.

Many people have come to discuss this issue not so much as piracy anymore.  They used to come on board and take the liquor and the money off the crew, or whatever else it was they wanted, and then take off.  Now when you have these kidnappings, threats to the crew, and killings in some cases, I think it takes on a whole different level.  The international attention paid to this is unfortunately not what it should be, and I think the only reason you can assign to that is the media have not focused on the fact that the majority of these crews are non-westerners.  Regrettably, I think the issue does not receive the attention that it should.  I can tell you that if it were 500 Americans who were continuously kidnapped, effectively tortured, I think the situation would be quite different.

JM: I think you just answered my next question which was, do you think there has been an adequate response to the rise, and I think that it’s a definitive no.

AG: Apparently from several independent sources, which I would classify as highly qualified, the understand is that the pirates are controlled by approximately a dozen or so people comfortably living in Europe.  They are starting to classify these pirates as terrorists now, which has given a whole new meaning to how the international community looks a these people, and reacts to them.

We were one of the first to put armed guards on our ships when many of the other carriers were hesitant to do that.  I think everyone is starting to come to the conclusion that you don’t have much choice.  Buying more risk insurance just isn’t getting it done.

JM: Lets hope there is an adequate response in the near future.

AG:  There isn’t going to be.  People aren’t aligned on this regrettably, and things are going to get uglier.  The experts in the field don’t believe this will go away.  The view is simply that defensive measures are more than inadequate.

JM: Thank you gentlemen, just one final question before we wrap this up.  In all the topics we’ve covered here, and considering all that is going on in the world, as a CEO, what is the one thing that keeps you up at night?

AG: I have to tell you, I’ve been doing the same thing in this industry for a really long time and I think that our industry and our business is particularly conditioned to change.  I believe it the fact our business in particular has positioned itself particularly well to deal with those changes.   Obviously we did not predict the big meltdown, etc.

I sleep pretty damn good.

I’m confident in our ability to deal with what’s taking place in our industry.  Point of fact, my view is that the current turmoil will benefit this company in particular because we are ready to find ways to take advantage of that change.  When the market is really flush,  it’s very difficult to do much better than the benchmark.  I think the opportunities come when there is a dislocation like this and finding ways to really leverage your strengths and we have the systems and the people to do that.

MD: And we have the balance sheet to do that as well.  We did not over-lever our balance sheet back in 2007-2008 when a lot of the competition was out there ordering ships and taking on a lot of debt.  We’re in a position now where we have a very strong balance sheet with cash and a limited amount of debt, and a good shareholder base that will help us take advantage of some opportunities that are going to be out there.  The banks are going to be looking for good operators that have the ability to pay, either to charter or keep ships employed.

AG: I guess what keeps me up at night is not being able to capitalize on opportunities.

JM: Thank you for your time.

KL: IMO will shortly be attending the Conference of Parties [COP17] for the UNFCCC in Durban, what message is the Organization taking to that meeting?

EV: The main message will be to encourage the parties to UNFCCC to continue to entrust the International Maritime Organization with the control of greenhouse gas emissions from international shipping, and of course a central part of our message will be the successful outcome of MEPC62 this July when governments adopted amendments to Annex 6 to introduce mandatory energy efficiency measures for ships engaged in international trade.

KL: There seems to be concern that overall emissions from shipping may not fall even after the new IMO regulations take effect, but isn’t that a function of global demand for trade, and therefore outside the scope of any technical regulation?

EV: You’re absolutely right.  Due to the continued demand for shipping services that again is a result of world trade, or increase in world trade, the technical and operational measures can act the best lead to the establishment of shipping emissions, but it will not lead to an overall total reduction.  That is why IMO is continuing it’s work to control greenhouse gases with both to expand the technical measures to other ship types, and also working on a market-based measure to provide additional incentive for the shipping industry to invest in more fuel efficient ships, and to operate them even more fuel-efficiently than today.

KL: A recent study suggests that the volume of greenhouse gas emission reductions from international shipping resulting from applying the mandatory measures adopted by the IMO will be even greater than first envisaged.  Can you expand on that?

EV: Yes, I’m happy to expand on that.  Following the adoption in July, the IMO Secretariat commissioned a study to look into the detailed affects the adopted measures will actually produce, and it’s very promising that by 2020 we will see a reduction by 100 to 200 million tons, or between 10 and 17 percent reduction over business as usual.  And if you go further down the line to 2030, the reduction will be between 200 and 400 million tons, or in percent, an 18 to 27% reduction over business as usual.  If you go all the way down to 2050, we will see a reduction between 35 and 40% compared to business as usual.  Meaning that a ship in 2050 will be twice as efficient as it is today due to the new regulations.  The operational measures will have an immediate affect, while in the longer term, it will be the design index that will be the main driver of change.

KL:  The recent amendments to MARPOL Annex 6 that you referred to earlier have established the first-ever mandatory regime for an industry sector, is IMO organizing workshops or training to assist with their implementation?

EV: Actually, we have already had the two first workshops.  One took place in Singapore last week and as we speak, the second one is about to conclude in Durban, South Africa, so that is very fitting that we have one here and one in Durban.  We have planned activities of about 20 workshops over the next two years to assist, in particular, developing countries to implement and enforce the new measures.

KL: Is IMO’s work connected with other UN organizations such as UNIP?

EV: Yes, definitely.  IMO is part of the UN family, the UN system, and a lot of our work is very closely linked to the work of, in particular, UNEP, but also other UN agencies such as UNDP and of course our greenhouse gas work is closely linked to what happens in the global negotiations under UNFCCC.

To find out more about IMO’s work, find them online at www.IMO.org

JM: The expansion of the Panama Canal will certainly have a significant impact to the global shipping industry once completed. Do you see that as having much of an impact on your existing business.  None of your vessels are Panamax, but what impact, if any, do you see that having?

MD: It really doesn’t have much impact on our ships going through there, or even our competitors, because those ships are small enough where they currently have easy access to the canal.  I believe the most significant impact lies within the bigger container ships as the 12 to 13,000 TEU will now be able to pass through.  The super 18k TEU ships will not be able to pass through, but with these larger container ships going through, they’ll move to the East Coast and the Gulf Region which will have an impact on the ports in those places.  There is going to be a need for transshipment and this will put a greater demand on port facilities in the US and the Gulf area.  Greater demand on ports will put a greater demand on labor supply, but will also provide opportunities for us.  We are one of the largest container carriers for niche containers in South America, so there may be opportunities for transshipment in those areas as well.

It’s not going to have a direct impact on the project shipment per se, but it will have an impact on other ancillary businesses within the container front, and within the port facilities.  There are already several ports that are trying to determine how they are going to react to this canal expansion, both in the US and other countries such as Trinidad.

It’s going to be interesting to see how it develops over the next few years.

JM: As you look into the future, do you see the niche container trade becoming more of a factor for you based on some of these new opportunities that may present themselves?

CEO, Andre Grikitis: I think we hope that’s the case.  When Mike talks about our container traffic, we’re talking about the ports that the large containerships will not be going in to.  Hopefully we can get to do more of that work whether on a direct, or transshipment basis.  I think that the opening of the canal will certainly impact the region, and places like Columbia will expand their transshipment activites.  That brings other economic development, and we are certainly out looking for the possibilities where we have capacity where we can assign to carrying containers to some of these “outports”.  Again, it’s part of our view of the need for us to have a combination of cargos to continue to be successful.  I expect this will have an impact.

MV Industrial Freedom, image courtesy Intermarine

JM: Early on, you touched on the KG situation, and I know that had a direct impact on Beluga Shipping along with some of the irregularities that apparently went on over there.  Those assets appeared to have been redeployed with other shipowners/operators who are out there, but what impact do you see to the access to capital.  Do you see a change, or have you had any involvement with the KG financing schemes, or do you a change coming in the future where there will be a significant shift that will help to correct the balance of supply and demand?

AG:  Of course, my opinion is that the KG system completely screwed up the supply and demand story.  The fact that some of those assets have been redeployed doesn’t mean they have been redeployed in a way in which they are properly deployed.  What we see is a kind of crisis because pricing for certain projects and cargoes, the delta between high and low prices from time to time is so wide, that we can see that many of the ships that are out there today are in inexperienced hands who are not aware of the trade.  As a result of the KG system,  understand that the KG’s themselves had what they called owners who were the technical managers and they were sometimes the commercial managers.  The commercial managers quite often put these vessels on to time charter, and those deals, the bank deals, were obtained on the basis of a time charter, with the banks not looking at who the time charter necessarily was, meaning that the underlying credit risk was not vetted or understood.

I think that sounds a little familiar right?

So, that is the core of the problem right now.  You have more assets looking at homes for all kinds of bad reasons, and the market is going to have to get re-priced somehow.  Moratoriums for the KG’s were put in place by the banks because they could mark to market, they didn’t want to take the write-downs, so they kicked the can down the road, and now they’ve come to the end of the road.  This is just one of the pieces of what looks like a pile of rubble on the European banking front.

I think what the KG really was, is what I would call a market destroyer.

So the KG system is, if you look at the statistics, is only fractionally there.  New lending is down, and I think now there will be a lot more “retrenching” in Europe.  The European banks are in such a difficult situation with their capital structure that they need to improve their capital base, especially in Germany, which has historically been the source of debt financing for the container operators, and the multi-purpose sector.  They are in a very difficult situation because they need to retrench, scale back the amount of their ship portfolio, and mark them to markets.  Which means they will have to take losses and will basically do-in some of the owners.

So then where do they go?

They then have to spill these assets, but they’ve been reluctant to do that up to this point, but some of these KG owners have had moratoriums on debt of up to 3 years.  And now they’ve reached the point where they can’t do that any longer.  They are getting a lot more strict with the borrowers, and are now starting to seize assets.

It makes for a very difficult situation over in Europe, one that kind of bleeds over to the US.  Although there aren’t many shipping companies in the US, there are the publicly-listed companies, but there isn’t a lot of other entities.  It has impacted the asset values which has then dried up the source of debt financing.  Some of the US banks have started to get interested again, the likes of Chase and Bank of America, and some of the others.  The leasing companies are starting to show interest.  The Loan to Values are not going to be as good as they have historically been.  If you get a loan at a value of 60% I think you’ll be doing pretty well.  So it’s definitely turned the sources of capital upside down, and for those entities that are highly leveraged, it’s going to be an extremely difficult road for the next 18 to 24 months.

There’s just not a lot of good news on the horizon because the ships keep coming, there is going to continue to be freight rate pressures impacting the charter rates and the EBITDA by these companies.  It makes it extremely difficult to try and raise new capital.

The banks are gun-shy.

For the most part, they don’t really want to lend any more, and the ones that do want to lend will only do so with the good companies in the first place.  There are a few companies in the US that will be able to source funding from US banks, but some people are thinking to turn to the Chinese banks.  The Chinese banks are very slow to move, they are used to only lending to Chinese companies, and they are starting to look at other European and US companies, but it’s an extremely slow process.  These companies are starting to find out that Chinese lending terms and cost of funds is very expensive.  That will be one alternative, but it will be expensive and slow to develop.

For newbuildings there will be opportunities, because the Chinese shipyards will benefit from that financing source, but refinancing or FCFs, that will be more difficult.

Please check back in with us soon for the 4th, and final part of this interview…

M/V Industrial Dream, image courtesy Intermarine USA

Part 2 of an exclusive gCaptain interview with Intermarine’s CEO, Andre Grikitis, and CFO, Michael Dumas.

By Jack Mylott, Partner, Flagship Management

JM: With the growth of the heavy lift and project cargo industry over the past decade, we’ve also encountered the global debt crisis, the Eurozone crisis, and China contracting, constricting, or otherwise limiting their trade.  From an infrastructure development standpoint, what has been the impact of these issues on the projects you have been involved with?  What has been the impact to Intermarine?

AG:  When there is a crisis, project movement lags, whereas the bulk industry reacts almost immediately.  Projects can’t stop immediately and they don’t start immediately.  Essentially, there is a lag-effect in our industry and it can vary depending on the region, so it could be 8 months or longer, and that’s both in the up and down cycles.

I think that’s one feature of our industry if you relate it to the bulk industry.  The demand for projects, or our type of cargo, is very difficult to forecast, because there aren’t many people following it and many people don’t report what’s on their books.  Our view of the market has to be developed from what our clients tell us what’s coming.  However, I think the complication for our market is that, like other parts of shipping, during the last decade or more our industry was really over-built, so the oversupply of tonnage is outstripping the forecasted demand, and has done so consistently since 2009 through 2013, from what we can see of newbuildings.

This overbuilding has had a few driving factors.  The major factor is the KG system in Europe which has made Germany the largest ship-financing region.  Many ships were built on speculation, and by people who didn’t operate them themselves, they did it because the money was available, and what you have now is equivalent to a sub-prime condition.  Equity was available from private investors who got tax deductions, these funds were created and promoted by the financial community, and this really led to a boom in building of multi-purpose, heavy lift, and container vessels as well.  It was completely overbuilt without any real notion of what the demand cycle was, and it far outstripped what many of the traditional carriers in this segment themselves had forecasted.  The market became distorted, and that distortion is a bubble that will continue here until supply and demand comes into sync.

One of the difficulties in our industry, and I’m guessing some others, is that having the equipment, and having the ships is one thing, but having the personnel that are competent and capable of operating them, is in fact, in short supply.  So, many of these ships are out on the market providing “space”, but they are effectively bringing down the industry.  I would say the problem has been pushed down the road by the German banks with moratoriums etc etc and they anticipate of the market recovering, but that hasn’t happened.  So, I think we’re expecting some redistribution of control, but that redistribution of control won’t necessarily improve the market if the ships don’t get into the proper hands in terms of how they can be used and managed.

JM: Regarding personnel competency and capability and some of the extended services you offer beyond A-to-B ocean-going service, where do you extend your logistics management expertise?  How far into the supply chain to you go?

AG:  Essentially, we go as far as our clients have wanted us to go.

One of our difficulties is that the freight-forwarding community is often involved in this as well, and in many cases, they arrange the ocean transportation. So, they are in fact our customers.  We cannot, and do not, compete with them on a direct basis, however on certain projects, we have quotes on cargos that have included services including road building, believe it or not, we’ve participated in barging, we have a barge in Venezuela that has brought the equipment alongside the Jose Refinery, and was the only barge available that had the capability to do that.  We’ve certainly done trucking, collaborated with heavy haul folks, all the way up to quoting on some erection.  We offer packing at the terminal for people who want to consolidate their cargos in a single location from multiple suppliers.  Clearly we do whatever is required on the documentation front, and I think that all these services, we can either do them in-house, or we collaborate with others in the industry, so it can all be done with the shipper going to a sole-source.

We’ve made arrangements, for example, for folks to be able to transport cargos from ship-side to their final destination by using berths where rail is available.  So, essentially, we are flexible in our approach to how we handle transportation solutions, and even if we are not the party who does the direct contracting, we try to involve ourselves as early as possible into the lifecycle of a project, so that the proper pre-planning can be done.  I suppose it’s no different in most businesses, but if you’re involved early enough in project cargos, quite often, you can achieve a much more effective and efficient operation in the end, and it puts people on the same page.  We try to avoid surprises.

M/V Industrial Freedom, Image courtesy Intermarine USA

JM: I’ve seen on your website that you have a couple of images of ships carrying wind turbine blades which falls outside of heavy lift, and moreso into the project cargo domain.  Do you see a difference with your services as they relate to the wind turbine industry?

AG: Let me make our position on heavy lift and project cargo clear.    Our formula is that our business needs to run on a combination of cargos.  Essentially, almost anything up to and including containers in some cases, in our view, qualifies as project cargo because a combination of cargos is necessary to make a successful voyage.  Irrespective of how much cargo there is, if you don’t have it in the right combination on a vessel, then you cannot produce a successful and profitable voyage.  So, with the number of ships in the world today, and the way cargo flows go, we certainly do not build our business around heavy lift cargoes.  Heavy lift cargoes are not that large of a percentage of our overall cargo mix.  Cargo mix is really what’s key in being successful in this industry in an ongoing basis.  I think that essentially is how we’ve always treated voyages.  We’re always combining various commodities in the best possible combination for a good outcome.

Wind blade equipment today, probably constitutes roughly 20% of ocean-borne multi-purpose heavy lift cargo today.  It has become extremely important for a number of reason.  For one, it moves almost from everywhere to everywhere these days, and producers are both importing and exporting from the same locations sometimes, which is not so easy to understand in some cases, but it’s become a commoditized business in many ways.  It has produced a large volume of cargo.  These cargos require specialized vessels due to their dimension, not because they are heavy.  They need to stow on vessels in a way that makes them more economically viable to transport because they are not that highly valued.  So, as part of the project multi-purpose heavy lift cocktail, they are a vital ingredient today.  Some of the turbines, and the other structures such as the towers, can of course get quite heavy, and they move as well.  The blades are a very important part of the global cargo movement.

Thinking about project and heavy-lift cargo, I would not make the distinction that only heavy pieces are project cargo.  There exists the Heavy-Lift Club, which was modeled after the Container Box Club where many of the world’s heavy lift carriers get together twice a year on the CEO-level.  The qualification to “join” the club is to have vessels of 150-ton lifting capacity continuously employed in service.  If you look at a cross section of the members, it’s quite clear that  the majority of them are engaged in things other than just heavy lift cargo.  There are many ships today that have heavy lift cranes, but it doesn’t mean they are in that trade on a continuous basis or even necessarily on a high frequency of service in the heavy lift sector.  There are many ships that have 150-ton lifting capacity in the modern fleet, and where as years ago we traditionally called things over 150-ton as heavy lift cargo, that story is different today.   Many “multi-purpose” vessels which are capable of carrying containers and homogenous cargos and so forth are also equipped with good gear of over 100 tons.

Check back in with us soon for Part 3 of this interview… read Part 1 here:  Intermarine CEO Discusses Operations, Ex-Im Bank Financing, Part 1

Part 1 of an exclusive gCaptain Interview with Intermarine’s CEO, Andre Grikitis, and CFO, Michael Dumas.

By Jack Mylott, Partner, Flagship Management

JM: Andre, Michael, thank you for joining us today.  Let’s kick this off with an overview of Intermarine and your operations. 

AG:  We are the largest break-bulk project cargo carrier based in the US.  Our headquarters are in New Orleans, and our largest office is in Houston where the majority of our clients are in a radius of 100 miles.  We have a 90-acre industrial terminal in Houston, which is the busiest project cargo terminal in the United States.  At that facility, we have rail siding, truck delivery, barge docks, and mobile cranes.  From there we operate about 250 voyages per year, primarily within the Americas and Latin America.

Venezuela, Trinidad, Columbia, Ecuador, Peru, Chile, Suriname, Guyana, Argentina, Brazil are our core and we have a high frequency of sailings and strong market share in all of those trades.  We carry break bulk, project and heavy lift cargo, and we do have some container capability for projects.

Image courtesy Intermarine

Our core fleet has 3 generations of vessels.  Our first series were 2×200 for a combined of 400-ton lifting capacity.  Four of those now are US-flagged, followed by another similar ship that was only really upgraded and tweaked to a 2×250… there are 6 of those.

Now the larger version, a new class we dubbed the F-class, has been specially configured for being able to carry very large and over-dimensional pieces, and has no line-of-sight issues.  These vessels have a capacity of 2×400-ton cranes for an 800-ton lifting capacity.  They are the largest in our fleet and are 14k DWT.   One of them is operating under the US-flagged fleet for a total of five US-flagged vessels.

The EPC companies [Engineering, Procurement, and Construction], Oil, Gas, Mining are the industries where a majority of our clients are operating in.  We have contracts with many of the suppliers to these industries, and as projects are built, we supply the infrastructure.

We do the same thing on a global basis.

We traded actively in the trans-Pacific trades to Asia and we’ve had services on an intra-Asia basis from north Asia (Japan, Korea, China) into India and the Persian Gulf region.  We trade with both Foreign-flagged and US-flagged assets and have a high concentration of heavy lift vessels between 400 and 800-ton lifting capacity.

The main supply of cargoes for this comes from Ex-Im Bank-financed lending to buyers of US goods.

I think it’s well known that the president has established a goal of doubling US exports in his inauguration speech.  Ex-Im, in fact, has turbo-charged its lending, which I think has been particularly successful in the current environment.  They have more than doubled their lending over the last two years.

They continue to grow, and we’ve grown with them.

I think from the point of view of a successful government program, the bank doesn’t cost taxpayers anything, produces jobs, manufacturing jobs, and jobs on the waterfront that go with moving the cargo.  When you consider that we’ve more than doubled our fleet with the expansion of Ex-Im, there is a direct relationship there, and there are good-paying seagoing jobs associated with this program as well.

From a point of view of anybody I think reading an article of what has been working, and frankly what could use more turbo-charging, in my opinion, Ex-Im Bank lending has been extremely successful.  My view is that program should be expanded.  Regrettably, the current Chairman, Fred Hochberg, who’s been very proactive and engaging, has not been able to add sufficient staff to promote the lending to the level that I think they could.  Simply because, like other government agencies, he’s constrained by budget issues.

Our view is that the government should be prudent and somehow working out exceptions to some of these because this is certainly a non-partisan viewpoint about what works and exactly what the country needs.  That is a very important part of what we see as a potential growth area for our economy and our business.

Our services are essentially customized to fit the needs of our clients.  Meaning while we’re consistent in our sailings, the same ship does not sail the same route, or call on the same ports on a consistent basis.  We are tailoring and customizing voyages to optimize client’s needs.  The focus of our business is not about the hardware.  Essentially, while we obviously need and maintain a core fleet of vessels, and we are normally operating 25 plus vessels at any given time, our business is a service business and what we aim to do is to really satisfy the needs of clients and make ourselves useful to their transportation needs.  The fact we’ve been able to provide that sort of expertise and consistency over time has led to what I would call a very strong brand.

What we provide is certainty and reliability in a business that of course has a lot of moving parts, and for many of the projects that our clients are involved in, the lowest cost in transportation does not necessarily end up being the best value.

The value of projects getting up and running on time, or keeping running, is much more important than some difference in freight.  What we try to do is manage our schedules to ensure that we are delivering what we promised, and I think that having done so consistently has led to a high degree of client retention.

And it’s not just A-to-B transport…

We provide other services as required.  What’s important to our clients, among other things, is that they also want timely, accurate documentation because everything may go very well, but if they can’t bank their document on time, then people are obviously not going to be happy.  Everybody in our company is involved in the cargo life cycle in some way.

We maintain a very strong corporate culture which I think is evident to the clients, and considering the kind of turmoil that the shipping markets are often in, I think that stability, consistency, and reliability are really the important ingredients for us to continue to grow and develop our business further.

JM: You touched on one or two things as far as what is sparking some of the growth such as the Ex-Im Bank financing.  What are the key factors that are driving the requirements for the services you’re offering?

AG:  On a macro basis, there are a few things.  Keep in mind that the Ex-Im are cargoes only emanating out of the US.  Clearly multi-nationals today operate a lot differently than they did.  Where previously, a particular supplier of cargo would be quoting a cargo out of one area, today, the multi-nationals may quote that product out of 3 separate locations.  You may be quoting a cargo into someplace in Brazil, and it may be produced in Europe, the US, India, or China.

So, the complexity of our business has clearly expanded over time, and there are a number of factors that influence that.  The macro picture on how companies are doing business is a big part of that.  Ex-Im is an important US initiative, if you will, but in terms of overall cargo movement on a global scale, it’s certainly not that large.  You’re talking about a small number of vessels being occupied with Ex-Im, the US fleet of course is not large, shipping is not a valued industry in the United States.  It’s clearly not been in the forefront really on any level, so it makes our business more complicated to communicate and to have others understand the value of it.

On a global basis, you’re talking about the macro picture, where infrastructure development continues in more places than it’s ever taken hold before.  Whereas maybe 20 or 30 years ago, you would have the oil patch building in the Persian Gulf, and perhaps West Africa, but today, you have projects really all over the world as all the Asian countries continue to build infrastructure.  Certainly it’s ramped up in the Americas on a continuous basis as well.  West Africa has expanded, so there is more activity on a much larger scale as the world industrializes.  Of course, to industrialize, it comes back to the raw materials required and you see the booming economies of places like Brazil and Australia who are involved in the producing commodities required for manufacturing the materials required for further industrial growth.

Again, I think the industrialization on a worldwide basis is requiring more carriage of specialized cargoes and I think that’s driven the multi-purpose, heavy lift sector over the past decade.

Please check back in with us soon for Part 2 of this interview…

My interview this morning with Caterpillar’s (NYSE:CAT) Director of Marine Product Support, Jaime Tetrault (via Skype).

Jaime has worked in various roles at Caterpillar for the past 15 years and has a B.S. Marine Engineering from the United States Merchant Marine Academy, and an MBA from Indiana Wesleyan University.

In our chat, Jaime discusses Caterpillar’s ongoing carbon footprint reduction initiatives, their global product support structure, the state of the Brazilian marketplace, and finally his take on the recent reassignment of Kings Point’s Superintendent, and the future of the United States Merchant Marine Academy.