Friday, 6 April 2012

Quality, Brand (and Piracy)

A philosophical post over the Easter holiday, on the cost but apparent zero value of quality and whether there is emerging value in brand?

Quality first entered shipping's vocabulary with in the form of SIRE - the Ship Inspection Reporting Programme. After an evolutionary process of Oil Company setting up their own oil tanker vetting programmes, the duplication of inspections and administration was recognized and a single inspection criteria for oil tankers from which all member of OCIMF would submit and use.

In the world of dry bulk, Rightship followed in 2001, founded by BHP and Rio Tinto to apply a quality standard to ships chartered to load at their terminals and carry their cargoes.

The admirable objective of both SIRE and Rightship is to establish a quality standard higher than straight statutory compliance and to encourage Ship owners to invest in quality as a commercial incentive.

Which brings us to the ugly reality today of Capesize bulk carriers and VLCC tankers earning a fraction of their daily operating costs. A modern Cape need to earn about $21,00 day to break even on financing, wages and operating costs but are currently making less than $5,000 a day in the volatile spot market. VLCC's costing over $150 million need about $30,000 as day but can earn as little as $1,000 a day in an over-tonnaged trade route.

The crux of this post is that structural separation Shippers' absolute demand for quality while at the same time demanding less than break-even cost of freight. This same scenario is being played out in the everyday lives of shoppers as large Retailers demand higher quality standards combined with driving down the cost of goods - sometimes referred to as the WalMart effect.

The inevitable question is when will quality have to be sacrificed in the interests of economic survival? In some circumstances this may have already happened and despite rules, QA systems and audits the shipping industry has undergone Darwinian adaption which provides the illusion of quality while in fact operating in 'needs must'.

The above opinion runs completely contrary to Adam Smith's theory of the invisible hand self-regulating the market. However, the Antipodean Mariner's theory is that the pursuit of quality, far from being a differentiator, has become in itself a distorter of the true state of the market.

Placed into the context of several high profile casualties featured in this blog, Rena and Costa Concordia both went aground and were lost with audited and certificated quality systems in operation.

If quality is no longer capable of differentiating market participants, and Buyers are no longer prepared to pay a premium for quality, the AM hypothesizes that brand will enter the salty vocabulary of shipping.

Brand represented by the financial resources to perform the promises made in a contract. The industry buzzword is counter-party risk, or the likelihood that the Company you signed a charter with today will collapse in a litigious heap next month or next year. The shipping world is wracked with high profile financial collapses (Korea Lin, Sanko Steamship - again), as high cost contracts struck in an environment of pre-GFC largess fail to be sustainable in the current low freight market.

There is an emerging argument that Owners have assets over which a Court can secure orders in the event of a commercial dispute. However, Charterers can collapse an under-capitalised entities and emerge the next day ready to fix under new terms.

Shipping has had a long tradition of 'low doc' contracts, based on mutual trust between Buyer (Charterer) and Seller (Owner). The rise of counter-party risk has unfortunately pervaded the freight contract market and Shippers and Owners need to develop risk tools in addition to quality tools to avoid being left holding the financial baby.

If you have got the end of this mini-essay, a bit of light entertainment can be found here (especially if you're a working Seafarer). Thanks to for posting and the AM endorses their hope that this clip makes its way to a Somali pirate's iPhone soon.

The Antipodean Mariner

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