Hijack ship costs are subject to general average, the Supreme Court has ruled

OPERATING expenses for hijacked ships are liable to general average contributions, the Supreme Court ruled on Wednesday, overturning an earlier decision by the Court of Appeal.

The landmark decision - which will impact on owners, charterers, cargo interests, insurers and average adjusters alike - could potentially open the way for retrospective claims, one of the lawyers involved said.

It will also fuel the ongoing controversy surrounding the York Antwerp rules that govern GA, a system that cargo interests have long argued is stacked against them.

Mitsui & Co Ltd v Beteiligungsgesselschaft LPG Tankerflotte MBH & Co KG arose from the seizure of Longchamp, a Bernhard Schulte-managed liquefied petroleum gas carrier of 4,316 dwt, now some eight years ago.

The vessel was taken by Somali pirates in January 2009, and it subsequently emerged that the ship had not registered for European Union protection, and had missed a scheduled Gulf of Aden transit. It was released in March that same year.

The nub of the case was whether operating expenses incurred during a 51-day period of ransom negotiation with the pirates were or were not subject to general average, which is applicable to the ransom payment itself.

At first instance, Deputy Judge Stephen Hofmeyr QC upheld the adjustment of the average adjusters, Stichling Hahn Hilbrich, which had allowed such expenses. But this decision was overturned by the Court of Appeal.

The Supreme Court yesterday effectively reinstated the original decision, confirming that Longchamp's opex costs - namely crew wages and high-risk bonus, maintenance and bunkers consumed - were recoverable in general average.

In the circumstances, the payment of operating costs was deemed to represent an alternative course of action to simply shelling out the pirates' initial ransom demand of $6m.

In the event, the ransom actually paid was just $1.85m, representing a saving of over $4m, but only made possible by incurring an opex of $160,000 during this time.

The cargo interests were held liable for 14.44% of GA, and made payments on account. But following publication of the adjustment, proceedings were issued challenging the adjuster's conclusion that negotiating period expenses are covered by rule F of the York Antwerp Rules. 

In effect, the litigation- and the ultimate cost of taking the matter all the way to the Supreme Court - boiled down to a dispute over an outlay of $160,000, of which cargo interests' share was in the order of $24,000. That expense was more than compensated for by reduction in the ransom which resulted from the period of negotiations.

In the ruling handed down today, Lords Neuberger, Sumption, Hodge and Clarke found for the appeal. In addition, Lord Mance issued a dissenting judgment.

Stephenson Harwood partner Duncan McDonald, who acted for the shipowners, argued that the majority judgment is of general application in piracy cases.

"The natural justice point - which was picked up by some of the judges - is that if you take a step back, general average is intended to ensure that expenditure and sacrifice is shared rateably by the parties involved in a marine adventure.

"If the decision had gone against us, there would have been expenditure, from which everybody got the benefit, incurred by the shipowner alone."

In terms of the money at stake, it was unusual for a case such as this to reach the Supreme Court, he added. "But the legal costs here - looked at purely in terms of the sums of money at stake - are not the issue. The issue is a point of principle."

Before this case, average adjusters had taken the view that operating expenses during the negotiation period were not allowable under GA. But Stichling Hahn Hilbrich took the contrary view and stuck to its guns, and have now been vindicated.

"What this has demonstrated is that prevailing average adjustment industry practice has not been according to the law.

"This may be the trigger for shipowners who have not had the benefit of this Supreme Court judgment may seek to reopen adjustments, on the basis that they should have got a bigger contribution from the other interests."

Top stories:

Party congress takeaway: Bigger and stronger China state shipping conglomerates

CHINA Cosco Shipping Group chairman Xu Lirong was a member of the Shanghai delegation for the 19th congress of China's Communist Party, and has now shared what he extracted from the meeting.

With China's growing role in global governance, Chinese state-owned enterprises must unswervingly grow larger and stronger, setting the "game rules" in their respective sectors and having a bigger say in the international arena, Mr Xu, who heads the country's largest state shipping conglomerate, told the Chinese magazine China Economic Weekly earlier this week.

If that was Mr Xu's key takeaway from the congress, which ended yesterday, those who have been keeping an eye on China's rising shipping power and rapid moves in overseas acquisitions should listen.

The idea was already in the report addressed by President Xi Jinping when he lifted the curtain on the party congress last Wednesday: "[We will] make state-owned capital become stronger, better and larger."

The policy is not new, except it was "state-owned enterprises" - not "capital" - in the previous wording.

The distinction is subtle, but the use of "state capital" could suggest more overseas mergers and acquisitions to come.
  
During his interview, Mr Xu gave the Chinese reporter an example. Cosco Shipping has, over the past few years, invested around Yuan9.3bn ($1.4bn) in 10 overseas ports alongside the Belt and Road regions, which include Singapore, Egypt, Turkey, Greece, Spain, Italy, the Netherlands and Belgium.

Mr Xu was obviously being modest. His company's $6.3bn takeover of Hong Kong-based liner shipping company Orient Overseas International Ltd has just won approval from the US competition authorities. There is even talk about acquisition of another major container carrier in the pipeline.

Cosco Shipping Energy Transportation, the conglomerate's oil and gas shipping arm, is looking at buying a foreign tanker owner, preferably in Greece, according to industry sources close to the company. The Chinese giant is keen to expand its scale, especially in the very large crude carrier sector, but has concerns over ordering new tonnage that can put further pressure on a desired market recovery.  

Full story

Industry fights back amid environmental lobbying accusations

A NUMBER of companies accused of opaque lobbying tactics at the International Maritime Organization have rejected the allegations, while the IMO itself has sought to clarify the role that companies, non-governmental organisations and trade associations play in its decision-making process.

A report published on Monday by the business lobbying watchdog InfluenceMap, highlighted the corporate influence at play in the IMO's environmental meetings. Responding to the NGO's report on Wednesday, IMO secretary-general Kitack Lim defended the "transparent, inclusive approach" that the UN agency applies to decision-making.
  
"As is the case in other UN agencies of a technical nature, the make-up of national delegations to IMO is entirely a matter for the countries themselves, and those countries who wish to include industry technical experts or others may do so," Mr Lim said.

Mr Lim further argued that the IMO's consultative arrangements with 77 NGOs cover the "broad spectrum of shipping, maritime and social interests".

Full story

Boxship owners could face massive impairments

THE dire conditions in the container shipping sector over the past few years have had a knock-on effect for non-operating owners, who have seen the value of their fleets massively reduced and their share prices dramatically impaired.

Research from Alphaliner shows that since 2010 over $2.7bn has been written off by seven publicly listed container shipowners: Seaspan, Danaos, Global Ship Lease, Costamare, Diana Containerships, Box Ships and Rickmers Maritime Trust.

Of those, only five remain in operation following the collapse of Box Ships and RMT.
Moreover, despite improved charter market conditions and rising secondhand prices this year, the five remaining listed owners' share prices are still down by over a third since the start of this year. 

Full story

Opinion:

Bait and switch - what lies behind Scorpio's share offer hokey cokey routine?

SCORPIO Bulkers has earned the dubious distinction of trying to raise money from shareholders, one day after triumphantly deciding to return cash to them. It is unclear which side of the fence it wants to be. Does it want to grow its business, or does it want to harvest the crop?

To make things murkier, the company ultimately abandoned the 10m share proposed offering citing unsatisfactory pricing conditions. This marks the first time a Scorpio company has walked away from a previously announced fundraiser. Has the market finally caught up with its antics?

Robert Bugbee, president of Scorpio Bulkers, told Lloyd's List that the decision to raise equity was consistent with the company's strategy to acquire second-hand vessels at reasonable prices before their values move up. A strategy that, according to Mr Bugbee, was reiterated as recently as Monday during the company's earnings conference call.

He also said that the dividend initiation was meant to set the framework for a return to normal conditions, given the expectation for a market recovery in 2018.

As for the abandoned deal, Mr Bugbee categorically insisted that is was only because of a difference in price and not because of change in the company's strategic direction.

But let's analyse this whirlwind turn of events, one step at a time.

When a company initiates a dividend payment, it (typically) signals its intention to return part of its free cash flow to shareholders. The emphasis here is on the word "free".  Free cash flow is what is left after a company spends all money required to maintain or grow its business.

How do you reconcile, then, initiating a dividend payment on Monday, only to raise $80m on Wednesday "to be used for general corporate purposes, which may include the expansion of the company's fleet"?

Add to the mix the fact that a mere six weeks ago the board of directors of Scorpio Bulkers had authorised a $50m share repurchase programme. As equity analyst Amit Mehrotra of Deutsche Bank said: "To this point, Scorpio Bulkers may be one of only a few companies that has announced a $50m share repurchase authorisation, and then six weeks later, an $80m equity offering."

That is unfortunately life in the fast lane driven by Scorpio's two top executives, Emanuele Lauro and Robert Bugbee. Or as Ben Nolan of Stifel said, "the new dividend may be early but Scorpio Bulkers has never been shy".

We noted on Tuesday that the dividend declaration came as a total surprise to Wall Street analysts who cover the stock. We also noted that Scorpio is still in the red, having reported a net loss of $10.7m, or $0.15 per share, for the third quarter.

True, the market is firm and a dry bulk recovery in 2018 should (reasonably) be in the cards. But shouldn't you wait to return to profitability before you start paying dividends? Furthermore, why ask your board to authorise share repurchases, when you are not done raising equity?

Are your shares under-priced (hence the share-repurchase authorisation) or fairly-priced (hence exploring fresh fundraisers)?

Perhaps a better question for shareholders to ask should be: "Are we comfortable with management's decisions, or are there other dry cargo companies with a more coherent message and strategy?"

Scorpio Bulkers needs more than even before to send a simple and clear message to the market on where it stands on the capital cycle.

Full story

Markets:

Atlantic MR earnings near 2017 lows but optimism for November remains

SPOT earnings of medium range product tankers in the Atlantic trades have fallen to around their year-to-date lows, weighed down by oversupply and limited inquiry this month.

However, market participants remain optimistic about the near-term market prospects, anticipating that US imports of European clean products will pick up in November - which could drive up Atlantic MR rates.

Assuming that the supply of clean products from the US Gulf region remains below early-2017 levels, US Atlantic coast import requirements should rebound in December due to rising diesel demand and stock-building efforts, Makai Marine Advisors' Jeff McGee told Lloyd's List.

"Tanker demand could be 30% higher in November than summer levels," Mr McGee said.

Full product tankers report here

Panamax index softens despite pickup in Pacific trades

THERE was a general softening of the panamax bulker market in the Atlantic region over the past week, although the segment continued to earn better rates in the Pacific.

According to Intermodal's weekly report, the Atlantic panamax market witnessed a bit of pressure last week as congestion in the US Gulf and fewer transatlantic inquiries limited upside on rates.

At the same time, the brokerage noted that trading in the North Pacific region once again provided support to the segment, while the period business also saw improvements in terms of both volume and numbers.

However, the strength in the Pacific market did not really translate into any improvement for the Baltic Panamax Index, which declined 1.5% over the week to close at 1,626 points.

The average weighted time charter on the Baltic Exchange slipped to $13,091 per day at the close of trading on Tuesday versus $13,265 per day a week before.

Full panamax market report here

In brief:

Seaco is firmly on the acquisition path

CONTAINER leasing giant Seaco is still actively seeking new acquisition and takeover opportunities despite having been rebuffed on a number of occasions over the past year.

Speaking exclusively to Lloyd's List, the group's chief executive Jeremy Matthews revealed he and his staff had approached a lot of "material competitors" over a potential buyout to no avail and had even been told to get lost in no uncertain terms, but Seaco remains undeterred. "It is very hard to take somebody over if they do not want to be taken over," he said. "If they are a public company they'll have lots of defences and if a private company it is really up to the owners."

Nevertheless, Mr Matthews said that Seaco was aiming for at least one or two acquisitions over the next five years.

Full story

Korea's co-op federations have been hit by Hanjin's collapse

SOUTH Korea's local co-operative federations have become the latest victims of Hanjin Shipping's demise.

The federations were established to enhance the social and economic status of their members and to promote a balanced development of the national economy.

According to lawmaker Park Wan-joo, co-operative federations across the country recorded roughly Won118.7bn ($107.6m) in losses as of end-September as a result of having previously purchased Hanjin Shipping corporate bonds. They include the National Agricultural Co-operative Federation and Korea Federation of Livestock Co-operatives. One of their roles is to provide banking and insurance services to local workers and residents outside of Seoul.

Full story

Bills to repeal or limit Jones Act for Puerto Rico look unlikely to gain traction in Congress

FOUR bills that aim to either repeal or limit long-entrenched US coastal shipping regulations for hurricane-hit Puerto Rico are unlikely to make it through Congress in the immediate term, according to law firm Holland & Knight.

"Many of the same forces that have kept US cabotage laws essentially intact for some 225 years continue to be aligned against any permanent waiver, either globally or locally focused on Puerto Rico," it said in a note to clients, with the Puerto Rico-mainland route well-served by US flagged liner services.

But it did argue that two of the bills related to reconstruction efforts for the US territory might be viable as a wider relief package in light of the US Department of Homeland Security granting a brief waiver in the wake of Hurricane Maria to let foreign-flagged vessels transport goods from the mainland to the island.

Full story

Wärtsilä has posted a 9% rise in third-quarter net sales

ENGINEMAKER Wärtsilä has posted a 9% year-on-year rise in net sales for the three months ended September 30 this year, to €1.2bn ($1.42bn).

Although the Services business continued to make up the bulk of net sales at €526m, it grew only 3% compared with the previous period. Despite good order intake growth in Marine Solutions, the marine market environment is still challenging, with merchant, gas carrier, and offshore segments plagued by overcapacity and sluggish trade growth.

Full story

Costamare beats third-quarter profit estimates

CONTAINERSHIP owner Costamare has posted a higher than forecast profit for the third quarter of 2017, while unveiling a large number of new charters at improved rates.

The New York Stock Exchange-listed owner of 70 boxships posted adjusted earnings per share of $0.16, slightly ahead of the consensus expectations of analysts following the stock. A $1.5m gain on vessel sales contributed to net income of $24.1m for the quarter, ahead of the $20.7m profit posted in the third quarter of 2016.

Full story

DP World saw third-quarter gross box throughput rise 13%

AMID a tentative recovery in the container shipping industry, DP World has seen gross container volumes at its terminals worldwide grow 13.5% year on year to 18.3m teu.

The port operator said that the global trade outlook offered a substantial improvement over 2017 and cited the World Trade Organisation raising its trade growth forecasts to 3.6% from 2.4% for the year. All three of the group's operational regions saw strong growth in the third quarter over the second quarter, particularly for terminals in the Middle East and Africa, Europe and the Americas.

"The recovery of global trade in 2017 has outperformed previous expectations and we have seen significant upward revisions by economists and industry experts," said DP World group chairman and chief executive Ahmed Bin Sulayem

Full story

Golar LNG Partners aims to raise $138m from units offering

NASDAQ-listed Golar LNG Partners is looking to raise up to $138m from an offering if its series A cumulative redeemable preferred units. It has priced the public offering for 4.8m units at $25 apiece, with distributions payable on the preferred units with interest of 8.75% per year at the liquidation price per unit of $25.

Golar LNG Partners intends to use the net proceeds for general working purposes such as repaying debt, financing working capital, capital expenditures or acquisitions.

Full story

CAN a closed-down shipyard bring prosperity to a local community instead of being an eyesore? A South Korean city, Tongyeong, is poised to find out.

The city recently applied for a government subsidy to help local communities across South Korea in urban regeneration projects. The city plans to use the subsidy to turn a closed shipyard into a tourist attraction, which could be a first in the country.

Full story