IMO Steps Up Safety in Polar Waters, by Joseph R. Fonseca

Posted on November 28, 2014 by admin

IMO adopts a new set of regulations on navigation in polar waters now in force

United Nations’ International Maritime Organization (IMO) has adopted global, binding regulations to enhance safety of navigation in polar waters. After several years’ intense negotiations, the IMO Maritime Safety Committee (MSC) has today adopted a new set of regulations on navigation in polar waters, including the waters around Greenland. The IMO hereby takes a great step towards making the Polar Code in its entirety internationally binding. The Polar Code covers all aspects of navigation in polar areas – from the construction of ships, the training of crews and navigation to improved coordination of search and rescue operations. The Polar Code will apply to passenger ships, and it will also apply to cargo ships with a gross tonnage above 500. Director General of the Danish Maritime Authority Andreas Nordseth states: ”I am pleased that, with the adoption of the navigational safety issues of the Polar Code, we have taken yet another great step towards an internationally binding set of regulations to enhance the safety of ships navigating polar waters.” Before the Polar Code becomes effective, the environmental provisions on navigation in polar areas must also be adopted by the IMO Environment Protection Committee (MEPC) in the spring of 2015. However, the provisions have already been approved by the MEPC in September 2014. Therefore, it is expected that the entire Code will be adopted to become effective at the turn of the year 2016/2017.

MHI Completes Development of “Sayaringo STaGE”, by Joseph R. Fonseca

Posted on November 28, 2014 by admin

[Sayaringo STaGE a next-generation LNG carrier]

Mitsubishi Heavy Industries, Ltd. (MHI) has completed development of the “Sayaringo STaGE,” a next-generation LNG (liquefied natural gas) carrier. The Sayaringo STaGE was developed as a successor to the “Sayaendo1,” the company’s highly acclaimed LNG carrier evolved from carriers with Moss-type2 spherical tanks that offer a high level of reliability. The adoption of apple-shaped tanks (ringo being the Japanese word for “apple”) has enabled a near 16% increase in LNG carrying capacity without changing the ship’s width, while incorporation of a hybrid propulsion system has boosted fuel efficiency by more than 20% compared to the Sayaendo (and more than 40% vis-à-vis earlier carriers). Leveraging the Sayaringo STaGE’s capacity for transporting North American shale gas safely and efficiently, MHI plans to undertake extensive business activities promoting the new vessel as a strategic product among its LNG carrier offerings.

Whereas the Sayaendo has a continuous cover over spherical pea-shaped tanks, the tanks adopted on the Sayaringo STaGE have an apple-like shape with the upper half bulging more than the lower half. The new apple-shaped tanks constitute an improved version of high-reliability Moss-type tanks, and they have been adopted on the Sayaringo STaGE as part of MHI’s initiative to develop a vessel in the New Panamax3 category, i.e. capable of passing through the newly expanding Panama Canal which is expected to go into service early in 2016. The new structural configuration succeeds in efficiently increasing LNG carrying capacity. STaGE, an acronym deriving from “Steam Turbine and Gas Engines,” is a hybrid propulsion system combining a steam turbine and engines that can be fired by gas. The components of the Sayaringo STaGE system are the “Ultra Steam Turbine plant” (UST), a highly efficient reheating steam type marine turbine developed independently by MHI, a dual-fuel diesel engine capable of operating on both gas and oil, and an electric propulsion motor. Plant efficiency has been significantly improved through the UST’s effective use of the engine’s waste heat, resulting in a propulsion system enabling high-efficiency navigation throughout a full range of speeds. The basic design of the Sayaringo STaGE has now been completed, with the vessel’s LOA (length overall) set at 297.5m, width at 48.94m, depth at 27.0 and draft at 11.5m. Four apple-shaped tanks are featured. The developed design provides 180,000 cubic meters (m3) in total LNG tank capacity, but capacity can be set in accordance with the customer’s transport needs. Since MHI developed the Sayaendo in 2011, orders have been steady, commencing with the first order that called simultaneously for two vessels. To date a total of eight vessels have been ordered, including one ordered through MI LNG Company, Limited, a joint venture with Imabari Shipbuilding Co., Ltd. Now, with the Sayaringo STaGE as a successor ship to the Sayaendo offering increased transport capacity and greater fuel performance, MHI aims to conduct brisk marketing activities for its next-generation LNG carriers delivering superlative environmental performance in its quest to make a robust contribution to the global LNG transport industry. 1 “Sayaendo” takes its name from the peapod-shaped continuous steel cover over its spherical aluminum tanks. Integrated with the ship’s hull, this innovative structure was developed by MHI with technical support from Aker Arctic Technology Inc. of Finland. 2 Moss-type LNG carriers use independent spherical cargo tanks to transport LNG. The spherical tanks are supported by a cylindrical skirt integrated with the hull and covered with a hemispherical steel cover attached to the main deck. 3 New Panamax indicates the maximum size of ships navigable through the newly expanding Panama Canal. Maximum dimensions are 366m in LOA, 49m in width and 15.2m in tropical freshwater (FTW) draft.

Facilitation Payments: Stand your Ground, BY Wendy Laursen.

Posted on November 26, 2014 by admin

Sometimes captains face demands for bribes or facilitation payments at a port before shore passes are granted. Sometimes they are fined for fabricated issues relating to their crew’s nationality, their documentation or the inspection of their vessel.

And sometimes these requests come with the threat of violence or physical detainment.

The rationale of the people requesting money: Everyone does it. It’s not bribery; it’s courtesy. If I don’t bring something back I will lose face.

I need it; they can afford it.

According to the United Nations, corruption adds 10 percent or more to the cost of doing business in many parts of the world. Corruption can interrupt investment, restrict trade, reduce economic growth, and distort the facts and figures associated with government expenditures. Moreover, corruption in certain countries contributes to

poverty and income inequality.

According to Transparency International, in very corrupt states, the most corrupt sectors are very often the police, the bottom rung of the legal system, and the political parties, the very top of the political structure.

“This is not something you can tackle on your own as one company or as one shipping nation. It requires collective action by the industry and also close cooperation with inter-governmental organizations,” says Maria Bruun Skipper, senior adviser for the Danish Shipowners’ Association. The association is one of 43 members of the Maritime Anti-Corruption Network (MACN), a global business network working toward its vision of a maritime industry free of corruption. Established in 2011 and formalized in 2012, MACN consists of vessel owners, cargo owners and service providers.

MACN and its members promote good corporate practice in the maritime industry for tackling bribes, facilitation payments, and other forms of corruption. MACN also collaborates with governments and international organizations to identify and mitigate the root causes of corruption in the maritime industry and to develop sustainable solutions. Last month the Danish Shipowners’ Association hosted a conference as part of Danish Maritime Week that saw shipowners speak openly about the challenges they face. For example, a leading bulk shipping company that runs a tramp service spoke of the difficulties for trampers to make arrangements in advance. This can make them easy targets. The crews may not be familiar with local cultures and routine practices. Therefore they might see it as easier to pay a bribe than argue with officials.

Negotiating power can depend on time pressures, negotiating skills, threats of violence and threats to the business. “Within MACN we have developed an online training toolbox for captains to demonstrate best practice when they are met with a demand for a facilitation payment. It is for the captain and also the operator on shore because the captain needs shore support,” says Skipper. “It is important that the captain is prepared. He should know what he can do, the relevant regulations, and he should also be aware that there might be some ways of handling the situation at a personal level that can help. This might be how he addresses the port official. Be assertive, polite and confident. Try to explain that the decision is not up to him by saying things such as: I trust you are aware that you are asking me to break my company’s rules.”

As well as the toolbox, MACN has been initiating action on shore. The group chose Nigeria for a series of consultations and surveys to identify specific challenges. The local authorities were willing to be involved. A sector reform in Nigeria in 2004 has been followed up more recently by a national development strategy focused on improving competitiveness.

The findings of the study demonstrated a number of organizational problems, including the amount of red tape involved. For example, 142 signatures can be required to process a cargo in Lagos. The officials have broad discretionary powers and limited accountability. Integrity is not emphasized, and corruption is widely accepted and rationalized. Pressure from higher ranks to comply with established corrupt practices is also frequent.

As a result of the collaborative project, MACN is encouraging the development of an anti-corruption policy, improved controls and training. The organization will continue to work with authorities in Nigeria to help them change the current situation.

MACN is considering taking the issue of bribes to IMO. “The IMO has not really been active on this, but at MACN we are talking about how we can bring the issue into the political arena,” says Skipper. The benefits for the shipping industry are significant: increased efficiency, reduced cost and reduced risk of fraud, blackmail and other security threats.

MACN is continuously seeking commitment from United Nations agencies and other international organizations on how they can endorse and officially support initiatives going forward.

The Seven Principles upheld by MACN members:

Compliance Program Requirements

Members should create and maintain an anti-corruption compliance program that reflects and is designed to address the risks pertinent to the company’s business. Senior management and/or the board of each member should give explicit and visible support to the anti-corruption compliance program.

Members should confer responsibility for the anti-corruption compliance program on trustworthy officers who are sufficiently independent and empowered to fully implement the program.

Proportionate Procedures

Members should have clearly articulated policies and procedures that comply in full with the laws which apply to them and, as a minimum, prohibit all forms of corruption and give specific guidance on facilitation payments with the ultimate aim of their elimination. The policies and procedures should be proportionate to the risks faced by the various parts of each member, as well as the nature, scale and complexity of the organization’s activities, and should apply to all employees as well as third parties that act on behalf of the member.

Risk Assessment

Members should assess external and internal corruption risks on a regular basis and document their findings.

Training and Communications

Awareness of policies and procedures should be reinforced through communications and training to employees and, where appropriate, third parties. A record should be kept of all training provided.

Monitoring and Internal Controls

The anti-corruption compliance program should include features designed to prevent and detect incidents of bribery, facilitation payments and other forms of corruption through appropriate monitoring and auditing protocols. Internal controls should be implemented to protect the integrity of financial and accounting procedures such that the company keeps fair and accurate books, records and accounts. The program itself should be audited regularly and improved or updated as necessary .

Reporting, Discipline and Incentives

Members should provide employees with access to methods for asking questions and/or reporting concerns. Those asking questions or reporting concerns in good faith should be able to do so without fear of retribution. Members should investigate credible reports of improper behavior and should implement appropriate corrective actions when necessary. Compliance with the anti-corruption compliance program should be encouraged through incentives for proper behavior and, where necessary and appropriate, enforced through discipline for improper behavior.

Due Diligence

Members should conduct risk-based due diligence on counterparties as well as in respect of the hiring and oversight of third parties and business partners. The due diligence should include an anti-bribery commitment from third parties

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Royal Navy Warship in Caribbean Drugs Bust, by Marex

Posted on November 26, 2014 by admin

HMS Argyll has dealt another blow to drug smugglers after seizing more than 850 kg of cocaine in a high speed midnight chase. It is the third drugs bust for HMS Argyll in as many months. This latest haul has a wholesale value of £36 million – in total she has now seized 1,600kg of cocaine with a combined value of more than £68 million.

Secretary of state for Defence Michael Fallon said: “HMS Argyll has had phenomenal success in disrupting the drugs trade which continues to blight the UK. Her crew are doing outstanding and demanding work, and the British people will rightly be proud of, and grateful for, their professionalism and commitment. Thanks to them, drugs destined for our streets never reach our shores.” HMS Argyll apprehended the suspect vessel after being alerted by a US customs aircraft, which directed the ship to intercept. The Plymouth based frigate was pushed to maximum speed and quickly closed the 70 mile gap. After a high speed chase, during which time the smugglers began to throw their illegal cargo overboard, the warship used high tech radar to guide her small patrol boats which surrounded the smugglers and forced them to surrender.

In recent weeks HMS Argyll has provided assistance to Bermuda in the wake of Hurricane Gonzalo and has conducted two further counter-narcotics seizure.

Danish Lighthouses go Mercury Free , by Marex

Posted on November 26, 2014 by admin

In cooperation with the Technical University of Denmark (DTU), the Danish Maritime Authority has developed new bearing systems without mercury for a number of lighthouses. Denmark has become a frontrunner when it comes to phasing out mercury in lighthouses. Historically, mercury has been of great importance to the range of some of the lighthouses of the Danish Maritime Authority – the lighthouse lens was floating on a bath of mercury in order to reduce friction to a minimum and to increase the speed of the lens and the intensity of the light.

But, according to general knowledge, mercury is poisonous and harmful to the environment. Therefore, the Danish Maritime Authority has been striving to phase out mercury, and in 2009 it was agreed with the Danish Working Environment Authority that all Danish lighthouses should be free of mercury by 2014.

Now, the Authority has succeeded. In some of the lighthouses, it was chosen to change to modern, high-intensive LED (Light Emitting Diode) lights with a range of approximately 18 nautical miles, a little more than 33 km. The LED light was a supplier off-the-shelf item, but for protected lighthouses and lighthouses of great culture-historical and local-historical interest a mechanical solution was requested so as to keep the rotating and sweeping light.

That turned out to be more complicated. The solution was required not to destroy the original design and not to be more expensive than the LED solution, and it had to be approved by the Danish Agency for Culture. Finally, it was a challenge that the design of each individual lighthouse was so different that a solution developed for one lighthouse could not immediately be used for another lighthouse.

A mechanical bearing system was developed in close cooperation between the Technical University of Denmark (DTU) and the Danish Maritime Authority’s Service and Maintenance Centre Korsoer. Nakkehoved Lighthouse at Gilleleje was the first lighthouse on which the solution was tested in 2013. The result was positive and, during the following years, systems were developed for Lyngvig Lighthouse, Skagen Lighthouse, Blåvand Lighthouse and, most recently in September 2014, the system has been implemented in Myggenæs Lighthouse on the Faroe Islands.

Head of the Centre and Senior Engineer Aids to Navigation’ Jørgen Royal Petersen has been the coordinator of the project at the Danish Maritime Authority. He is satisfied:

“I am very pleased that it has been possible to find such a gentle and economical solution. Each lighthouse has contained 12-15 liters of mercury so the phasing out has a great impact on the environment. Only a few other countries have implemented partial phase-outs, but not such planned and total phase-outs as the one that has now been finalized in Denmark. Other countries are very attentive to what has been done in Denmark and, on several occasions, I have had the possibility of presenting the Danish solution to our colleagues abroad and other stakeholders. It is a milestone in the history of lighthouses.”

India Targets Private Cash to Ease Port Congestion , by Marex

Posted on November 26, 2014 by admin

India is targeting up to $1 billion of private investment by 2017 to build rail lines linking ports and national networks to ease growing congestion, which has delayed coal imports for power plants and contributed to a power supply crisis.

Such investment would more than double the $400 million that India’s state-owned railways have attracted in the decade since they allowed limited private participation and help fund crucial “last mile” links to ports.

Cash-starved, India’s British-built rail system has added just 11,000 kilometers (6,800 miles) of track in the 67 years since independence, and the network has come to symbolize the poor state of India’s infrastructure. China has managed 14,000 km of new lines in the five years to 2011.

Over-crowding at ports has been delaying much-needed coal deliveries to Indian power plants and supplies of iron ore for steelmakers at a time when there is already a shortfall.

Prime Minister Narendra Modi wants private companies, which have held back from investing in freight lines because of the struggle to win the necessary approvals, to build more of the last mile links where bottlenecks bite the most.

Companies will now be allowed to part-own new rail lines for variable periods of time rather than a fixed number of years, said Mukul Saran Mathur, an executive director at the Ministry of Railways. The railways will also take on more of a project’s financial risk, Mathur said, without giving further details.

“We have put in place the appropriate policy. Demand is rising,” he said, adding that the government had given approval to domestic infrastructure companies such as Navayuga and Balaji Infra to build up to 316 km (196 miles) of lines within two years.

The ministry also wants foreign operators which own stakes in Indian ports, like Denmark’s Maersk, to invest but so far none had shown any interest.

WHERE ARE THE WAGONS?

The government estimates port operators will spend $8 billion over the next two years to expand capacity to meet rising imports.

That rapid expansion worries port operators, who say the government’s proposed $1 billion worth of last mile railway links won’t help with bottlenecks on the wider network.

On a critical line between the eastern coast and the capital Delhi, demand exceeds capacity on four of every 10 kms (six miles). That forces cargo onto clogged roads and raises transport losses, which consultancy McKinsey says could cost India $140 billion in 2020. Essar Ports, a large port operator, wants to build new rail lines to help meet an expected doubling of its cargo handling capacity to 200 million tons in the next few years.

But the state-owned railways, which have a monopoly on the provision of goods wagons, are failing to provide sufficient wagons to service the extra cargo, said Essar Ports CEO Rajiv Agarwal.

“We can build our own rail lines but there is this major shortage of wagons,” he said.

Wagons are largely made by domestic companies Texmaco Rail & Engineering and Titagarh Wagons, who would benefit if the railways’ finances improve and more wagons are bought.

Most Indian ports only have access to two-thirds of the wagons they need, and the shortage is one reason why ships have to wait for two days more to get berthed and unload than the international average, according to Deutsche Bank.

“Most of the time we face a shortage,” said G.P. Biswal, deputy conservator at the busy eastern port of Paradip, where in September a surge in coal imports left twice as many vessels waiting than there were available berths. “We’re taking up the case with railways to increase their capacity.”

By Krishna N. Das and Tommy Wilkes (C) Reuters 2014.

Underwater Robot Sheds New Light on Antarctic Sea Ice, by Marex

Posted on November 26, 2014 by admin

The first detailed, high-resolution 3-D maps of Antarctic sea ice have been developed using an underwater robot. Scientists from the UK, USA and Australia say the new technology provides accurate ice thickness measurements from areas that were previously too difficult to access.

The results, published Nov. 24, 2014, in the journal Nature Geoscience,step up the pace of research in the polar regions aimed at understanding the dramatic sea ice changes in the context of climate change.

Scientists use a range of technologies and techniques to measure sea ice thickness. Satellite observations can measure large-scale thickness from space, but interpreting the data accurately can be difficult due to snow cover on the ice. Measurements made on the sea ice by drilling holes, together with visual observations from ships are critical for building a more complete picture, but difficulties in getting access to thicker areas of sea ice leaves gaps in the data. Now, with the Autonomous Underwater Vehicle (AUV) known as SeaBED, scientists have an invaluable new tool to fill this gap.

While most oceanographic survey instruments look down at the seafloor, SeaBED was fitted with an upward-looking sonar in order to measure and map the underside of sea ice floes. The AUV operated at a depth of 20 to 30 meters and was driven in a lawnmower pattern. These lines of data were merged to form high-resolution 3D bathymetric surveys of the underside of the ice.

The yellow SeaBED robot, which is approximately two meters long and weighs nearly 200 kilograms, has a twin-hull design that gives the robot enhanced stability for low-speed photographic surveys.

“Putting an AUV together to map the underside of sea ice is challenging from a software, navigation and acoustic communications standpoint,” says Hanumant Singh, an engineering scientist at the Woods Hole Oceanographic Institution (WHOI) whose lab designed, built and operated the AUV.

“SeaBED’s maneuverability and stability made it ideal for this application where we were doing detailed floe-scale mapping and deploying, as well as recovering in close-packed ice conditions. It would have been tough to do many of the missions we did, especially under the conditions we encountered, with some of the larger vehicles.”

“The full 3-D topography of the underside of the ice provides a richness of new information about the structure of sea ice and the processes that created it,” adds co-author Guy Williams from Institute of Antarctic and Marine Science. “This is key to advancing our models particularly in showing the differences between Arctic and Antarctic sea ice.”

The data from SeaBED, combined with airborne measurements of sea-ice surface elevation, ice coring surveys, and satellite observations, vastly improves scientists’ estimates of ice thickness and total sea ice volume.

“The AUV missions have given us a real insight into the nature of Antarctic sea ice – like looking through a microscope. We can now measure ice in far greater detail and were excited to measure ice up to 17 meters thick,” says co-author Jeremy Wilkinson from British Antarctic Survey.

The team deployed AUVs as part of two Antarctic cruises (IceBell and SIPEX-2) in 2010 and 2012 in the austral spring. The first expedition was on the British Antarctic Survey’s RRS James Clark Ross and the second on the Australian icebreaker the RSV Aurora Australis. Three locations around the Antarctic Peninsula were mapped —the Weddell, Bellingshausen and Wilkes Land sectors covering an area of 500,000 square meters.

The next steps are for the scientists to do large-scale surveys that can be compared to large-scale observations from aircraft and satellites.

“What this effort does is show that observations from AUVs under the ice are possible and there is a very rich data set that you can get from them,” says Ted Maksym, a WHOI scientist and co-author of the paper. “This work is an important step toward making the kinds of routine measurements we need in order to really monitor and understand what’s happening with the ice and the large scale changes that are occurring.”

The research was carried out by scientists at the Institute of Antarctic and Marine Science (Australia), Antarctic Climate and Ecosystem Cooperative Research Centre (Australia), Woods Hole Oceanographic Institution (USA) and British Antarctic Survey (UK).

Funding for the work came from the Antarctic Climate and Ecosystem Cooperative Research Centre, the British Antarctic Survey, and the Natural Environment Research Council. The U.S. National Science Foundation, which funding the SeaBEd development, manages the U.S Antarctic Program.

The Ship Mortgage Crisis, by marex

Posted on November 3, 2014 by admin

How ship valuation methods rationalized toxic shipping portfolio and ship covered bonds

By Okan Duru, Ph.D.

The U.S. subprime mortgage crisis (home mortgage crisis) is thought to be major reason of great economic slowdown since 2007. There is a global consensus about causes of the crisis, and both housing bubble and its financial backing, credit bubble, have played a significant role. Therefore, ‘credit crunch’ is interchangeably used for referring the same crisis. Since 2008, several studies investigated the direct causes and drivers (motivators) of the subprime mortgage crisis, and the common component of the failure is frequently mentioned as the banking industry (one remarkable article is written by Joseph Stiglitz titled “The anatomy of a murder: Who killed America’s economy?”). Yuliya Demyanyk and Otto van Hemert published a paper titled “Understanding the subprime mortgage crisis” investigated the background of the crisis and indicated some striking conclusions. The financial quality of loans (e.g. credibility of borrower, credit default risk, liquidity risk, etc.) was eroded in six consecutive years before the crisis, and more surprisingly, securitizers (i.e. mortgage securitizers who monetize the mortgage loans) were well aware of the declining power of credibility and refunding capacity. Another confounding conclusion of Demyanyk and van Hemert is that the problems behind the financial failure could be identified well before the crisis while high house prices shaded the monitoring mechanism. The subprime mortgage crisis seems to be a mixture of human error and malfunctioning financial architecture.

While the subprime mortgage crisis sparked a financial chaos by 2008, the shipping business and ship mortgages were not immune to the misguided banking industry. On October 5^th 2012, a credit rating institution, Moody’s, posted the following announcement:

“Moody’s Investors Service has today placed on review for downgrade the Aa1 ratings assigned to the public-sector Pfandbriefe (public-sector covered bonds) and the Baa1 ratings assigned to the ship Pfandbriefe (ship covered bonds) issued by HSH Nordbank AG (HSH or the issuer), which are governed by the German Pfandbrief Act. On 16 December 2011, both covered bonds were downgraded to Aa1 and Baa1 respectively.

The ratings of HSH’s mortgage Pfandbriefe, which are currently on review for downgrade, are not affected by this rating announcement.”

In 2008, the volume of the global shipping loan market (transaction volume) reached over US$ 90 billion, and HSH Nordbank was the leading shipping bank with over US$ 50 billion portfolio (the second is DnB Nor, the leading book runner, with over US$ 30 billion portfolio). Traditionally shipping banks work based on asset-backed mortgage method (ship mortgage). Therefore, the shipping asset value is a critical indicator for monitoring the credit default risk as well as liquidity ratios. The ship covered bonds mentioned on above announcement of Moody’s are a kind of securitization instrument for transferring risks to third parties at some extent. Such kind of bond issues help lenders to raise more funds and take more risks. The critical question here is how to measure the value of ships as a backing of these security bond issues.

There are a number of reasons behind the anomalies on the shipping loan market including risk handling and ship valuation which finally caused the ship mortgage crisis hidden behind the aftershocks of the 2008 crisis. On December 2^nd, 2009, an article is published on Business Insider Australia titled “Banks hide shipping losses with -The Hamburg Valuation-” and frankly disclosed motivations behind the valuation game:

“As ship values soared, so did apparent collateral values backing shipping loans. Yet as ship values then collapsed, the collateral disappeared. This threatens to put, and has put, many debtors in breach of banks’ loan covenants.

How can banks avoid coming to terms with the fact that much of their collateral is worth far less than they represent? Scrap mark to market valuation of ships and replace it with a new mark-to-model-driven valuation methodology. Sound familiar?”

The mechanism behind the subprime mortgage crisis and the ship mortgage crisis does not differ much and the fundamental drivers seem mostly same: The imbalance of value and prices, lax regulation on banking industry, deteriorating incentives (e.g. common equity constraint, value at risk approach) and short-sighted governance.

Interpretation of causality through nested instruments and drivers is not a simple one. Rather than benefiting from hindsight, one should dissect the case through each components and legal/substantial evidences to support arguments. Although it is difficult to uncover whole picture and recognize each pieces of irregularities, we look behind the banking industry and shipping firms and investigate the systemic as well as psychological nature of financial meltdown since the global subprime mortgage crisis. The ship mortgage crisis is indicated as a well-hidden banking failure in the shipping business through some system-produced standards such as ship valuation models.

Mortgage loan system and subprime mortgage meltdown

Before analyzing the ship mortgage crisis, it would be useful to review the traditional mortgage system and the subprime mortgage mechanism in the modern banking industry as a state-of-art product of financial engineering. Mortgage loan system basically brings a security instrument, mortgage, for raising large funds. Mortgage ensures trust between lenders and borrowers against insolvency of borrowers. Related legal mechanism is established in almost all free markets, and it allows lenders to possess secured properties such as vessels. The repossession (foreclosure) effort is a coercive power acting as a nudging mechanism in terms of behavioral law and economics (a new perspective in both economics and law making). Once the borrower defaults on the loan or fails to satisfy monitoring instruments (e.g. minimum value covenant), then lender may foreclose the contract and sell the ship to recover the fund raised for purchasing it.

Mortgages in the meaning of collateral or security are first used in 1930s by the regulations of Federal Housing Administration of U.S. The legal framework offered 80% and more of loan-to-value leverage which provided a unique opportunity for Americans to have their own houses (The remaining portion of the value is required from borrower as a contribution to the cost i.e. downpayment). In the amortization period, borrowers pay back the loan with an interest premium till the pay-off date. Finally, the entire ownership of house (or ship) is transferred to borrower while closing the contract.

While the traditional mortgage mechanism is widely used in the present banking industry, a financial engineering product, subprime mortgage, has brought a new tier to the system. The term, subprime, refers to borrowers with higher default risk (low credit rating), and prime mortgage is the traditional form of mortgage financing. In the prime mortgage system, banks can convert their risks (credit default risk) to cash through bond issuing mechanism. Mortgage-backed bonds are sold to investors (e.g. pension funds, insurance firms, mutual funds) who gain from repayments of borrowers indirectly (See Figure 1). Lenders still gain profit from these transactions through the difference between interest gained from borrowers and paid for bonds in addition to miscellaneous fees collected at the time of handling the loan agreements.

In the subprime mortgage mechanism, banks create a way of funding risky borrowers. The mortgages collected from subprime borrowers are repacked in collateralized debt obligations and sold in slices based on the level of risk (safe, risky, etc.) The problem behind the mechanism is the uncertain valuations of properties (i.e. houses). When a slowdown slightly hits the economy, the risky (subprime) borrowers begin to fail and turn to be insolvent. Banks repossess houses (mortgages) and sell for recovering the outstanding debt. This simple process may well work when a few of borrowers default the credit repayments. However, if the volume of defaults rises enormously, then several houses will be nominated for sale as a security of the loan. Based on the simple principles of supply-demand framework, larger supply of houses will result in lesser house prices, and the recovered fund extremely declines. Finally, banks cannot recover the debt properly.

Figure 1. The system of mortgage-backed bonds.

Crisis is sparked through the insolvency of borrowers causes a broader panic and loss of confidence, and the subprime mortgage meltdown of 2008 is also ignited when house prices has fallen dramatically by the panic sales. Therefore, the meaning of security and the risk behind the value of collaterals has attract attention of both financial experts and researchers. The crisis of 2008 is usually thought to be a product of insolvency of Lehman Brothers while it is actually result of more of a fundamental reason: How to value assets when asset prices oscillate in a massive upy-downy market. The valuation problem of houses is not a particular case for banking industry, and the ship valuation is the second tier of entire valuation debate.

Liquidity trap and The Ship Mortgage Crisis

The shipping market boom of 2007 (after previous historical boom of 2004) was the most fruitful and profit making term in the history of maritime industry. Optimism, euphoria and finally irrational exuberance are thought to be driven by repetitive and continuous rise of freight rates (appeal to trend), and these emotional traps triggered less critical assessments and competition neglect on posterior decisions such as ordering new ships or purchasing a second hand asset with historically highest asset prices (Duru, 2013, 2014; Greenwood and Hanson, 2013). In a previous study, I have investigated the impact of boom market climate from the perspective of behavioral economics and have emphasized the lack of practical implications of shipping market knowledge (information-knowledge vs. action-knowledge). One reason of delayed response or lack of awareness on upcoming over supply is associated with the rigidity of supply (response of shipyards, production lag as well as planning failure-delays). The concept of delayed supply response is not a new topic in the economics. Cobweb theory illustrates how delayed supply can cause price fluctuations which is conventionally called business cycles. The underlying principle behind the cobweb theorem is expectations of economic actors are usually backward-looking, and that causes mistaken expectations ignoring the future state of markets or adjusting slowly (i.e. competition neglect in Greenwood and Hanson (2013)).

At the time of market boom (2004~2007), a massive orderbook has been built up by the strong demand for shipping services, ‘non-storable’ shipping spaces. However, there has been another reason which encouraged financing of ships, ‘cheap money’. Lenders were able to have cheaper funds. By the second half of 2007, US Federal Reserve made a critical decision and decreased interest rates enormously (in contrast to the rest of the world including EU, UK and Japan). At the time of market crash, this kind of sudden changes may happen. The uniqueness of 2007 comes from the fact that markets were still enjoying the prosperity and no other country tend to decrease interest rates. Even Euro area increased interest rates slightly. The impact of this unusual interest rate decline is the liquidity trap. Since treasury bills and other secure investment options no longer earn much, large scale investment banks have turned to industries and/or funding other regional/national banks. Cheaper and lax funding trend also sparked shipping finance. Philippe Louis-Dreyfus tells its impact as follows (from Dynasties of the Sea of Lori Ann Larocco):

“Banks put pressure on the shipowners to accept money almost for free, and sometimes offering 100 percent financing with no equity at all. So, banks have played the very awkward, if not the perverse, role in proposing cheap money to shipowners who not only didn’t deserve it, but didn’t really even want it.”

The traditional method of ship financing relies on the collateral security, usually ship mortgage. Similar to house mortgages, shipping banks have an opportunity to repossess the financed ship in case of borrower’s default. Banks can sell and recover the debt. Since ship prices are quite fluctuant, periodical test of asset value is needed to check whether the underlying asset has capacity of recovering the debt in case of a default. The mechanism of periodical asset valuation is ruled by minimum value covenant in loan agreements. If the value of ship declines below the minimum value constraint (e.g. 120% of the remaining debt), then shipping bank forecloses the contract and goes for selling and recovering the debt. Without a minimum value test, it may be too late to foreclose since the asset price may be far below the remaining debt.

Figure 2 illustrates the entire mechanism of ship mortgages and ship covered bonds. Shipping banks monitor loan agreements (risk assessment) through minimum value constraint, liquidity ratios, among others. On the other hand, financial regulators monitor banking industry through a number of legislative instruments such as Basel accords (e.g. Basel III). Basel accords require some control procedures and risk exposure limits. For example, banks should have a minimum common equity of 7% (Basel III) and review some risk measures such as Value at Risk (VaR) indicator. In addition to the regulators’ stance, independent rating agencies (e.g. Moody’s) review and rate credibility of lenders as well as borrowers.

Figure 2. Ship mortgage system and ship covered (mortgage-backed) bonds.

A critical connection with the shipping loans and common equity arises from Negative Equity debate. When the value of asset (ship) is less than the remaining loan, then the difference causes negative equity. Therefore, the ship valuation method also contributes measuring the equity as an indicator for Basel standards.

About monitoring shipping loans, VaR approach brings some tough questions. Pablo Triana in his mind-blowing book, “The Number That Killed Us: A Story of Modern Banking, Flawed Mathematics, and a Big Financial Crisis”, has criticized the principles behind the VaR method and even blames it as a leading driver of the financial crisis. Although it seems quite numerical and fair, there are several subjective gaps behind its complicated functions. Selection of distributions or dataset is subject to arbitrarily preference of experts. The subjective inputs of risk monitoring are among current debates in the banking industry. Particularly regulators find it difficult to slow down funding of toxic loans at the time of a boom market. The following downturn makes easier while it is usually late for a proper countermeasure.

In the sudden downturn of 2008, ship prices declined largely and the minimum value mechanism raised a serious problem. Shipping banks have had a huge shipping portfolio and most of these assets were under the default risk in terms of contracts while shipowners were somewhat able to pay back. The ship mortgage crisis has been somewhat postponed through the uncertain and tricky nature of ship valuations. There are several reasons of ship valuations (insurance, company valuation, court sales etc.) and several methods of valuation. Mark-to-market valuation is simply the potential price of the ship in the current market state with assumption of potential buyers and sellers. In case of peak market, there would be many representative sales in similar technical particulars, then one may find a very accurate value of the ship. In case of slowdown, it is not easy to find representative sales, then experts tend to estimate prices based on a pseudo-sale scenario. Mark-to-market method is frequently used for minimum value constraint while it has brought a massive default problem. As an alternative, mark-to-model (valuation based on a model estimation) and Discounted cash flow (DCF) methods (also income method) have begun to be used by shipping banks.

As a DCF-based valuation method, the Hamburg Ship Valuation Standard (HSVS) in other words long term asset value (LTAV) is developed and enacted on 6^th May 2008 in German Law. HSVS method has been an outlet for German Banks to eliminate massive foreclosures based on monitoring the asset value. In the subprime mortgage crisis, the volume of defaults by subprime (risky) borrowers transferred houses to banks’ ownership while these assets were not able to repay the outstanding debt with the declining house prices. Therefore, mortgage-backed bonds have lost their credibility as well as credit default swap buyers (a kind of insurance for credit default) have begun to write down the insured value. In the ship mortgage crisis, ship covered bonds (ship mortgaged-backed bonds) played a multiplier role. HSVS saved,

Shipping portfolio from massive default which may have ignited further and deeper credit crunch in the shipping industry (very low ship prices, undesirable foreclosures etc.)

Ship covered bonds from insolvency indirectly.

However, the countermeasures did not secured the credit rating of ship covered bonds. The “Schiffspfandbriefe” (ship covered bonds) of HSH Nordbank was first rated as a top, Aaa, by Moody’s, one of the leading credit rating institution, on 3^rdSeptember 2007. Then, Moody’s began to review the bonds for possible downgrade and finally the first downgrade to Aaa3 was declared on 6^th May 2009. In the following years, Moody’s reviewed Pfandbriefe of several German Landesbanken and their subsidiaries and downgraded the credit ratings many times. European Central Bank (ECB) listed some German banks including HSH Nordbank, Commerzbank AG and Norddeutsche Landesbank Girozentrale for comprehensive assessment in 2013, and HSH posted a loss of 814 million euros in the same year, the biggest since 2008.

Moody’s published a report titled “German Shipping Lenders: Rising Problem Loans May Prompt Net Losses at Some Banks” in December 2013 and indicated “significant asset quality challenges” in 2014. The report also questions the shipping focused banks and indicates “Less diversified banks with significant shipping sector concentrations are the most exposed to persistent stress in the sector”.

International Monetary Fund (IMF) reviewed the German banking industry (IMF Country Report No. 14/216; 21^st July 2014) and indicated that

“While work on the ECB’s Comprehensive Assessment was still ongoing, the authorities were confident German banks were generally well positioned for the exercise. They noted the continuous and significant improvement in banks’ capital ratios over the past several years, but agreed that shipping loans could be a source of further impairments”

Several investigations showed that the shipping loans are usually toxic and it is quite difficult to avoid risks under the volatile nature of shipping markets. None of conventional countermeasures and financial engineering solutions can precisely settle the fundamental problems of ship valuation and risk assessment. Therefore, we need an outlet for this emerging problem.

References

Duru O. (2014). Motivations behind Irrationality in the Shipping Asset Management: Assumptions Drive Investors. The Conference of International Association of Maritime Economists, Norfolk VA.

Duru, O. (2013). Irrational exuberance, overconfidence and short-termism: Knowledge-to-action asymmetry in shipping asset management. The Asian Journal of Shipping & Logistics, 29(1), 43-58.

European Central Bank (ECB), Note: Comprehensive Assessment, December 2013.

Greenwood, R., & Hanson, S. (2013). Waves in ship prices and investment (No. w19246). National Bureau of Economic Research.

IMF Country Report No. 14/216; 2014 ARTICLE IV CONSULTATION—STAFF REPORT; PRESS RELEASE; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR GERMANY, 21^st July 2014.

Moody’s Investor Services, “German Shipping Lenders: Rising Problem Loans May Prompt Net Losses at Some Banks”, 9^th December 2013. Available at http://moodys.alacra.com/moodys-credit-research/German-Shipping-Lenders-Rising-Problem-Loans-May-Prompt-Net-Losses-at-Some-Banks-PBC_159949

Is the U.S. Petrodollar Under Threat?

Posted on November 3, 2014 by admin

Recent trade deals and high-level cooperation between Russia and China have set off alarm bells in the West as policymakers and oil and gas executives watch the balance of power in global energy markets shift to the East.

The reasons for the cozier relationship between the two giant powers are, of course, rooted in the Ukraine crisis and subsequent Western sanctions against Russia, combined with China’s need to secure long-term energy supplies. However, a consequence of closer economic ties between Russia and China could also mean the beginning of the end of dominance for the U.S. dollar, and that could have a profound impact on energy markets.

Rein of the USD

Before the 20th century, the value of money was tied to gold. Banks that lent money were constrained by the amount of their gold reserves. The Bretton Woods Agreement of 1944 established a system of exchange rates that allowed governments to sell their gold to the U.S. Treasury. But in 1971, U.S. President Richard Nixon took the country off the gold standard, which formally ended the linkage between the world’s major currencies and gold.

The U.S. dollar then went through a massive devaluation, and oil played a crucial role in propping it back up. Nixon negotiated a deal with Saudi Arabia whereby in exchange for arms and protection, the Saudis would denominate all future sales of oil in U.S. dollars. Other OPEC members agreed to similar deals, ensuring perpetual global demand for greenbacks. The dominance of the U.S. “petrodollar” continues to this day.

Russia and China Cozy Up

Recent news coming out of Russia, however, suggests that the era of U.S. dollar dominance could be coming to an end, due to increasing competition from the world’s second largest economy and primary consumer of commodities, China.

China and Russia have been furiously signing energy deals that indicate their mutual energy interests. The most obvious is the $456 billion gas deal that Russian state-owned Gazprom signed with China in May, but that was just the biggest in a string of energy agreements going back to 2009. That year, Russian oil giant Rosneft secured a $25 billion oil swap agreement with Beijing, and last year, Rosneft agreed to double oil supplies to China in a deal valued at $270 billion.

Since Western sanctions against Russia took hold in reaction to the Russian land grab in Crimea and the shooting down of a commercial airliner, Moscow has increasingly looked to its former Cold War rival as a key buyer of Russian crude — its most important export. IP checker . Liam Halligan, a columnist for the Telegraph, says “the real danger” of closer Russian-Chinese ties is not a bust-up between China and the U.S., which could threaten crucial shipping routes for China-bound coal and LNG, but its impact on the U.S. dollar.

“If Russia’s ‘pivot to Asia’ results in Moscow and Beijing trading oil between them in a currency other than the dollar, that will represent a major change in how the global economy operates and a marked loss of power for the U.S. and its allies,” Halligan wrote in May. “With China now the world’s biggest oil importer and the U.S. increasingly stressing domestic production, the days of dollar-priced energy, and therefore dollar-dominance, look numbered.”

While no one is arguing that could happen anytime soon, considering the dollar remains the currency of choice for central banks, Halligan’s proposition is gathering strength. In June, China agreed with Brazil on a $29 billion currency swap in an effort to promote the Chinese yuan as a reserve currency, and earlier this month, the Chinese and Russian central banks signed an agreement on yuan-ruble swaps to double trade between the two countries. Analysts says the $150 billion deal, one of 38 accords inked in Moscow, is a way for Russia to move away from U.S. dollar-dominated settlements.

“Taken alone, these actions do not mean the end of the dollar as the leading global reserve currency,” Jim Rickards, portfolio manager at West Shore Group and partner at Tangent Capital Partners, told CNBC. “But taken in the context of many other actions around the world including Saudi Arabia’s frustration with U.S. foreign policy toward Iran, and China’s voracious appetite for gold, these actions are meaningful steps away from the dollar.”

Rise of the Yuan

It is no secret that Beijing has been looking to promote the yuan as an alternative reserve currency. Having that status would allow China cheap access to world capital markets and cheaper transaction costs on international trade, not to mention increased clout as an economic power commensurate with its rising proportion of world commerce.

However, the Chinese have a problem in their plans for the yuan. The government has not yet removed capital controls that would allow full convertibility, for fear of unleashing a torrent of speculative flows that could damage the Chinese economy.

However, “[It] is clear that China is laying foundations for wider acceptance of the yuan,” said Karl Schamotta, a senior market strategist at Western Union Business Solutions,” as quoted in an International Business Times article. IBT pointed out that “more than 10,000 financial institutions are doing business in Chinese yuan, up from 900 in June 2011, while the pool of offshore yuan, non-existent three years ago, is now near 900 billion ($143 billion). And the proportion of China’s exports and imports settled in yuan has increased nearly sixfold in three years to nearly 12 percent.”

Conspiracy Theory Spoiler Alert

Adding some vivid color to this story, Casey Research energy analyst Marin Katusa speculated in a recent column that the death of Total CEO Christophe de Margerie, whose private jet collided with a snowplow in Moscow, may not have been an accident. Instead, Katusa muses that the mysterious circumstances surrounding his death and the unlikely odds of being hit by a snowplow at an airport, could have more to do with de Margerie’s business interests in Russia than being at the wrong place at the wrong time.

According to Katusa, de Margerie was “a total liability” due to Total’s involvement in plans to build an LNG plant on the Yamal Peninsula along with partner Novatek. The company was also seeking financing for a gas project in Russia despite Western sanctions.

“It planned to finance its share in the $27-billion Yamal project using euros, yuan, Russian rubles, and any other currency but U.S. dollars,” Katusa writes, then entices the reader with this: “Did this direct threat to the petrodollar make this ‘true friend of Russia’—as Putin called de Margerie – some very powerful and dangerous enemies amongst the power that be, whether in the French government, the EU, or the U.S.?”

That may be a stretch, but Katusa’s U.S. dollar reference shows that any developments that point to a move away from the dominance of the greenback are not going un-noticed. By Andrew Topf of Oilprice.com

Study Finds Oceans Arrived Early to Earth , by marex

Posted on November 1, 2014 by admin

Earth is known as the Blue Planet because of its oceans, which cover more than 70 percent of the planet’s surface and are home to the world’s greatest diversity of life. While water is essential for life on the planet, the answers to two key questions have eluded us: where did Earth’s water come from and when?

While some hypothesize that water came late to Earth, well after the planet had formed, findings from a new study led by scientists at the Woods Hole Oceanographic Institution (WHOI) significantly move back the clock for the first evidence of water on Earth and in the inner solar system.

“The answer to one of the basic questions is that our oceans were always here. We didn’t get them from a late process, as was previously thought,” said Adam Sarafian, the lead author of the paper published Oct. 31, 2014, in the journal Science and a MIT/WHOI Joint Program student in the Geology and Geophysics Department.

One school of thought was that planets originally formed dry, due to the high-energy, high-impact process of planet formation, and that the water came later from sources such as comets or “wet” asteroids, which are largely composed of ices and gases.

In this illustration of the early solar system, the dashed white line represents the snow line—the transition from the hotter inner solar system, where water ice is not stable (brown) to the outer Solar system, where water ice is stable (blue). Two possible ways that the inner solar system received water are: water molecules sticking to dust grains inside the “snow line” (as shown in the inset) and carbonaceous chondrite material flung into the inner solar system by the effect of gravity from proto Jupiter. With either scenario, water must accrete to the inner planets within the first ca. 10 million years of solar system formation. (Illustration by Jack Cook, Woods Hole Oceanographic Institution)

“With giant asteroids and meteors colliding, there’s a lot of destruction,” said Horst Marschall, a geologist at WHOI and coauthor of the paper. “Some people have argued that any water molecules that were present as the planets were forming would have evaporated or been blown off into space, and that surface water as it exists on our planet today, must have come much, much later—hundreds of millions of years later.”

The study’s authors turned to another potential source of Earth’s water— carbonaceous chondrites. The most primitive known meteorites, carbonaceous chondrites, were formed in the same swirl of dust, grit, ice and gasses that gave rise to the sun some 4.6 billion years ago, well before the planets were formed.

“These primitive meteorites resemble the bulk solar system composition,” said WHOI geologist and coauthor Sune Nielsen. “They have quite a lot of water in them, and have been thought of before as candidates for the origin of Earth’s water.” In order to determine the source of water in planetary bodies, scientists measure the ratio between the two stable isotopes of hydrogen: deuterium and hydrogen. Different regions of the solar system are characterized by highly variable ratios of these isotopes. The study’s authors knew the ratio for carbonaceous chondrites and reasoned that if they could compare that to an object that was known to crystallize while Earth was actively accreting then they could gauge when water appeared on Earth.

To test this hypothesis, the research team, which also includes Francis McCubbin from the Institute of Meteoritics at the University of New Mexico and Brian Monteleone of WHOI, utilized meteorite samples provided by NASA from the asteroid 4-Vesta. The asteroid 4-Vesta, which formed in the same region of the solar system as Earth, has a surface of basaltic rock—frozen lava. These basaltic meteorites from 4-Vesta are known as eucrites and carry a unique signature of one of the oldest hydrogen reservoirs in the solar system. Their age—approximately 14 million years after the solar system formed—makes them ideal for determining the source of water in the inner solar system at a time when Earth was in its main building phase. The researchers analyzed five different samples at the Northeast National Ion Microprobe Facility—a state-of-the-art national facility housed at WHOI that utilizes secondary ion mass spectrometers. This is the first time hydrogen isotopes have been measured in eucrite meteorites.

The measurements show that 4-Vesta contains the same hydrogen isotopic composition as carbonaceous chondrites, which is also that of Earth. That, combined with nitrogen isotope data, points to carbonaceous chondrites as the most likely common source of water.“The study shows that Earth’s water most likely accreted at the same time as the rock. The planet formed as a wet planet with water on the surface,” Marschall said. While the findings don’t preclude a late addition of water on Earth, it shows that it wasn’t necessary since the right amount and composition of water was present at a very early stage. “An implication of that is that life on our planet could have started to begin very early,” added Nielsen. “Knowing that water came early to the inner solar system also means that the other inner planets could have been wet early and evolved life before they became the harsh environments they are today.”

This research was supported by a Harriett Jenkins NASA graduate fellowship, an Andrew W. Mellon Foundation Award for Innovative Research, and a NASA Cosmochemistry award. The Northeast National Ion Microprobe Facility is supported by the National Science Foundation Instrumentation and Facilities Program.