Cyprus Shipmanagement round table debate

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Left to Right: Capt Peter Bond, Dieter Rohdenburg, Sergey Popravko, Sophoclis Constantinou, Alexandros Josephides, Arthur McWhinnie, Capt Norbert Aschmann, Capt Eberhard Koch, Petros Monogios, Capt Eugen-Henning Adami, Andreas Hadjipetrou.

In the latest in its series of industry round table debates, Ship Management International (SMI) travelled to Limassol, Cyprus and assembled 10 of the leaders in global in-house and third party shipmanagement to debate key issues facing the industry. Chaired by SMI Editorial Director Sean Moloney, the panellists included: Sergey Popravko, Managing Director, SCF/Unicom; Petros Monogios, Director and Chief Operating Officer, Lemissoler Navigation; Capt Peter Bond, Managing Director, Interorient Shipmanagement; Dieter Rohdenburg, CEO, Intership Navigation; Alexandros Josephides, Deputy Director General, Cyprus Shipping Chamber; Captain Norbert Aschmann, CEO of Bernhard Schulte Shipmanagement (BSM); Arthur McWhinnie, MD of BSM Cyprus; Capt Eberhard Koch, Chairman, CEO & Partner, Oesterreichischer Lloyd Shipping; Capt Eugen-Henning Adami, MD, Mastermind Shipmanagement; and Andreas Hadjipetrou, MD, Columbia Shipmanagement.

Sean Moloney
Shipping is still struggling to break free from the ravages of this eight-year-long recession with freight rates and the Baltic Dry Index at record lows. How has this adverse situation affected the way managers enlist their clients and service their clients’ needs? Are owners’ demands changing and are managers having to be more streamlined and better resourced to earn their margins?

Sergey Popravko

SMI5Ship owners are becoming more demanding when it comes to cost control, but they are also mindful that they still have to do business with quality charterers like the oil majors and as a result, seek to work with quality managers who have earned the necessary approvals from the oil majors. But, yes, they are still very demanding on cost control and are continually asking third-party managers to come up with the necessary savings, especially on the dry side.

Sean Moloney
What exactly are the dry bulk owners saying to the managers because this sector is under a lot of pressure at the moment?

Sergey Popravko
They appreciate that while some cost control initiatives may cause some long-term harm, they still want us to come up with initiatives to minimise cost. They are also becoming very greedy when it comes to the manager’s remuneration; if greediness is the correct term to use. Although the management fee comprises only 6% or less of the overall OpEx, some owners still don’t want to see managers getting rich on the back of the current market situation. Instead of trimming items like insurance, technical or even crew travel, owners can become unreasonably tough with respect to their manager’s fees.

Petros Monogios

SMI4Maybe we should start paying attention to areas like risk management and corporate management as many owners have shifted towards setting up corporate structures and are beginning to expect the same from their managers. We are moving away from the traditional shipmanagement scenario towards a more corporate and risk management set-up.

Capt Peter Bond
In answer to your question about whether owners’ demands are changing, a lot of the clients we have now employ their own technical teams in-house so they’re far more astute when it comes to management procedures and therefore look more closely at the work of the outsourced technical manager. Owners are becoming more involved in the decision-making process in choosing shipyards or dry docks for example, and they want to take far more care of performance management. They are also heavily involved in fuel management which is a high cost area for them. Around 20 to 30 years ago the manager was a lot more autonomous: this has changed.

Sean Moloney
Does this affect your flexibility in managing a ship?

Capt Peter Bond
No, it is not about interference; owners just want to be involved in the process. At the end of the day through the terms of the contract, they are saying this is your job and you have got to do the job but they want to know what is behind that decision-making process, particularly when expenditure is involved.

Dieter Rohdenburg

SMI3First of all, I agree with what Peter is saying; owners are keen to become part of the whole decision-making process, but the demands of the owners are directly related to the income the vessels are earning. On the tanker side there is certainly a drive for higher levels of excellence in areas like compliance. As a result you have to have your systems in place. As for the dry bulk sector, it is sheer survival at the moment and the owners are looking for cost savings. Sometimes they ask you to break down the cost, or in the example of crew costs,  maybe move away from the lump sum arrangement to a cost-plus basis. As far as dry bulk is concerned, the worst is yet to come. It will become more difficult for owners and we will see an impact being felt on the ship managers very soon. The more that owners suffer, the more difficult they will find it to come up with the cash to pay for the management of the ships.

Capt Norbert Aschmann

SMI1There is certainly a higher focus on cost consciousness and on operational efficiencies as Peter said. Fuel efficiency has been on the agenda for quite a while, but it has now moved to the top of the agenda. Our clients have expected more or less the same things for a number of years now – they have always demanded the highest possible performance; the highest possible efficiencies in every area – but maybe they are just a little bit more serious about it now because they don’t have a choice. It is about survival in many areas. When you analyse what managers can do to enlist more clients, I think the profit margins in shipmanagement haven’t been fantastic for quite a while but this is nothing new. Managers have come under pressure to improve their own internal efficiencies but again, this is nothing new. As managers, if we still want to make a decent margin, we have to look inside our organisations; we have to be efficient and we need technology to support whatever we are doing. But I doubt that with the shipping markets improving, if and when they do, that margins will automatically improve with this.

Sean Moloney
Will this drive for efficiency create a situation where the larger ship managers are better able to understand the market situation than their smaller competitors?

Capt Norbert Aschmann
Certainly, the larger you get, the more efficient you become. You need to be a certain size in order to be efficient in the first place but I wouldn’t say that with another couple of hundred ships on top of what a large manager may already have, he will suddenly be more efficient. But size does matter, I’m pretty sure. And the owners out there managing fleets of five, 10 or 15 vessels represent an opportunity for our industry because that sector is, by definition, quite inefficient.

Arthur McWhinnie

Arthur McWhinnieBulk carriers and containerships are the sectors under scrutiny at the moment but we had the same issue with tankers only 18 months ago. The change is just in the sector and how to manage that change with regards to the people and the expectations of the sector. As a ship manager, we were able to see growth within the tanker sector and with the onset of the bulk carrier issues, we were able to employ that strategy as well. Historically, are we able to manage ships more cost efficiently? In some cases yes and in some cases, no. But a lot will depend on the owner and where he is situated. I also look at the changing environment with regard to who the new owner is. Is he the traditional ship owner or is he a bank or private equity firm, and what are his needs? And we have to meet these needs either through a step change, with regards to data today, rather than data tomorrow, as well as through our ability to provide that information up front and they accept that.

Capt Eberhard Koch

SMI6I’m extremely happy not being in third-party shipmanagement; we manage our own vessels in-house and my demands are certainly coming from the investors and the bankers. The investors have the same questions as before; they know we are doing our utmost to avoid any breakdowns and off-hire. The questions from the bankers, however, are getting more in-depth because they have the possibility to look at other third-party managers within their new structures, and compare the OpEx of a company like ours with that of a third-party manager. We get a lot of these types of questions from their side because our OPEX is always very well below Moore Stephens OpCost Surveys. We are also very focused on crew rotation as a way of saving money. There are a lot of opportunities to save in this regard;  I’m not talking about establishing your own travel agency but as my colleague said, there is a lot that you can save regarding money and cost.

Sean Moloney
As an owner, are you looking to take more services in-house?

Capt Eberhard Koch
We have 100% in-house management including crewing. But there’s a certain trend from some ship owners to take the vessels back in-house; even the private equity houses are thinking about a final decision whether to have an in-house manager.

Capt Eugen-Henning Adami
My thoughts are based on this eight-year-long struggle, and this eight-year-long struggle across all the shipping sectors has prompted ship owners to have serious discussions with their financiers. In Europe, we have the opportunity under Basel II and Basel III arrangements, to restructure our loans in 36-month intervals. If we go beyond the 36 months threshold, it is impossible for the banks within the same framework, to give an extension to the loans. So the owners are basically prompted by the banks to change ownership. This we see happening massively within Europe. The ships are then shovelled within the portfolio of the bank, maybe to branch offices, and they end up in different management structures. This is a phenomenon that will continue until the banks are able to be paid again. So I foresee more shipmanagement activities being dictated to, by the mortgage banks, and here we see ourselves embracing corporate structures. These vessels are given to larger corporations other than smaller set-ups, and in the larger corporations you need all of the systems which the established ship managers have implemented. Risk management on the financial side is added. Cost cutting is no longer the solution because everyone has already done that to the bone. An industry has to see from where it is coming and we are coming from a demand to put in ISM systems because we had vessel accidents and oil pollution and the fear is, if we compromise our quality we turn back to the old days which nobody wants. Smaller ship owners can add value in this business, due to their expertise and knowledge and connections. If they cannot add value, then they will have a very very tough time in the next couple of years.

Andreas Hadjipetrou

SMI2 I agree with what has been said on the table so far; this period we are going through is also an opportunity for us to improve the relationship we have with our clients, because if the client is not earning enough money, it is obvious that he will tell the manager to cut costs but he will ask more questions. And they will ask more questions simply because they need to be serviced in the best possible way. So how do we support them in the best possible way? Well, you come closer to them. One of the lessons we have learned, during this period is that the more we listen to the client’s needs, the easier it is to interact with them, and maybe even expand your business with them. It is not about maximising profits nowadays, as it has been said already, the margins are low, but the current situation represents an opportunity to restructure ourselves; beef up our relationships with our clients so that the future becomes brighter for all of us.

Sean Moloney
I want to open up the floor to general debate and I would like to see how, for instance, relationships with your clients are changing?

Capt Norbert Aschmann
As I said before, I’m not sure there have been any significant changes in the types of demands we are receiving from our clients; admittedly we have new types of clients, notably a sector of the industry which didn’t really grow up in shipping. We have private equity investors and we have bankers who now have ships in their own portfolio. And these guys have different expectations for us as managers, in the area of reporting for example, it has to be right. The finance guys want the highest possible amount of reliability when it comes to budgets because they have to go to their investors and justify their positions. On the operational side, as I said, I don’t think there are significant changes; they all expect accident-free vessel operations; they all expect financial efficiencies; so I don’t see much of a change there. But the character and the type of client is changing and you can see this in many areas, that the moment you start dealing with banks and private equity, it is different.

Petros Monogios
Yes the owners have the banks and the private equity. But here is where we should see a difference between risk management and corporate management, ie. what the banks are expecting from an owner and what an owner is expecting from us. But I do believe that a manager with all the systems in place has an advantage because he has the correct accounting procedures and can deliver what the banks want to see. I still believe it’s difficult for an owner to have in place the systems that a third-party manager can employ. But he still has to report to the bank and the private equity.

Sergey Popravko
Owners need more transparency in respect of their reporting because the bankers and equity or institutional investors want to produce OpEx reports in a format which is suitable to them. And doing this would create trust and in this way, we can enhance our transparency and improve our relationships with the owners. This is why we pay a lot of attention to developing our IT system, to make it more flexible, more transparent and flexible enough to meet the demands of the different kinds of owners. We partly manage in-house vessels and Sovcomflot may ask for specific reporting. But we also provide third-party management services and principals here also need reporting done in a specific way. Dry bulk owner demands will be different from tanker owners and gas carrier owners. It also ranges across geographic locations. Japanese and Chinese owners have their specific way of reporting while Europeans favour another way. By improving our reporting system, and our IT system, we can enhance our position as a reliable manager.

Dieter Rohdenburg
I would like to reiterate that is important for our clients to understand that we are adding value to them and there is also the opportunity for us to grow stronger together with our clients. We are not pure third-party managers, we are also owners as well, and what we are offering to potential customers is also commercial management – membership in one of our commercial pools for example. We are trying to expand the value offering we give to our clients. To respond to your question, yes, I think critical mass is important, there is a certain size but I would also agree with what Norbert was saying, that it is not right to think that for every extra hundred ships you have, you are getting that much more efficient. There is a threshold beyond which the efficiencies do not grow.

Sean Moloney
What lessons have the industry learned from this difficult time we have experienced over the last eight years? There is still massive oversupply of tonnage and there are still a lot of ships due to be delivered out of shipyards.

Capt Norbert Aschmann
Owners keep making the same mistakes – overbuilding, being overly optimistic, and believing that every development is a one-way street which it never is. So I would call the learning success limited at best. Everything we experience today hasn’t really come as a surprise. Nobody could really have believed that China would continue to sustain double-digit growth rates. What we’re learning as managers, is that all of the ships still have to be managed. We won’t manage ships without a margin and yes the margins are small, but if they are small and you multiply by a larger number then the returns are larger. But yes, the ships all need to be managed. I’m not saying I’m enjoying the situation but that is what is happening at the moment. Ships are there and somebody will either lay them up or operate them. And whether you operate them or lay them up you still need somebody to look after them. So for me it is a growing market.

Capt Eberhard Koch
I don’t agree that it is not a surprise because if you look at the private equity houses and how they have pushed money to the owners and how the owners have accepted the money to build new bulk carriers then it is really a surprise as to why ships have been ordered against no demand.

Capt Norbert Aschmann
For me, it was the KG scheme reloaded from day one.

Capt Eugen-Henning Adami
I think that is a European view when you talk about KG. And that is not the main driver here. The main driver is that the industry is changing from a European-driven industry to an Asian-driven industry. When we had a crisis in the mid-1980s, Cyprus was basically booming in shipmanagement and we were also facing an overcapacity of ships. At that moment we had European shipyards heavily supported by European governments, just to stay alive. Shipyards were producing ships, providing the ships to the ship owners, with special subsidies etc. This carried on until we finally realised that shipbuilding was a dying industry and that we were losing taxpayers’ money trying to support the shipyards. And it took 10 more years in Europe until the oversupply of tonnage came into balance and earnings went up. Now we have China, which is a massive country and the world leader in shipbuilding, and China is doing exactly the same thing. The Chinese shipyards build ships for Chinese shipping companies, and these ships will carry Chinese cargo. So these growth factors that we were expecting of 8%, 9% are meaningless because as a European ship owner, I will not participate in pitching for the Chinese cargo so I’ll have to look at my growth here. And that is not 8% but closer to 4% so we have to look at niche areas. And China has to understand that the ships they build now, will continue to contribute to the oversupply of tonnage until the shipyards die as what happened in Europe.

Sean Moloney
I want to move onto the next question. Cyprus is holding on to its position as a global maritime cluster but how big a threat to this title are neighbours like Dubai and Singapore, and how do Cyprus’s geographic location and economic position factor in its plans to grow as an international maritime centre?

Alexandros Josephides

JOSEPHIDES-750x347 We have been looking around at the competition and the Government commissioned a study to look at the weaknesses and the strengths of the maritime cluster here in Cyprus. I believe the right steps will be taken to further improve the competitive environment but certainly having the EU breathing down on us doesn’t make it any easier for us to compete with locations outside of the EU. We are addressing these issues with our members and hopefully will be in a position to make some good changes that will maintain the competitiveness of the island as a shipping centre.

Capt Eberhard Koch
We have something strong to offer here in Cyprus and that is a white flag; it is a European flag and a quality flag. The tax system is not unbeatable but is excellent as far as the owners are concerned and it is approved by the Europeans. The location of Cyprus close to the Suez Canal is, in my opinion, also a bonus. The cluster can be improved but thank God we now have a government who listens to the industry and that something can be done. The Government is in the process of promoting Cyprus and driving in additional tonnage and if the reunification of the island will come and if the Turkish ban on the Cyprus flag is dropped, then we have the opportunity to increase our fleet considerably, from not only 7% of the GDP but maybe towards a small double-digit percentage. I know we have been talking about the lifting of the Turkish ban for many years, but we have got reasons to believe that something could be done. If at the end of the day we can find the finance to fund the reunification then let’s remain optimistic that this can be done.

Dieter Rohdenburg
Personally I don’t think Singapore is a real threat because of the high cost of living there. Yes, they do have ship managers there but they have much higher cost levels than we do here. I do not see substantial growth coming there from clients who would also consider Cyprus. What we really need to do here in Cyprus is promote ourselves better as a cluster. We need to be seen by the outside world as not just being a bunch of ship managers, who are based in Limassol, but that there is a lot more to the community here, including all the other parts that normally form a shipping cluster and that Cyprus will include in the future such as financing, commercial management and academic institutions. But it is something we are working on.

Capt Eugen-Henning Adami
The geopolitical surroundings around the eastern Mediterranean are possible drivers for the future growth of Cyprus. We have North African countries which are currently commercially defunct, which, from a governmental structure, are very questionable and you see traditional ship owners from Lebanon or Egypt completely leaving the sector. When these countries stabilise, these families will return back to their roots and don’t forget that Cyprus is a gateway to Europe. Cyprus has the possibility of offering with the excellence of an all-embracing cluster, when finance is added, stability to the region. As a group we are working with small businesses in the area where we can add value, and as Norbert said,  yes the margins are small but if you add two or three businesses together it makes sense and you can give something back to your customer on the other side to create loyalty. We have to rebuild the entire North African coast there is no doubt about it. So this is business that you can do that is not achievable from places like Singapore.

Arthur McWhinnie
We are in a positive position here to drive our shipmanagement cluster forward, whether that is increasing shipmanagement activities on the island or owning activities or even banking and law. We have to be careful because over the last five to 10 years there has been destabilisation in the region. If you consider, it only takes one incident to cause a problem for us here. But we are European and we provide a European service that many of our clients want and appreciate.

Andreas Hadjipetrou
Yes, Dubai and Singapore are different locations to Cyprus, however, most of us around the table here are also able to service our clients in Asia. The challenge we have as a cluster in Cyprus, is to become the destination of choice for European ship owners and ship managers. I would not say we compete with Singapore as, in many ways it is different – different time zone, different customer needs. Whereas if we compare, for example, bases in Northern Europe, Greece and the UK, they are much closer and they serve the same clientele. Over the last year we have seen big Italian operators come to Cyprus – MSC has its biggest shipmanagement office here in Cyprus  and we have seen a major Norwegian shipmanagement company transferring its head office here. And, more recently, we have seen a lot of Greek ship owners arriving. Therefore the cluster is improving. What one needs to realise is that there is not enough capacity for the sector to double in size; we do not have enough expertise on the island to accommodate this expansion. So even though I personally promote and support the island, at the same time I know that if 50 Greek companies came to open their offices here in Cyprus tomorrow we do not have the people to manage the ships. We would need to import these resources. There is a certain element of growth, which we can’t accommodate.

Sergey Popravko
As Andreas says, the lack of technical shipping expertise in Cyprus can be compensated by the liberalisation of the immigration rules. Some time ago it was very difficult to bring in expats, especially non-Europeans, so I think with new immigration rules, it will ease the movement in of this expertise. If you look at Singapore, well, it has become extremely expensive and their immigration rules are becoming stricter on bringing in foreigners, so I think that in this respect, Cyprus has certain advantages. What is important is that Cyprus starts to recover after this devastating financial haircut it has endured and starts to build up trust again for the owners. Cyprus is still an attractive option as a shipmanagement hub.  Three years ago, my principals and shareholders were quite upset about Cyprus as it was going through tough financial times. I thought we would shut down our operations here in Cyprus. Now we are beefing up our operations here in Cyprus.

Petros Monogios
We have always had competition and if we solve the Turkish issue then this will be seen as a benefit to Cyprus.

Capt Norbert Aschmann
I never saw Dubai or Singapore as competition. We run our own shipmanagement centres in Singapore and in Cyprus and we certainly don’t cannibalise our own business. So we are talking about different time zones and we are talking about maybe, a slightly different customer base, although our Singapore office manages ships from clients in Europe and our Cyprus office manages clients from Japan, for example. I don’t think it is competition. From my point of view, it is about centres complementing each other but I think there is a difference when you look at the whole maritime cluster. And I think Cyprus doesn’t have a chance on earth to compete with Singapore really as a maritime cluster; where do you put Keppel, the repair yards, the huge port; it is not going to happen. If we look at the shipmanagement industry, as a part of the maritime cluster then I think we are there. We are pretty competitive in Cyprus and it keeps developing. We signed an agreement yesterday with the University of Nicosia for the Cyprus Maritime Academy to start training seafarers. The first tranche will come in this year.

Alexandros Josephides
There is a lack of local well-trained personnel willing to go to sea, this is something that we as an association are working on in a very structured way; to convince the younger generation that there is a future in a career in shipping and at sea. There are approximately 300 young Cypriots going through the marine academies at the moment and in the next 10 years these guys are going to come back here and they will be a locally-grown resource. Our local universities are introducing marine engineering courses, and we have a new Cyprus Maritime Academy here which means that in the next 10 years there will be an abundance of well-educated, locally well-trained staff who have gone to sea.

Capt Eugen-Henning Adami
Tax is the driver behind where a ship owner decides to manage his ships from and since more and more ship owners today are corporate institutions, global tax planning plays a major part in this decision. In Cyprus we have two laws which cater for this; one is our tonnage tax structure and the second one is the global infrastructure for foreign investment in Cyprus. If you pair these two items of legislation, you will find that, within Europe, they are most likely the best infrastructure tax wise for companies wishing to establish holding structures. This means that the funds you inject into Cyprus remain tax-free not only on the shipmanagement side but also on the ship owning side, for as long as you keep the funds in Cyprus. Of course, the issuing of dividends to the owner is subject to the tax regime where the owner is residing.

Capt Eberhard Koch
I would like to add to what Andreas said that our Cypriot employees are not just highly educated but are extremely loyal and are one of the biggest assets we have in our company.

Sean Moloney
Gentlemen, thank you very much for your participation.

Source: ShipManagementInternational.com

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