No sooner had shipping taken a (slightly strained) sigh of relief after the USTR published its plan last month, its lower-profile yet more earnest sibling has taken centre stage.
The SHIPS Act has risen from the proverbial grave, having been rejected by Congress last year, in a new and “improved” guise; one that this time looks set to be approved. It was reintroduced on Wednesday, 30 April, and is fast gaining traction.
Unlike the USTR’s plan, which appears little more than a gambit in the multi-faceted war between the US and China, the SHIPS Act could better be described as the “real deal”. To sum up briefly, it comprises elements of the USTR’s original proposal and, unlike the USTR’s plan, which could be undone in a figurative heartbeat, only a vote through Congress would be able to undo the SHIPS Act (should it be voted through in the first place), which has bipartisan support.
Its supposed purpose is to restore US shipbuilding in the interests of national security. Should the US find itself at war with China, a scenario which looks increasingly possible, it wants to ensure on-going access to vessels and seafarers with minimal disruption to trade.
Firstly, there are proposed fees on vessels built by a “foreign shipyard of concern” (FSoC). Of course, this includes China, although for now yards owned by China State Shipbuilding Corporation have been targeted directly. From October 2027, other yards can be added to this list.
Under the SHIPS Act, there would be additional fees for vessels owned or operated by “foreign countries of concern” (i.e. China), as well as vessels owned by other countries but built at FSoCs. A fee of USD 5 per net tonne will be applied to vessels not only owned or operated by a foreign country of concern (FCoC) that call at US ports, but also vessels registered there, or even vessels registered there three years prior to “the date of determination of the application”.
"Its supposed purpose is to restore US shipbuilding in the interests of national security. Should the US find itself at war with China, a scenario which looks increasingly possible, it wants to ensure on-going access to vessels and seafarers with minimal disruption to trade."
There’s more; any other owner or operator that has 50 per cent or more of their vessels on order at FSoCs as of the application date or has 50 per cent or more of its newbuilding deliveries within two years of the application date, will pay the same fee.
Owners and operators not from a FCoC, but with 25 – 49 per cent of their newbuildings at FSoCs or delivered within two years of the application date, will be charged USD 3.50 per net tonne.
Finally, fees of USD 1.25 per net tonne will be charged to non-FCoC owners or operators with 50 per cent or more of their vessels either built at FSoCs or undergoing repairs at FSoCs “at any time” within the three years preceding the application date.
Moreover, the SHIPS Act fees are not cumulative – whichever is highest will be applied – but they are in addition to any incurred USTR fees.
Still with me? There’s more.
While the USTR’s plan laid the groundwork for increasing amount of US-produced LNG to be exported on US-owned and -flagged vessels, the SHIPS Act will do something similar for US crude oil exports and US imports of Chinese goods, while further muddying the waters for LNG.
First, the matter of crude oil.
In each of the first four years after the SHIPS Act comes into force, 3 per cent of US crude oil exports will have to be transported by US-flagged tankers. Between years five to seven, 3 per cent of US crude oil exports will have to be carried on US-built tankers; in years eight to 10, this rises to 6 per cent; and in years 11 to 13, it will be 8 per cent; and from year 14 onwards (for now), it will be 10 per cent.
Regarding US imports from China, 1 per cent of Chinese imports measured by tonnage must be imported via US-built vessels from the fifth years after the SHIPS Act’s implementation. This will increase by 1 per cent each subsequent year to 10 per cent after the 14th year.
As for LNG, the SHIPS Act has its own version of the USTR’s plan, which discredits the latter further. During the first five years after implementation, 2 per cent of US LNG exports must be transported by US-flagged LNG carriers; across years six to seven, 2 per cent will be exported on US-built LNG carriers; 3 per cent in years eight and nine; 4 per cent in years 10 to 11; 6 per cent in years 12 and 13; 7 per cent in years 14 to 15; 9 per cent in years 16 and 17; 11 per cent in years 18 and 19; 13 per cent in years 20 and 21; and finally 15 per cent from year 22 onwards.
While different to the USTR’s timeline, both reach the final 15 per cent target at theoretically the same time (the USTR’s plan outlines 15 per cent in 2047). The penalty for failure to comply? A fine that is larger than the difference in cost of shipping on a US-built vessels versus the cost of shipping on a flag-of-convenience vessel.
"While the USTR’s plan laid the groundwork for increasing amount of US-produced LNG to be exported on US-owned and -flagged vessels, the SHIPS Act will do something similar for US crude oil exports and US imports of Chinese goods, while further muddying the waters for LNG."
Finally, if vessels undergo repairs at FSoCs, they will pay a fine of 200 per cent of the cost of those repairs upon calling at a US port.
All incurred fees will be directed to the Maritime Security Trust Fund; it is not clear what the exact purpose of the fund is just yet, but it will probably – at least in some part – go towards supporting US shipbuilding, which would also receive generous tax benefits as part of the SHIPS Act. The ultimate goal of all this? To create a US-flagged fleet of 250 vessels.
So, what does this all mean for the industry? For now, it remains difficult to quantify because there is so much that needs to be explained. Who exactly is responsible for ensuring 3 per cent of US crude oil exports are transported on US-flagged vessels? How will this be monitored? If this isn’t achieved, who is liable to pay? Will there be exemptions in line with those in USTR?
Regardless, the SHIPS Act would mean that any Chinese owner or operator, or any owner with more than half their orderbook built at FSoCs, would pay USD 5 per net tonne for calling at a US port. In the case of a VLCC, for example, this would be a fee of around USD 550,000. For an Aframax, the fee would be roughly USD 175,000. Compared to the original USTR proposals of up to USD 1.5 Mn, this is not hugely significant.
For owners with between 25 – 29 per cent of their orderbook at FSoCs, the fees would be USD 385,000 and USD 122,500 for VLCCs and Aframaxes, respectively. And, finally, those owners with over half their active fleet built in China would pay USD 137,500 and USD 43,750, respectively. Unwelcome, but hardly bank-breaking.
"Will it turbocharge the US shipbuilding industry? Unlikely. The last time a Suezmax was built was in 2006, by Avondale Industries."
From a newbuilding perspective, the expected impact is muted – particularly as there is provision for the President to suspend fees on vessels from friendly countries. Assuming the SHIPS Act is strictly regulated, to qualify to be US-flagged, a vessel must be US-owned and must employ US citizens as licensed officers, while no more than 25 per cent of the unlicensed seafarers may be non-US citizens. And even then, these seafarers must have a Green Card. This all would obviously come at significant cost.
Having said that, vessels that fit this criteria would theoretically be able to command significant premiums in the freight market, opening up a new tier. However, throughout the lifespan of the SHIPS Act (in its new guise, at least), volumes are relatively small, so no sizeable impact is expected.
Will it turbocharge the US shipbuilding industry? Unlikely. The last time a Suezmax was built was in 2006, by Avondale Industries. Avondale ceased trading in October 2014. Meanwhile, just two trading Aframaxes were built in the US by, as it was called at the time, Aker Philadelphia Shipyard. The latest of these was in 2015 and, last year, the yard was bought by Hanwha, with the yard subsequently renamed Hanwha Philly Shipyard.
The threat of fees may deter owners from ordering at Chinese shipyards, should it push their orderbooks at Chinese yards above 50 per cent, but this will be to the benefit of Japanese and South Korean yards, not US yards. But again, as has been regularly stressed since the USTR first reared its ugly head back in February, the US crude oil tanker export market is a comparatively small market. The SHIPS Act is unlikely to dictate the actions of owners and change the course of the industry (much).
n.b. The legislation says “tonne”, but this is not defined, but US tonnage taxes refer to net tonnes.