. prices across the board. According to Business Week, of April 2, 1979, "“For every 1 percent decline in the dollar, prices rise 0.75 percent in the long run.' We should add that, because many foreign shipyards, notably those in Japan, are offering prices at 10 to 40 percent below actual costs, they are "dumping" their ships in foreign markets. Such ships built for U.S. operators foreclose substantial contracts for U.S. shipbuilders and many thousands of man-years of employment, not only in U.S. shipyards, but in support industries. In effect, the U.S. 10 percent investment tax credit bonus for the acquisition of ships applies equally to foreignbuilt vessels, and, therefore, is a further inducement to build foreign at the expense of our trade balance. National defense The fact that neither Navy nor MarAd officials could offer conclusive testimony on the number of shipyards needed for national defense does not in any way lead to a conclusion that our national interests would be served by relying upon foreign shipyards to meet our shipping needs in time of emergency. While oil and ships are vastly different, we should point out that oil was boycotted in 1973 by "our friends" and turned off in 1979 by our staunch ally-Iran, who, in a few short weeks, not only broke away from that close embrace, but attacked our embassy and forced our citizens from their country. Nor did our closest allies in NATO give us their cooperation in our attempt to use their landing fields so our planes could refuel in order that we could meet our commitments to assist Israel. Admiral Kidd noted in his testimony on Sealift Capabilities in September, 1978, that the constantly developing technology for military application virtually assures tremendous destruction to each side's shipping. How long would Japan's, South Korea's, or our NATO allies' shipyards be available for ship construction given their proximity to our principal adversary's might in even a "short war"? In that context he predicted that losses to American shipping ". . . would be staggering . . . horrendous." Fortunately, we are not at war. But we should point out that both European and the adversary's shipbuilding capabilities were virtually eliminated during World War II. The U.S. had a three year period of grace in which to increase its shipyards and acquire the production capability which, with its genius for productive innovation, enabled those shipyards to turn out 5,777 merchant ships of all types, totalling some 56 million deadweight tons, as well as an armada of warships with which to carry our civil and military support requirements. Even so, the allied effort never had enough ships to meet its needs and numerous campaigns were delayed because shipping was in short supply. During World War II, the U.S. lost 674 merchant ships. It is ironic that currently, privately owned U.S.-flag ships-the backbone of the American merchant marinenumbers 586, of which 235 are in foreign trade, practically all of which were built with CDS. * Mr. Edwin M. Hood, in his testimony before the Subcommittee on Merchant Marine (March 15, 1979) stated: 19 of the 26 shipyards in the active U.S. shipbuilding base are currently building ships. It can be predicted that no more than eight or nine shipyards will hold major shipbuilding contracts in 1984. This severe contraction of a resource base which the Secretary of the Navy asserted . . . in 1977 was only marginally adequate for a short war and substantially inadequate for an extended conflict should not be dismissed lightly. The cumulative effect will spread to other industries and activities that not only supply and service shipyards, but also enhance the assurances of national security to a nation whose reliance on ships for defense and commerce is historic and monumental." We do not share your view that CDS is a "failure" due to "poor planning and execution", but were it even as you appear to indicate, would not a better approach be to examine the causes and remedy them, rather than destroy a process that has enabled the U.S. to have the most technically innovative and productive ships on the oceans today? Would not this approach be more useful in helping to maintain a strong shipbuilding base in a world of tensions than eliminating CDS forthwith, and thus diminishing our defense capability? We strongly believe it would. We appreciate your courtesy in giving us the opportunity of expressing our views on a subject that bears so importantly on our national welfare in these troubled times. Respectfully, EARL W. CLARK, Co-Directors. Mr. ERNEST CORRADO, MMS ASSOCIATES, Stamford, Conn., March 19, 1979. Chief Counsel, House Merchant Marine Committee, DEAR MR. CORRADO: MMS Associates is a consulting group made up of individuals from the international shipping industry. We have been in business for the past ten years (through Marine Management Systems, Inc.) serving as consultants to some of the largest international bulk carrier and tanker operators. We as Americans in the marine business are concerned about the position of the U.S. bulk shipping fleet. The U.S. controls about 25 percent of the bulk business, yet our ships carry less than 2 percent. We are convinced that an economic U.S. flag merchant marine can compete in the world market, if given the right conditions. This could be done at significantly reduced cost to the taxpayers, instead of increased cost. The enclosed report shows our recent efforts in pointing out what several alternatives may be to a competitive U.S. flag bulk carrier fleet. This is obviously not an indepth study, but the analysis method used is simple and sound and accepted by the international industry today. We feel there is hope for the U.S. maritime industry, if the facts are presented clearly. We would be happy to provide our services to this end. Sincerely, Enclosure. EUGENE D. STORY, Principal. ANALYSIS OF U.S.-FLAG VERSUS FOREIGN-FLAG BULK SHIPPING COSTS A CASE OF A 73,230 DWT PANAMAX BULK CARRIER Introduction The purpose of this brief study is to illustrate a simple and valid method of examining the impact of various assumptions on the competitiveness of U.S. Flag Bulk Shipping. The need for a competitive U.S. Flag Bulk Carrier (and tanker) fleet, from both a strategic and commercial standpoint, has been obvious and will not be covered here. What has not been clear is what factors, at any particular time, have an impact on the competitive position of U.S. Flag Bulk Carriers. While a number of studies have been undertaken, including trade forecasts, they are usually so large and comprehensive that conditions have often changed before their completion. The approach shown in this study, follows some very basic principles that are used by shipowners all over the world engaged in the international bulk transportation market. The actual economic analysis programs used here have been accepted and used by many of the international operators so that the method of analysis should not be in question, only the assumptions. These assumptions can be varied at will, showing the resulting effects almost immediately. The international bulk shipping operator serves a market that is continually changing. He must therefore have the flexibility to change his business strategy or trade, as needed. He equates all his costs to a time charter rate or cost/day figure that covers all his capital and operating costs and required return on investment. He must be able to evaluate his required return, regardless of the trade he is in at the time. The operating and financing assumptions are shown in the study, with the results of U.S. Flag vs. Foreign Flag shown in Table 1. These numbers may be compared with the international market for any period, since the market figures are reported daily (see exhibit “A” MARDATA report for period February 19 thru March 17, 1979. The next step could be to take the ship or ships, with the calculated time charter rates and put them into a particular trade, calculating the break-even freight rate to cover all added voyage costs. Note that the return on investment is already covered in the time charter rate. The result can be compared with the daily market (as shown in the MARDATA Voyage Charter Report exhibit "B"). As an example, we have looked at the impact of the cost of a bulk carrier built in the United States, with Construction Differential Subsidy (CDS) and an Operating Differential Subsidy (ODS) against the same ship bought on the open market (foreing flag), put under the United States flag with American crew and ODS. It is immediately apparent that the latter case is competitive even in today's relatively depressed market. The case shown uses estimated figures, with a very conservative (low) ODS rate to show the point. The numbers used are reasonable in today's market, but would require additional refinement. Again the purpose is to show the method, not the absolute result. We believe that this approach to the analysis of U.S. Flag Shipping can serve as a standard to judge the various proposals in a simple, fast and accepted manner, thus eliminating much of the detail that has clouded the real issues in the past. The purpose of this brief study is to examine the impact on the competitiveness of U.S. Bulk Shipping of different assumptions using a 73,230 DWT vessel as a model. The principal cases under review for comparison with Foreign Flag costs are as follows: 1. U.S. Flag Newbuilding-No ODS Or CDS Subsidy 2. U.S. Flag Newbuilding-CDS But No ODS Subsidy 3. U.S. Flag Newbuilding-CDS And ODS Subsidy 4. Foreign Flag Purchase-No ODS Subsidy 5. Foreign Flag Purchase-ODS Subsidy The cases are examined on a 10 percent return on equity and a breakeven basis. The results are shown on a time charter equivalent rate basis and a transportation cost per ton basis. Results based on the above assumptions we have developed the time charter equivalent rates based on 350 operating days/year. These results are summarized in Table 1. In order to provide a comparison of the three alternatives on a specific voyage, we have developed assumptions for the coal trade Hampton Roads to Rotterdam and derived cost comparisons as the basis of a cost per ton of cargo delivered. Assumptions required relate to Vessel Characteristics; Voyage Characteristics and Voyage Costs. The Vessel Characteristics are described in exhibit A and C and represent the characteristics of the vessel “THORSDRAKE". The Voyage Characteristics and costs for the voyage Hampton Roads/Rotterdam are described in exhibit B. Briefly the assumptions used are as follows: ᎠᎳᎢ . Vessel characteristics—Thorsdrake (exhibits A and C) 73,231. 3,208,350. Speed Ballast 55 tons. 10. 2. 2. Voyage characteristics and costs (exhibit B) 3,547. 2.0. $120/ton. $135/ton. 0.25/ton. 0.25/ton. 42 ft. 65 ft. This data along with the time charter rates developed are used to calculate the transportation cost per ton of cargo delivered from Hampton Roads to Rotterdam for the different alternatives. The results are summarized in table 2. |