Cholera Risk Means Mounting Costs for Hapag-Lloyd, Torm: Freight

Hapag-Lloyd AG (TUI1) and Maersk Line (MAERSKB) are among ship owners facing a $100 billion bill to cleanse ballast water that spreads diseases such as cholera and invasive species including mitten crabs, adding to costs as cargo rates slump.

A binding convention drawn up by the International Maritime Organization requires shipping lines to retrofit 60,000 vessels with gear that kills unwelcome organisms and costs from $200,000 for an offshore-supply craft to $4 million for an oil tanker.

The rules add to pressure on margins at shipping companies from Hamburg-based Hapag-Lloyd and Denmark’s Maersk to Evergreen Marine Corp. of Taiwan, which all posted tumbling third-quarter earnings. Waertsilae Oyj (WRT1V) of Finland and OceanSaver AS of Norway, providers of cleaning equipment and filters, expect to benefit.

“It’s right that we shouldn’t move dangerous species around the world,” said Jan Fritz Hansen, executive vice president of the Danish Shipowners’ Association in Copenhagen, whose members carry 10 percent of global shipments. “But the limits being set look very costly and will require substantial investment at a time when international shipping and trade is in the red.”

Shares of Copenhagen-based D/S Norden A/S (DNORD), Europe’s largest listed commodities line, have dropped 23 percent over the past 12 months. Torm A/S (TORM), the continent’s largest publicly traded shipper of refined oil products, has declined 90 percent. Both stocks were trading 0.2 percent higher as of 11:39 a.m. today.

Hapag-Lloyd is majority owned by tour operator TUI AG (TUI1) and Maersk, which estimates its installation costs at about $500 million, is a unit of logistics group A.P. Moeller-Maersk A/S.

Ballast Rules

The convention, likely to be ratified later this year and effective 12 months later, aims to clean up seawater used to stabilize ships by lowering their center of gravity when lightly laden. Tanks are emptied and thousands of gallons of water discharged when a heavier load is taken aboard, often on the other side of the world and in a wholly different oceanic zone.

A requirement for ballast water to be purged even on ships making short international journeys, such as Denmark to Britain, is particularly onerous, Hansen said. Less stringent rules may apply only for trips within a state’s territorial limits.

The IMO, as the London-based United Nations agency for regulating shipping is known, currently recommends that vessels minimize contamination by dumping water taken on close to shore in the open ocean, where coastal organisms struggle to survive. The method isn’t 100 percent effective and could lead to wider distribution of harmful species, especially to island chains.

Cleaning Contracts

The new convention requires ratification by at least 30 countries accounting for 35 percent of world merchant shipping. As of Jan. 1, it had been approved by 33 states that represent 26.46 percent of global tonnage, IMO spokesman Lee Adamson said.

About 40 companies are vying to bring cleansing equipment to the market, with 15 approved to date, according to Tor Atle Eiken, sales chief at Drammen, Norway-based OceanSaver, established in 2003 to tap demand for ballast treatment, who says the convention will provide a “major boost” to earnings.

Helsinki-based Waertsilae, the biggest maker of marine engines, has begun to attract customers for its BWT 500i device, which combines a filter with ultra-violet irradiation, Chief Executive Officer Bjoern Rosengren said in an interview.

“Ship-owners have been putting off decisions but they’re now starting to investigate which systems we have on offer,” Rosengren said in London last month. “We intend to capitalize.”

The stock traded down 0.2 percent at 25.99 euros today.

Peru Deaths

Seawater entered regular use as ballast when metal hulls became commonplace in the 1870s, according to a paper from Portland State University researcher Ian Davidson published this month in the international journal “Biological Invasions.”

The first record of an alien marine invasion dates to 1903 in the North Sea, according to the IMO, with the mass appearance of an Asian phytoplankton. Since then, a host of species have been transported, ranging from microbes, eggs, cysts, larvae and bacteria such as cholera -- with ballast water blamed for an outbreak that killed 10,000 people in Peru in the 1990s -- to larger animals such as the Chinese mitten crab, whose burrows are undermining the banks of the Thames and Hudson rivers.

In the U.S., an invasion of zebra mussels native to the Black Sea has clogged up water pipes, sluices and irrigation ditches at a cost estimated at $1 billion over a decade, while the North American comb jellyfish has travelled in the opposite direction, wiping out anchovy fisheries in the Sea of Azov.

Health Concern

Scientists began to explore the threat in detail in the 1970s, and by the 1980s countries including Canada and Australia had brought their concerns to the IMO’s Marine Environment Protection Committee, which issued guidelines in 1991 before initiating the development of legally binding measures in 2004.

Among the top 10 shipping nations by tonnage, only Liberia and the Marshall Islands, ranked No. 2 and 3 behind Panama, have ratified the plan, which Hansen of the Danish Shipowners’ Association reckons will finally win approval by next year.

“Progress on implementing the convention seems sluggish,” Portland University’s Davidson said in an interview. “Ballast water dumps whole assemblages of organisms into new environments and the threats that brings are ecological, economic and to human health on a local, regional and sometimes global scale.”

Major shipping companies have already begun to align fleets to the looming requirements, with Hapag-Lloyd (HPL), Germany’s top container line, investing in Mahle GmbH systems that again combine filters with UV treatment.

Counting Cost

The equipment will be fitted to 10 new Hapag ships with a capacity of 13,200 containers apiece, due for delivery over 18 months starting in July, with existing vessels to be retrofitted should an evaluation of its performance prove positive.

Solutions that don’t use polluting chemicals are limited, pushing up costs, spokesman Rainer Horn said, especially given flow rates needed to cope with water volumes on the biggest Post-Panamax ships -- those too big for the Panama Canal.

“Hapag-Lloyd takes its responsibilities very seriously here, and environmental concerns are a top priority, but the technology costs money and makes a greener product more expensive,” Horn said in an emailed response to questions.

At A.P. Moeller-Maersk (MAERSKB), 700 ships will need to be fitted out in a process which will have “no payback” and therefore have “a negative impact on the final result,” said Palle Wredstrom, project manager for maritime technology.

That’s excluding the expense of new ballast pumps, generators and higher power consumption, he said, while cleaning filters will mean a bill of thousands of dollars per ship each year for the company, which was priced 0.4 percent lower today.

Dry Dock

Refitting thousands of vessels across the industry within about six years will also put “almost impossible demands on the supply chain,” Wredstrom said, since installation must be done between voyages, while tankers will go into dry dock so that any gas can be pumped out, increasing demand for limited space.

“We do question whether the very speedy implementation is making this environmental investment overly expensive,” he said.

Norden (DNORD) anticipates a bill of about $500,000 to retrofit each of the 45 ships it owns out of a fleet totaling 216 dry- bulk vessels and tankers, which don’t include the very largest models, technical director Lars Lundegaard said in a phone interview. Equipping new craft would cost “significantly less.”

Trade Patterns

The biggest challenge is to settle on the right technology from the options available, Lundegaard said, with UV rays unable to penetrate highly silted water and chlorination performing poorly in the fresh water of rivers and estuaries.

“You have to decide based on your trade patterns,” he said. “We’ll have to use a combination of different technologies, because we trade all over the world. By delaying a final choice a bit longer we should have a better range of solutions.”

Copenhagen-based Torm (TORM) will require more costly fire-and explosion-proof gear for its fleet of 70 tankers.

“Once this equipment enters mass production and there are more suppliers it will probably fall in price,” spokesman Jakob Risom said by telephone. “But this may not happen before the implementation date, and the producers know this.”

Portland University’s Davidson says cost issues mustn’t be allowed to delay measures further.

“Shippers can calculate the price of implementing this, but I wonder if they know the expense of invasions,” he said. “The cost of losing fisheries, damaging infrastructure and altering ecosystems can be long-term and sometimes irreversible.”

To contact the reporter on this story: Sabine Pirone in London at spirone@bloomberg.net

To contact the editors responsible for this story: Chad Thomas at cthomas16@bloomberg.net; Benedikt Kammel at bkammel@bloomberg.net

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