Re-imagining the US Maritime Industry

Last week, the shipping giant Maersk made headlines when it christened the Alette in the Port of Los Angeles after its journey from China. The Alette was the first container vessel to cross the Pacific Ocean powered by green methanol fuel, as part of Maersk’s broader initiative to help companies like Nike lower supply chain greenhouse gas emissions. Unfortunately, the event was a black eye for the United States, as there was no green fuel available to refuel the ship (travel was unaffected since the ship can also run on conventional fuels).

On the surface, this story exposes how far behind the US maritime industry is in mitigating what accounts for approximately 3% of global greenhouse gases. Very few ships are equipped to use cleaner fuels, and the necessary infrastructure and supply chains are not yet prepared to support the process. To further complicate matters, there are calculations that green methanol’s lifecycle emissions are notably worse than marine diesel fuel.

Diving deeper, this story is emblematic of how weak the US maritime industry has become. As the world’s largest importer, the US relies heavily on foreign commodities, with 45%—amounting to $2.3 trillion in 2022—arriving by sea. Yet the Alette was built in South Korea by HD Hyundai, owned by a Danish company flying a Denmark flag, composed of a crew from Romania, the Philippines, India, Ukraine, Denmark and the Netherlands, and offloaded at a terminal operated by a Dutch subsidiary of a Danish Company (Maersk subsidiary APM Terminals). US influence, in an evolution vital to the American economy, was nowhere to be found.

Maritime shipping, shipbuilding, and port infrastructure are seen by many nations around the globe as key strategic areas to address for both national security and economic success. The COVID-19 pandemic did an excellent job at showcasing the fragility and importance of our global maritime supply chains, where any bottlenecks along the way can have ripple effects that may last for months or longer. Due to its importance, subsidies and protectionist measures are historically strong and come in a variety of forms depending on the country (e.g., the US has provided annual stipends to privately-owned US flagged vessels that agree to make themselves available in times of war). But even with strong levels of government support (perhaps not as strong as others), some countries have seen their maritime industry falter. And unfortunately, the US’ maritime industry is barely getting by on life support.

Shipbuilding Orders By Country Of Origin

Source: BRS Group

Three countries dominate the global shipbuilding industry, with China continuing to build on its market share. For comparison, the United States had only 4 ship orders representing less than 0.2 million Dwt capacity (deadweight tonnage). US ships are estimated to be four to six times more expensive than elsewhere globally.

Ship Ownership

Source: VesselsValue

American companies are influential players in the cruise industry but wield little influence where any goods are shipped (including in areas where the United States is a key global exporter, e.g., LNG and oil).

Flags of Convenience Dominate Maritime Freight

(Vessels’ countries of registration by total loading capacity in 2022 (million deadweight tons))

Source: UNCTAD, Statista

A merchant ship is required by international law to be registered in a specific country and must adhere to that country’s regulations and safety standards. Some countries have become “Flags of Convenience” to bypass stricter countries to allow for lower taxes, less strict rules, and the ability to hire cheap labor. The US has less than 200 ocean-going flagged vessels.

US Port Activity

Source: U.S. Department of Transportation, Bureau of Transportation Statistics, based upon 2021 data (latest available) provided by U.S. Army Corps of Engineers, Waterborne Commerce Statistics Center. Special tabulation as of November 2023.

Since America is the world’s largest importer and 2nd largest exporter of goods, US ports stay busy.

Path forward for the US Maritime Industry

With the current state of the US maritime industry, there is essentially a blank canvas to envision what the future may look like. Though some major strategic issues will have to be dealt with on the global stage (such as considering the US’ tenuous relationship with China and their global share of shipping and shipbuilding), US corporations and the government can address key sustainability issues, such as environmental stewardship and worker safety. Furthermore, innovation in propulsion technology (e.g., nuclear-powered and battery-electric), alternative fuels, and automation are areas where many US companies could likely contribute immediately to advancing the industry. It is also a perfect opportunity for the US to collaborate with key allies (e.g., Japan and South Korea) and their companies to help bring some life to the industry. There is a growing interest brewing in Washington, as a bipartisan group in Congress recently released a 10-step action plan to enhance the US’ Maritime Power (and President Biden has discussed shipbuilding in reference to boosting the US steel industry). We are starting to see some potential cues for future action, what will investors and companies do with them? Expect discussion in this area to heat up in the months to come (regardless of who wins in the November elections).

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Notable Companies:

HD Hyundai Heavy Industries (KSE: 329180)

Credit Rating: Aa2

The South Korean shipbuilder, with the help of $120 million in government grants, launched its first ship designed for autonomous operations in March.

CorePower

The UK company has partnered with Maersk and Lloyd’s Register to conduct a joint feasibility study for nuclear-powered container shipping.

Mitsui (TSE: MITSY)

Credit Rating: A3/A

The company’s US subsidiary was tapped to build cranes for US ports as a response to President Biden’s ban of Chinese-constructed cranes over security concerns. It will be the first time in 30 years that such cranes have been made on US soil.

Dominion Energy (NYSE: D)

Credit Rating: Baa2: BBB

The utility company launched its first offshore wind installation vessel, the Charybdis, in April. Planned commissioning is scheduled for late 2024/early 2025 and will support construction of the Coast Viriginia Offshore wind project.

Exxon (NYSE: XOM)

Credit Rating: Aa2/AA-

The oil giant, in partnership with QatarEnergy, is building an 18 million metric ton per year LNG export facility in Sabine Pass, Texas. The project has been hampered by delays due to its primary construction contractor going bankrupt.

China Ocean Shipping Group (COSCO) (SSE:CICOY)

The Chinese state-owned shipping giant launched two 10,000-ton river-sea electric container ships late last year. They carry a massive 50,000 kwh battery that allows them to travel up to 600 nm on a single charge.

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Others stories Sage is following:

Corporate ESG Pullback

Politicians may have had muted success in thwarting corporate ESG efforts, but a conservative activist is making his presence felt. Robby Starbuck has successfully persuaded companies like Lowe’s, Tractor Supply, and Ford to walk back DEI initiatives supporting employee resource groups and conducting Human Rights Campaign surveys. Molson Coors is the latest to follow suit, though the company says these plans have been in the works since March. The company will eliminate supplier diversity quotas, change the name of employee resource groups, and update its DEI training, among other efforts.

On the environmental front, Volvo abandoned its ambitious goal set in 2021 to create all electric vehicles by 2030. The new target is for 90% of its vehicles to be either electric or plug-in hybrids by that same year. Due to the change in vehicle goals, emission-reduction targets were also tempered.

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Offshore Wind Woes

The debris from a broken offshore wind turbine blade that littered the Nantucket shoreline for days wasn’t a good look for the technology that has seen a host of struggles here in the US, but unfortunately the bad news continues. Wind developer Invenergy had to pause development of its project off the coast of New Jersey after turbine manufacturer GE Vernova (the same company responsible for the Nantucket saga) decided to stop making a specific model of turbine. Other suppliers hiked up their rates prohibitively high, forcing a pause on the project.

Perhaps suppliers and developers are hoping the US will embrace offshore wind like the UK has. In response to industry pressure, the UK government increased its auction budget for offshore wind from ￡1 billion to ￡1.5 billion after receiving no bids in 2023.

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