TWO months after the cabotage policy for Sabah and Sarawak was removed on June 1, the shipping community in the two states are already feeling the adverse effects.
One Sarawak-based shipper says the impact is evident as international shipping companies have begun plying routes previously open to Malaysian ships only.
In fact, foreign container shipping companies went on standby mode just weeks after the government announced the cabotage policy.
East Malaysian shippers say they stand to lose billions of ringgit in revenue. With the industry already facing tough times, many of the smaller shipping companies may go bust.
In Sarawak alone, there are 3,000 state-registered ships employing 18,000 people. The container shipping industry is worth RM2 bil per annum (excluding shipyards/shipbuilding, car carriers, oil and gas tankers, and conventional ships).
In May, the government announced the exemption of the cabotage policy for Sabah and Sarawak as well as Labuan effective June 1.
The 30-year-old policy was introduced in the 1980s to promote Port Klang as the country’s main transhipment hub, where foreign ships ferry their cargo to Port Klang and local ships transport it to East Malaysia.
Call from leaders
The cabotage exemption was in response to calls from leaders in East Malaysia who felt the price of goods in the two states will reduce if the cabotage policy is removed.
This was because the costs will be cheaper if foreign ships called directly on East Malaysian ports instead of through Port Klang.
Under cabotage, Malaysian-owned ships then transport the cargo from Port Klang to East Malaysian ports
Should a foreign operator wish to transport cargo domestically, it needs to apply for a domestic shipping license, which is valid for three months.
Approval for this licence is on a case-by-case basis. The lifting of cabotage will give foreign shipping companies free reign on all ports, although inland trucking will still be handled by local logistics companies.
The cabotage policy was also introduced at that time for national security reasons, as only Malaysia-flagged vessels would be allowed to handle domestic transshipment of goods.
In times of national emergency, the government can call on local shipping companies to deliver goods and personnel to restricted areas.
Container ships are capable of faster speeds compared to conventional ships.
Hence, the change in cabotage policy means several listed shipping companies could see their bottom lines worsen. Already, many are suffering losses (see profiles).
Ooi says the influx of foreign players will erode the economies of scale for local players
Sarawak-based Shin Yang Shipping Corp Bhd CEO Capt Ting Hien Liong says foreign container shipping companies are already on standby, waiting for opportunities.
“Most of the big international companies are watching the container business for opportunities to enter the market.
“They are already coming in for the tanker and bulk cargo business. Removing cabotage does not benefit local players as all ports are now open to international players,” Ting tells FocusM
For Q3 ended March 31, Shin Yang posted a net loss of RM7.14 mil when in the previous corresponding period it recorded a net profit of RM462,000.
The loss was attributed to a decrease in margins for the liquid and dry bulk shipping segments.
Revenue for the quarter stood at RM142.9 mil, a slight increase from RM141.39 mil.
“Vessel overcapacity and demand continues to put dry bulk cargo rates under pressure over the short-term.
“The prospects for the shipping industry continues to remain challenging and positive with the recent decline in crude oil price.
“The group is prepared with sustainable and market-driven routes for its fleet movements,” said Shin Yang in its Bursa Malaysia results filing.
Shipping rates have fallen drastically the last few years, resulting in the bankruptcy of shipping giants Hanjin, as well as mergers and acquisitions globally.
In Malaysia, five shipping companies were forced to exit the container business due to losses in this segment – Hubline Bhd (2015), Swee Joo Bhd (2009), Geninki (2014), MISC Bhd (2011), and PDZ Holdings Bhd (this year).
Local container shipping companies have been feeling the impact of an increasingly competitive environment, so the decision to partially remove the cabotage policy could prove to be the straw that breaks the camel’s back.
As an increasing number of larger foreign shippers enter the market following the partial liberalisation, local shipping companies could become uncompetitive in their own turf.
Bintulu-based Harbour-Link Group Bhd, in a Bursa Malaysia results filing, says the relaxation of cabotage could negatively impact its shipping and marine division’s performance.
In the nine months until March 31, the company posted a revenue of RM385.84 mil. Of this, RM238.32 mil or 62% came from its shipping and marine segment.
Deputy Transport Minister Datuk Abdul Aziz Kaprawi said the cabotage exemption, effective June 1, was requested by leaders of the two states.
“We are confident that the Pan-Borneo Highway, once completed, will also reduce the cost of goods in Sabah and Sarawak alongside the cabotage policy exemption, and [contribute to]development in the two states,” he told Parliament on Aug 7.
Abdul Aziz said a working committee comprising the federal government and Sabah and Sarawak state government representatives was set up to assess the effectiveness of the cabotage policy.
The findings of the one-year trial period will be used to determine the direction of the policy.
But industry players are already refuting the effectiveness of the move, saying it will have little impact on the prices of goods in the two states.
Without cabotage protection, Malaysian shipping companies could see a drop in business to foreign players, they say.
MTT Shipping Sdn Bhd managing director and chairman of the Shipping Association Malaysia (SAM) Ooi Lean Hin says the influx of foreign players will erode the economies of scale for local players, which is crucial at present market rates.
“Local operators have been carrying out an efficient model to distribute essential consumer goods to every corner of East Malaysia despite the poorer port and transport infrastructure.
“This efficient supply chain model will be negatively impacted by the disruption caused by the entry of foreign operators in domestic trade.
“Unlike local operators, foreign ones will call at larger ports only, instead of the more remote areas.
“This increases the time needed to distribute essential consumer goods to remote areas of East Malaysia,” Ooi says in an industry newsletter on May 17.
Local players, he says, will also be disadvantaged in terms of cost management.
“Of course there will some risk for local operators as our pockets are not as deep as those of large foreign players.
“We go to all the smaller ports but foreign players can choose not to go there.
Local companies cut their inventory to reduce costs, but when foreign companies leave, who will take up the volume?” Ooi asks, when speaking to FocusM
A senior manager of a Sarawak-based shipping company says the impact is already evident.
“We will soon have to reduce capacity once the larger international shipping companies start to take up routes previously open only to Malaysian ships.
“We service smaller ports around Sarawak and Sabah even if it means losing a bit of money, as it is a form of national service. Besides, we have long-standing clients there.
“We make up for the shortfall by calling at the larger ports with larger head haul but we will lose this income [to foreign shipping companies] and won’t go into the smaller ports if it continues,” he says.
The Sarawak and Sabah Shipowners Association (SSSA) and the Sarawak Shipping Association (SSA) say the liberalisation has allowed foreign vessels to carry cargo from major ports without requiring the domestic shipping licence.
The ports include Port Klang, Tanjung Pelepas, Kuching, Bintulu, and Sapangar Bay.
Ooi says the number of shipping companies and jobs could decline if the government decides to permanently do away with cabotage.
The government began drafting a maritime masterplan last year in a bid to revive the local shipping industry in anticipation of a larger presence of foreign companies, but removing cabotage would render the masterplan ineffective.
“In the maritime masterplan, the aim was to staff all Malaysian-flagged ships with 100% Malaysian crew.
“There is also an employment generating deal which fuels the need for experienced Malaysian crew. The dismemberment of cabotage will no longer protect or incentivise operators to prioritise Malaysians.
“This will increase the risk of such crew being unable to secure further employment,” says Ooi.
Revenue that was previously generated by Malaysian companies can no longer be cycled back into the economy.
On the maritime masterplan, Abdul Aziz says there is an increasing number of foreign ships with capacities of up to 14,000 twenty-foot equivalent units (TEUs) that are eating into the local market.
Local liners are unable to compete, given that their average capacity is between 3,000 and 4,000 TEUs.
MISC’s exit from the container business was attributed to the investment surge by companies in larger ships, which was meant to bring down shipping costs. As a result, it could not compete.
Even when the cabotage policy was in place, the government was lax in enforcing the rules.
An industry source says that recently, an Iranian-Malaysian company briefly did business in the state before folding up upon posting losses.
Although the company had a paid-up capital of just RM100, it owned two ships. “It was 51% held by a local staff, while the rest belonged to the Iranian party.
“The authorities did nothing. The company entered [the local routes] and lost money, and at the same time we lost money too,” says the source.
Many industry players reason that the removal of cabotage is because of the high cost of goods in Sabah and Sarawak.
Shipping companies were also said to be profiteering by racking up shipping costs.
The cabotage policy, which limited the shipment of goods from the peninsular to East Malaysia to only Malaysian-flagged ships, led to the perception that goods have to be handled at two ports, thus incurring additional charges.
Ooi says it is only a myth to think that foreign operators can lower the cost of shipping to East Malaysia. Domestic players, he says, have not profiteered from the cabotage policy.
“In the past six years, many companies have closed down. If [the shipping industry] is really a cartel and profiteering, then [losses] would not have been incurred.
“Freight rates from Port Klang to Kota Kinabalu have dropped drastically since 2012. Cabotage is not the reason for the increasing cost of living.
“Once the smaller players are killed off, the cost of goods will rise. An 8-10% margin is not profiteering,” he stresses.
Cost of living
Ooi says that factors contributing to the higher cost of living in Sabah and Sarawak include a lack of industrialisation, poor road infrastructure which increases the cost of inland transportation, and traders requiring higher margins due to lower market volumes.
Removing the cabotage policy can potentially destroy the transport ecosystem to East Malaysia which is provided by domestic operators at very competitive prices.
Freight comparisons of similar nautical distances were made between Port Klang and Kota Kinabalu versus Shekou and Kota Kinabalu.
It concluded that the cabotage service corridor (Port Klang-Kota Kinabalu) is 35-40% cheaper than the non-cabotage service corridor of Shekou-Kota Kinabalu which is operated by foreign players.
All said, there is still hope for container shipping companies with interest in East Malaysia. Industry players are pushing for the development of Sapangar Bay, Sabah, to mirror the development of Port Klang.
Ooi says relaxing cabotage laws will work for Sapanagar Bay’s international traffic, as it encourages containerised shipping services to connect Sabah to global markets.
“Sapangar Bay can also work with domestic shipping operators to develop a feeder network connecting it to the Brunei Darussalam-Indonesia-Malaysia-Philippines East Asean Growth Area.
“Joint efforts will assist the federal government in the industrialisation and economic growth of the state,” says Ooi.
Cabotage in other countries
CABOTAGE laws are not unusual and are in place throughout the world in countries with a coastline. The exception is Singapore and Brunei, which are sovereign city states.
The laws are often used in addressing national defence, crisis response, control and distribution of consumer staples and to protect and encourage the growth of local maritime industries.
In the US, the Merchant Marine Act of 1920 (Jones Act) requires all goods transported by water between US ports to be carried on US-flagged ships, constructed in the US, and owned and crewed by US citizens and US permanent residents.
The Passenger Vessel Services Act of 1886 states that no foreign vessels shall transport passengers between ports or places in the US, either directly or by way of a foreign port.
Indonesia implemented a cabotage policy in 2005 after previously allowing foreign-owned vessels to operate relatively freely within the country.
Cabotage principles were implemented when the domestic shipping industry in Indonesia almost collapsed as a result of foreign vessels engaging in coastwise transportation.
After the Indonesian government implemented restrictions, the country’s shipping and offshore marine industry underwent major changes with the introduction of the Maritime Law No 17 of 2008.
It was aimed at providing business opportunities and a greater market share to Indonesian companies.
Last year, in a bid to spur economic growth and reduce reliance on foreign transshipment ports, India lifted some of its cabotage provisions for container-handling ports that are able to transship at least 50% of their total volume.
The relaxation will remain in place as long as the concerned ports meet the traffic criteria. Ports whose approvals were revoked for failing to meet the guidelines will not be reconsidered for the following three years.
By easing its cabotage regulations, India hopes to attract more containerised cargo by reducing time and cost for foreign-flagged mainline vessels that now transship containers destined for or coming from India through neighbouring hub ports.
Listed shipping companies in Sarawak
PDZ Holdings Bhd
Mainly in the container liner business, the company operates six vessels covering Malaysia, Brunei, Singapore and Myanmar.
It is also into fixed slots arrangements with other liners that provide services between China’s main ports and operates on a non-vessel basis covering others in Southeast Asia and the Indian sub-continent.
A shipping agent for some of the more established main line operators, PDZ Holdings represents Heung-A, a Korean shipping line, Hong Kong-based container shipping line OOCL and France’s CMA CGM.
It is helmed by CEO Tan Chor How who was appointed to the board in August last year. Tan has over 10 years’ experience with international banks.
For its Q1 ended March, the company suffered a 90% decline in revenue to RM2.6 mil. As a result, it also recorded a net loss of RM2.3 mil compared with its Q1 last year’s net profit of RM500,000.
The revenue decline was attributed to its ocean liner business which was affected by the authorities’ arrest of its vessels.
Shin Yang Shipping Corporation Bhd
Shin Yang has a fleet of 245 vessels which provide domestic and international shipping services. A leading shipbuilder in the country, its ancillary services include ship repair and fabrication of metal structures.
Hence, the company’s business focuses on shipping and ship building which represents its core revenue streams. And to support it, Shin Yang also undertakes ship repair and maintenance for third parties.
Incorporated in Malaysia in September 2004 as Shin Yang Shipping Corporation Sdn Bhd it was subsequently converted into a public limited company and assumed its present name in November 2009.
In 1998, it exported its first in-house built landing craft to Qatar.
Founder Tan Sri Ling Chiong Ho is the company’s chairman and has been instrumental in its success and growth. His brother Chiong Sing is the group managing director.
For the nine months ended March, the company recorded a 13% revenue decline to RM435.9 mil.
It suffered a net loss of RM5.2 mil compared with a net profit of RM9.4 mil in the same period the previous year.
Hubline owns and operates some 23 sets of tugs and barges in Southeast Asia via Highline Shipping Sdn Bhd. Its primary cargo includes coal, palm kernel shells, scrap iron and sand among others.
Some of the principal ports the fleet frequents include Manila and Cebu in the Philippines and Ho Chi Minh, Vietnam.
The company is helmed by CEO and managing director Dennis Ling Li Kuang who was appointed to the board in February 2001.
Ling also sits on the boards of many private limited companies.
At Hubline, he is responsible for developing and implementing corporate strategies and recommending related matters to the board.
For H1 ended March, the company recorded a 12% decline in revenue to RM48.2 mil. Its net loss amounted to RM11.6 mil compared with its RM2.6 mil net profit in the previous corresponding period.
Harbour-Link Group Bhd
Starting as a shipping and forwarding agent, Harbour-Link Group Bhd expanded to provide a range of services that include customs tax consultation, warehousing, heavy haulage, and mechanical erection and installation in Malaysia and across the intra-Asian region.
It later diversified into civil and mechanical engineering, building and construction.
Harbour Link group managing director Francis Yong Piaw Soon is a founding member who has been active in the shipping and freight forwarding industry since the early 1970s.
Distinguished as an industry pioneer, he was appointed to the Board in December 2003.
Under his leadership, the company grew into a major player in the region’s shipping and forwarding industry.
For the nine months ended March, Harbour-Link recorded an 11% drop in revenue to RM385.8 mil. This resulted in a 57% decline in net profit to RM17.2 mil.