Jones Act: Freight and Energy Markets.

The Jones Act 101

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US port to US ports

Jones Act’s General Rule: In order to carry cargo from/to a USA port you need a US Flag vessel/barge built in the USA.

There are exceptions; if you recover a foreign flag vessel in US Waters and it is a constructive total loss and you fix it in a US shipyard you can make it US with Jones Act privileges.

US port to Foreign ports

You can use a foreign vessel to carry the cargo.

Foreign Port to US Ports

You can use a foreign vessel to drop your first cargo in Boston and a second cargo in Baltimore but you can’t take a new cargo from Boston to Baltimore.

USAID cargoes

50% of these cargoes must go on US Flag. The ships do not have to be built here but if you buy or build foreign there is a 3 years waiting period before you qualify for these cargoes.

Military cargo: 100% us flag

Canadian to US ports

The Jones Act will not prevent you from carrying cargo from a Canadian port to several USA Ports, as long as you are not carrying any cargo of US origin between these ports. This would strictly be carriage of cargo from foreign ORIGIN to several ports in the USA.

Dredging

Every dredger operating within the U.S. is subject to the Jones Act.

It is estimated that the U.S. dredging markets is lagging behind some 25 years to the situation on the global scene.

This has led to a closed market, not subject to foreign competition, where some 300 dredging companies operate, widely scattered, with an outdated fleet, mainly small equipment (largest trailer dredger is “Wheeler”, operated by the U.S.A.C.E., with a capacity of 8000 m3).

Research and development is mainly focused on environmental and geotechnical issues, little on upgrading efficienty of dredging equipment.

Investment in new equipment is almost nil, thus reflecting the situation of the US. Merchant fleet.

Markedly it means that U.S ports and navigation roads are outdated.

Jones Act P.L. 66-261

The Merchant Marine Act of 1920 is a United States federal statute that regulates maritime commerce in U.S. waters and between U.S. ports. Section 27, better known as the Jones Act, deals with cabotage (i.e., coastal shipping) and requires that all goods transported by water between U.S. ports be carried in U.S.-flag ships, constructed in the United States, owned by U.S. citizens, and crewed by U.S. citizens and U.S. permanent residents.

Bloomberg has also done an excellent editorial in How a Disaster called the Jones Act blocks disaster relief   just after Hurricane Sandy.

Some ideas in this editorial are confirmed here.

Calling it a law that hinders free trade and favors Unions over Consumers, Senator McCain has said:

“The Jones Act only serves to raise shipping costs, thereby making US farmers less competitive and increasing costs for American consumers.

Not only Sen. John McCain but the Energy sector plus an ever greater proportion of people involved in the U.S Shipping industry are pushing to repeal the Jones Act.

  • The Jones Act doesn’t allow automation, smaller crews and under the cover of the national security has created one the least efficient maritime industry in the world.
  • One of the oldest oil tankers fleet in the world mandated to carry US oil.
  • Creates a relative handful of jobs at immense expense, some $250,000/year.
  • Inflated shipping costs for Hawaii, U.S virgin Island, Alaska and Puerto Rico.

Jones Act- Freight- Arbitrage

The Jones act regulation creates a regular arbitrage situations for Canadian refiners.

For example, Irving Oil , the 330,000 Bbl/day refinery located on the shores of the Fundy-bay (about 44 nautical miles north-east of the US border )ship products to many U.S terminals. They do it at a very low-cost compare to a USGC refiner or even a USNH* refiner not just because of the short distance to the U.S but mostly because they can use Foreign-Flag Vessels which costs minus 70%.

Jones Act USGC-USEC- lack of Arbitrage

Suppose that the Brent/WTI spread is 5$, chartering a U.S Flag LR2 tanker from Houston to NY Harbor cost you 4$/bbl, chartering another LR2 tanker from North Sea (for the double of distance) cost to you 3$/bbl. Do the maths… JA has certainly an impact beyond just freight rates.

Complex Arbitrage

It is possible to orchestrated an arbitrage from the terminals in the Caribbean using foreign vessels, rather than directly use a U.S inter-coastal itinerary  with Jones Act Vessels.Buckeye Partners, L.P.  and Statoil are both owners of terminals and storage assets that are strategically located in the Bahamas and are adapted for trans-loading.

If the trader  manage to deliver 1 or 2 ton to the local market and do the proper paperwork, the rest of the cargo can then be re-loaded onto a Foreign Flag Vessel and redirected to the U.S Coast.

Jones Act Gasoline

However, the economics of the U.S waterborne inter coastal shipping are also handicapped by the Country of Origin rule. The consequences of an importer being unable to substantiate NAFTA eligibility of energy products into the United States can be severe. This Energy Arbitrage has a Country of Origin rule Molecular Basis. In the case of Gasoline, the duty rate jumps from the NAFTA rate of “free” to $.525 or $1.05 per barrel. That’s why “Jones Act Gasoline” procedures are very elaborate to avoid commingling of foreign cargoes with NAFTA Cargoes at the blender/ the refinery/ on ship-to-ships transfers.

Initial motives behind the Jones Act

According to Rob Quartel, member of the Council on Foreign Relations and CEO of NTELX, the Jones Act was actually introduced not to help SHIPPING but to help the RAILROADS moving goods from the Pacific NW to Alaska.  In his book Alaska, James Michener recalled that Chinese shipping companies were competing against them on price. The U.S response was to make that all goods transported by water between U.S. ports be carried in U.S.-flag ships to favor the Railroad development.

Jones Act’s impacts on Energy Markets
Suppose that during this summer, there is a shortage of gasoline on the US east coast. With the Jones Act, a shipper can ship products from a USGC refinery to NY at 4$/bbl while he can ship the exact same products from USGC to Canada at 2$/bbl. By the way why you will see people not very happy to pay 6$/Gal at the gas pump.)

Global Shipping Power Countries.

Take two small country like Norway or Denmark ,  they continue to build-on with Free-Markets.
Presently with the Jones Act, I don’t see the U.S as competitive and innovative as Norway, Denmark.  The U.S shipping is 40 years behind these countries.

Norway and Denmark

  • Two small open economy based on exports (not on cheap labor).
  • Two  global shipping power houses.

You’ll never hear A.P. Moller Maersk pushing for more protectionism in their own country.

 

The Best Companies will do doing even better without the Jones Act.

For instance, Teekay and Chouest having the perspective that they have as two very successful business could just make more money by lowering their costs so they could be able to invest more, renew their fleet, lowered shipping costs for the economy, renew trade routes with new infrastructures (Great Lakes St-Lawrence seaway). Finally without the Jones Act, the U.S shipping industry could drive U.S exports in the world markets and generate economic growth.

Conclusion;

The Jones act was introduced to protect Alaska Railroads but is maintained to protect US Flag shipping interests (I think it has done just the opposite as it promotes railways).

Should the government be allowed to fix supply in a market economy ? (in this case vessel supply)

Free Markets (not regulations) will enable organizations to succeed in the long-term and allow free societies to prosper.

If the goal is to attract investment and build one of the strongest global shipping power house then repeal the Jones-Act.

-The Trade Shipping and Finance Wizard

*US East Coast north of Cape Hatteras

Sources:

http://www.theartofdredging.com/jonesact.htm

http://www.bloomberg.com/news/2013-01-01/how-a-disaster-called-the-jones-act-blocks-disaster-relief-view.html

http://www.asba.org/wp-content/uploads/2012/10/Bruce-Richards-2012-ASBA-Conference.pdf  [IN DEFENSE OF THE JONES ACT]

© 2013, The Trade  Shipping and Finance Wizard

commoditymerchanttradingandshippingadvisory

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