Bell tolls for Malaysian domestic lines

The removal of Malaysia's 30-year-old cabotage policy for Sabah, Sarawak and Labuan has been slammed by local shipping lines as disastrous for the industry and a political tool to gain votes while likely to have little effect on its stated purpose of reducing the high cost of consumer goods in the three territories to the east of Peninsular Malaysia.

The impact of the new policy, which came into effect on 1 June, is expected to mainly be felt by domestic lines in Sabah and Sarawak, which are already under pressure from the overall downturn in the shipping industry. These include small domestic-focussed players such as MTT Shipping, AML Shipping, MSC Shipping, Harbour-Link Marine Services and Shin Yang Shipping.

Others Malaysian shipping companies such as MISC, Hub Line, Swee Joo Coastal and Geniki Shipping have already exited the liner business due to unsustainable freight rates while PDZ Holdings is on the ropes battling several arrest orders on its ships.

Two Malaysian shipping bodies have come out to suggest various negative scenarios that could arise as a result of the new policy.

Shipping Association Malaysia (SAM) chairman Ooi Lean Hin was quoted as saying in local media that some local shipping companies had been considering moving their business to Singapore. The Sarawak Sabah Shipowners Association (SSSA) warned that Sarawak's maritime interests could be irreversibly harmed and might result in even higher costs in the long run.

SAM's Ooi cited positive factors in Singapore such as tax-exempt status and no national restrictions on crew if they were to move operations to the city state. "But the question is, how many of us can bring our businesses to Singapore and why should we?" he asked, likening it to allowing international carriers such as Singapore Airlines to compete with AirAsia on domestic Malaysian routes.

Ooi declined to forecast potential losses for local shipping companies, but claimed current margins on the trade are only between 8% to 10%.

The SSSA in turn produced figures to show that their rates are much lower on domestic routes compared to international carriers on similar routes. For example the protected Port Klang to Kuching route has average rates of $409 per teu while the rate from Singapore to Kuching averages $673 per teu for a slightly shorter voyage.

On the backhaul route from Kuching back to Peninsular Malaysia, the difference is even more stark, with the $131 per teu being charged by domestic lines on the cabotage route being about half the $259 per teu charged for Kuching to Singapore boxes.

SSSA warned that any rate reductions by international carriers after cabotage was lifted would only be temporary and used as a predatory move to eliminate the domestic players with much smaller pockets. Once competition is eliminated, the market would be at the mercy of the big players, the association said.

“Sarawak’s maritime interests should also be protected as 85% of Malaysian-flagged vessels belong to Sarawak companies or individuals. And out of 100 shipyards in Malaysia, 72 are in Sarawak," SSSA added.

Other potential issues would be gaps in national security, which the cabotage policy was also designed to address. "For instance, if there is a large Sulu invasion in Sabah, Malaysian-flagged ships cannot say no to the Government's call to supply necessities to the people there under the cabotage policy, but foreign vessels can decline," Ooi said.

"So what happens in such a situation, and when all local shipping companies have either moved to Singapore or gone bankrupt from this move?" he asked.

Former Port Klang Authority chairman Lee Hwa Beng was quoted criticising the cabotage removal for being a populist move made at a great financial cost to local shipping firms, shipyards and crew.

"This is just a political move to win the hearts of voters in Sabah and Sarawak, but what many don't see is this move will not actually make much difference to the price of goods there," he said.

Analysing the move in a briefing note, Clyde & Co partner Gerald Yee said: "The real consequences of the lift are yet to be seen. However, the Malaysian Shipowners' Association has warned that the increase in external competition will adversely affect Malaysian vessels operating on the previously cabotaged routes. It is anticipated that that domestic shipping companies will likely close shop or relocate their businesses elsewhere.

"It would be interesting to see if the lift will indeed lower the costs of goods and benefit trade in East Malaysia," Clyde & Co concluded.

Posted 13 June 2017

© Copyright 2019 Seatrade (UBM (UK) Ltd). Replication or redistribution in whole or in part is expressly prohibited without the prior written consent of Seatrade.

Vincent Wee

Asia Editor, Seatrade Maritime News

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