Research Summary - Economic Considerations

  • As part of the Pilotage Act Review

Darryl Anderson

February 2018

Transport Canada commissioned the present study entitled Economic and Competitive Considerations in The Provision of Marine Pilotage in Canada.  The project involved researching, analysing and answering the explicit research objectives to address the broader question of whether there were economic and competitiveness considerations concerning the magnitude of costs borne by users in the provision of pilotage services in Canada.  

Magnitude of Pilotage Costs with Respect to Maritime Trade

Pilotage costs are most visible to the party paying the fee directly, and these stakeholders are likely to have the most interest in the level of fees. The results of the case study analysis demonstrate that the parties to whom the cost of pilotage is most important are:

  • Ship owners;
  • Exporters – who, even if they do not pay pilotage costs directly, are cognizant that the burden of transportation costs falls on them either directly or indirectly, due to their position as price takers in international markets; and
  • Importers – who are unlikely to pay pilotage costs directly and for whom the costs are included within the overall shipping rate.

National Level Findings

In 2016, the magnitude of pilotage costs amounted to approximately one-tenth of one percent of the value of Canada’s maritime trade. Therefore, in the context of the national economy as a whole, pilotage costs do not negatively affect Canada’s trade competitiveness for importers and exporters.

Canadian maritime imports consist primarily of high-value consumer and manufactured goods. Export commodities consist of large volumes of low-value bulk commodities. As a consequence, the import cargo is less sensitive to pilotage costs because the higher value of the goods has a greater ability to absorb (or bear the burden) the costs.  In comparison, export cargoes have a lower average value. For example, the average cargo value per tonne was $5,843 for imported goods and $887 per tonne for exported commodities at the Port of Vancouver in 2016. 

The balance of trade between inbound and outbound cargo has a significant impact on the total cost of marine pilotage incurred by the shipper. The reason for this is that pilotage fees are an essential unit cost of a ship regardless of whether it is full or empty. When the trade volume is balanced at a given port with respect to both amount of cargo and the types of cargo requiring the use of the same vessel, the total cost of pilotage can be absorbed by the respective inbound and outbound freight movements. However, this ideal situation is not typical of Canadian marine freight markets or, for that matter, of those in other jurisdictions. In many instances, the export cargo must also absorb both the inbound and outbound marine pilotage costs due to a trade lane imbalance in cargo volume.

Regional Findings - Port of Vancouver Compared to Puget Sound, Washington State

In 2016, total pilotage costs at the Port of Vancouver amounted to 0.018 percent of the value of their maritime trade. In 2016, pilotage costs at Puget Sound ports amounted to 0.025 percent of the value of their maritime trade.  Thus, importer and exporters in Puget Sound face a higher relative cost burden for pilotage services than shippers at the Port of Vancouver.

Magnitude of Pilotage Costs by Vessel Type and Size

From the shipper’s perspective, the magnitude of the cost of pilotage on a per container basis is different for inbound (importer) and outbound traffic (exporter). In most instances, the unit cost of pilotage per container is cheaper for the importer than it is for the exporter, due to the larger volume of fully laden import containers discharged compared to the number of loaded export containers.

The pilotage cost per inbound container ranges from $2.37 per twenty-foot equivalent unit (TEU) to a high of $8.97 per TEU. Outbound pilotage costs per container range from a low of $3.28 per TEU to a high of $18.08 per container. The highest charge per container is attributed to the Oceanex shipping service from Montreal to Newfoundland.

The magnitude of total pilotage cost for either a container importer or exporter is not likely to affect their transport routing decisions because other cost factors are more significant. Therefore, total pilotage costs would not be expected to negatively impact Canadian container trade.

The overall cost of marine pilotage for a dry bulk shipment ranged from $0.06 per tonne for gravel, $0.07 per tonne for metallurgical coal and potash, and $0.09 to $0.22 per tonne for grain. Based on these figures, the netback price received by Canadian dry bulk exporters is not significantly affected by the cost of marine pilotage in a port-related pilotage assignment.

The findings for lake, river or fiord related pilotage assignments illustrate the fact that the cost of pilotage per tonne (grain) in a dry bulk vessel is heavily influenced by the time-based pilotage component used in the Laurentian region and the “zones based” component of the pilotage charges in the Great Lakes region. Consequently, the netback price received by Canadian dry bulk grain exporters would be significantly impacted by the cost of marine pilotage in a lake, river or fiord related pilotage assignment (such as the Great Lakes), since the cost per tonne for grain would be $2.29 for just the Great Lakes portion of the overall trip, for example.

For crude oil traffic in Atlantic Canada (where the cost per barrel attributed to marine pilotage for crude oil movements is about a penny), neither the netback price nor the total landed cost of imported bulk liquids (such as crude oil) is impacted significantly as the result of the cost of marine pilotage. The cost per barrel is however, influenced more significantly by the total amount of pilotage charges in the Great Lakes and Laurentian regions. The total landed price for crude oil imports in those regions could be impacted by between $0.46 and $0.56 per barrel.

Given the fact that pilotage costs per barrel of crude oil are meager and the fact that world crude oil prices have exhibited significant price volatility, the cost of marine pilotage would have a minimal effect on the market price and, therefore, on Canadian competitiveness overall.  However, the findings also indicate that since it is very hard to balance the trade flow and volume of some liquid bulk cargoes, ship owners will be sensitive to the magnitude of the total cost of pilotage, especially in a transit-type pilotage assignment through a lake, river or fiord.

Pilotage Performance and Supply Chain Competitiveness

Service Reliability and Responsiveness

Vessels in Canada are not, in general, frequently affected by delays due to a shortage of marine pilots. Consequently, pilotage delays do not impact demurrage and detention charges in shipping contracts, and are thus not a source of supply chain risk or friction that the parties must address in their commercial negotiations. From the perspective of reliability and responsiveness, the market for marine pilotage functions efficiently and does not impede economic competitiveness.

While the Pacific, Laurentian and Atlantic Pilotage regions are not significantly affected by delays, the Great Lakes Pilotage Authority has, since 2014, experienced unprecedented high levels of vessel delay due to a shortage of pilots. In 2016, the Great Lakes Pilotage Authority reported that traffic came “into the system unscheduled and often in surges. For traffic surges in the later months of the navigation season, pilot availability is often strained, with significant overtime situations required.”

Supply Chain Agility

Supply chain agility is essential for economic competitiveness as many shippers depend on the ability of a logistics service provider to respond rapidly to changes in the marketplace or to facilitate their sales strategies in response to seasonal or peak demand opportunities. The current Canadian marine pilotage system does experience periods of stress or challenges that can impact supply chain agility and, in turn, the economic competitiveness of Canadian maritime trade. For example, when the demand for marine pilots in the Great Lakes region is higher than initially forecasted (at the beginning of the shipping season) shippers are negatively impacted because they may experience a vessel delay. Marine pilots in certain circumstances can contribute to supply chain agility. The Pacific Pilotage Authority’s Excel-based tariff scenario modeling tool appears to be the most robust example of applying the concept of supply chain agility in the marine pilotage context.

Marine Pilotage Safety

The provision of marine pilotage service in all regions of Canada is subject to very, very low incident rates. The present system does not systemically create situations where poor safety practices give rise to extra costs for ship owners or cargo interests. As a result, the competitiveness of Canada’s marine trade is not adversely impacted. Canadian marine pilotage authorities are world leaders when it comes to publically disclosing safety performance statistics.

Pilotage Cost and the Behaviour of Shippers and Ship Owners

Marine pilotage is a shared resource that is expected to support the movement of many types of commodity flows, regardless of which supply chain configuration or commercial strategy is optimal for one specific participant. Each Canadian Pilotage Authorities use criteria for setting pilotage dues that address the distinct regional differences in both vessel navigation requirements and differences in traffic type and the volume of shipping activity. As such, they act to enhance Canada’s maritime trade competitiveness. Each Canadian pilotage region uses several criteria to balance competing interests and therefore, a singular or uniform perspective on the impact of pilotage costs is not to be expected.

Shippers can use a variety of commercial strategies to manage the risks and costs of marine transport services (including pilotage).

Ship owners and operators also have a wide variety of commercial tools to manage the costs of providing marine transport services. Agreements are influenced by the risk appetite of the parties involved, the amount and type of cargo to be transported by the marine mode, and the overall state of the shipping market. However, the results of the analysis indicate that the Great Lakes and Laurentian pilotage regions are generally the geographic locations of the highest pilotage cost per assignment. Thus, ship owners do have competitiveness concerns about the potential loss of traffic to other modes of surface transportation.

The cargo and traffic profile of the Great Lakes and Laurentian pilotage regions poses a constant competitiveness challenge for ship owners. Dry bulk and break-bulk cargoes are often contracted on the spot market. Shipping companies that serve the dry bulk (i.e. grain) or liquid bulk (oil) market are therefore exposed to commodity price volatility. Consequently, the ship owner’s resulting earnings or freight rates are sensitive to demand conditions in that market and also fluctuating voyage costs factors, such as fuel and other charges such as marine pilotage (which are a component of port costs). 

Other goods (i.e. vehicles) are traded under longer-term contracts and thus are not as sensitive to pilotage costs because the ocean freight rates are largely determined by the major cost drivers that impact the provision of a shipping service and the supply of ships that are suitable for carrying the cargo. The more specialised the cargo (and type of ship required), the less likely the trade will be conducted on the spot market.

Competitiveness of Canadian Pilotage in an International Context

Economic competitiveness is not an explicit criterion used to set pilotage dues. In the international jurisdictions reviewed, the major consideration given to the cargo interest is related to dangerous goods or marine safety.   A review of the international criteria also suggests that many nations consider the local or regional perspective to be of paramount importance in setting pilotage criteria and tariffs. This is due to the unique local navigational requirements and specific traffic interests that support maritime trade in these countries.

Cost Structure of International and Canadian Pilotage Authorities

The model of marine pilotage adopted by the various international regimes (i.e. placing a pilot physically on board a vessel) results in a rather uniform operating performance with limited internal economies of scale present in service delivery.

In the five pilotage regimes (in three countries - Australia, Canada and Finland) sampled pilot fees, salaries and benefits feature as the most significant expenses, representing between 50 percent to 83 percent of total operating costs (with an averaging of 69 percent). Other expenses include: pilot boat operating costs; materials; insurance; and administration staff salaries and benefits.

The Canadian navigational services to shipping industry displays characteristics of industry where labour and contracted services are fundamental cost drivers. Canadian pilotage authorities are no exception. However, operating ratios generally decline with firm size in the navigational services industry. The operating performance of the Laurentian Region represents an exception to this finding, and this could suggest that the existing financial self-sufficiency mechanism in Canadian regulations for pilotage authorities may be insufficient to drive the same level of operating efficiency as their domestic industry peers.

The cost structure marine pilotage sector seems to suggest that there are few economies of scale associated with providing the service. Rather, the differences in cost structure largely stem from other factors, such as geographic scope of coverage/service area, vessel traffic profile, and type of operation and operating conditions that require investments in fixed assets (such as pilot boats, etc.).

Pilotage Costs for Various Vessel Type in Various Jurisdictions

6,500 TEU Container Ship North American Port Comparison

The results of the analysis indicate that, on a port-to-port comparison basis, the actual cost of pilotage faced by shippers is determined by the trade lane balance between laden import and export containers, and not the total cost of pilotage per port.

On a per TEU basis for an entire ship, Halifax and Los Angeles have the lowest costs attributable to pilotage, at $0.61 and $0.78 respectively. Halifax export shippers face lower costs as a result of pilotage charges because of the balance between inbound and outbound containers. Conversely, Los Angeles import container shippers face the lowest overall costs. On the Pacific Coast, the cost per TEU for an entire ship at the Ports of Vancouver and Prince Rupert is less than at Puget Sound.

Dry Bulk Vessel (Grain) (45,605 GRT) -  Australia and North America

The cost of marine pilotage is one part of the total transportation costs that must be paid for a commodity to reach international markets. As such, the higher the cost of pilotage the lower the netback price received by the exporter. For example, assuming that the price of grain and all other surface transport costs were identical at each export location, Portland, Oregon on the Columbia, River would be a more expensive pilotage jurisdiction, with Fremantle, Australia (with direct ocean access to the port) the least expensive jurisdiction for marine pilotage.

The physical location of each port, and the navigational issues that must be addressed to reach the dry bulk marine terminal (for either a lake, river or fiord, or a port type of pilotage assignment), largely determine the total cost of the pilotage bill faced by the ship owner. For example, the cost per tonne attributable to pilotage for an outbound shipment of grain would be $0.74 for Portland Oregon and $0.29 for Port Bernard in the Lower Mississippi region.

For a port-based pilotage assignment, the cost per tonne for an outbound movement of grain would be the same in Seattle and Vancouver, at $0.19. Prince Rupert would be more expensive at $0.24. The ports with the easiest direct ocean access to the marine berth – Freemantle, Australia and Galveston, Texas – have the lowest cost per tonne, at $0.11 and $0.13 respectively.

The market fluctuations in grain prices per week are much greater than the cost of pilotage on a per tonne basis. If a grain seller were able to achieve their export asking price, the cost of pilotage would represent a very small difference in the final Free On Board price. As a result, the economic impact of pilotage costs on Canada’s overall grain trade is minimal.

General Cargo Vessel – Project Cargo & Break-bulk

The case study example of a general cargo vessel operating a service involving the United States or Canadian ports on the Atlantic coast, shows that pilotage costs between the United States and Canada for port type pilotage assignments are very comparable. Therefore, marine pilotage costs in a port pilotage assignment for a general cargo ship would likely make no difference to Canada’s maritime trade competitiveness compared to the U.S.

The case study also demonstrates that providing a general cargo shipping service to a marine terminal facility that is physically located on a river or a bay (and thus requires extended transit navigation) will incur substantially more pilotage costs in both Canada and the United States.

To the extent that market and cargo traffic conditions allow, a profit-maximizing general cargo ship owner would prefer not to provide service to geographic locations where the pilotage costs are higher than other places. Even if the pilotage costs are eventually recovered from a shipper, the cash outlay to pay the pilotage costs that a ship owner incurs requires a larger amount of operating capital needed to run their shipping service.

The results of the case study analysis also suggest that project cargo and break-bulk traffic could flow via an alternative gateway and surface transport mode if the total cost were too high. However, transport demand elasticity depends on more than just pilotage costs. The results of the comparison support Martin & Associates’ finding that the Great Lakes cargo market is sensitive to voyage costs and that marine pilotage fees are part of a ship owner’s voyage expenses.