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Prepared Remarks Michael A. Khouri, Chairman Federal Maritime Commission Virginia Maritime Association 99th Annual Banquet, May 9, 2019

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Honored guests, ladies and gentlemen. It is an honor to be with you this evening. Thank you to the Banquet Committee for the invitation to participate. And my thanks to one of your native sons – John Moran. John is the senior Counsel to the Chairman’s office, and he had the laboring oar in the research and preparation for this talk.

I have been coming to this VMA Symposium since 2010.   I return each year because of the quality and timeliness of the Symposium topics. And, I always enjoy the Banquet. For tonight, I was asked to talk for a few minutes about the past, and a minute or two about the future.

The Virginia Maritime Association will celebrate an important milestone next year – the 100th anniversary of the Norfolk Maritime Exchange – VMA’s predecessor organization

The Federal Maritime Commission recently celebrated a similar milestone – the 100th anniversary of the establishment of the United States Shipping Board, our predecessor federal agency.

So, what was happening a century ago that focused so much attention on maritime matters?

The Great War was drawing to a close and the League of Nations was being debated. The United States had recognized its error in not being ready with a sufficient U.S. merchant marine fleet to handle the war effort or to handle the burgeoning world commercial trade. America was becoming a global power with more involvement in world affairs. Our domestic economy was becoming more industrialized and we had an increasing role in an expanding global trade system.

Hampton Roads was very well situated to benefit from these developments. Finger piers and warehouses and many of the supporting maritime businesses were in the downtowns of Portsmouth, Hampton, and Newport News. In Norfolk, they were right across Waterside Drive. Then, as now, shipyards lined the Eastern and Southern branches of the Elizabeth River.

In 1919, total Hampton Roads trade was valued at just over 118 million dollars. Adjusted for inflation, that equals 1.7 billion in today’s dollars. Vessels calling on Hampton Roads at the time were around 6,000 tons and 450 feet in length over-all with a beam of 50 feet. They carried cotton, grain, tobacco, coal, and lumber to distant overseas markets and unloaded sugar, molasses, iron ore, rubber, and coffee from foreign ports.

This was the context and backdrop against which the Norfolk Maritime Exchange was founded. Their mission – “To promote, protect, and encourage international and domestic commerce through Virginia’s Ports.”

The founders knew that changes were underway, and that Hampton Roads needed to be prepared for the future – even if they did not know exactly what the future would look like.

The foundation provided by the Norfolk Maritime Exchange made possible the current success of your great port today.

Today, container vessels 1200 feet long with 170 foot of beam carrying 14,000 TEUs call on your port multiple times every week.

From 118 million dollars in 1919, total maritime trade moving through Hampton Roads last year had a value of 73.8 billion dollars.

At the beginning of the 20th century, carrier conferences – those closed shipping cartels that restricted and stifled competition – dominated the ocean liner trades. Also, nation states tilted the playing field toward the interests of their own national-flag carriers.

In part, it was to address these anticompetitive practices that Congress established the United States Shipping Board now constituted as the Federal Maritime Commission.

Today, at the heart of the Commission’s mission is ensuring a competitive and reliable ocean transportation system that supports the U.S. economy and protects the public from unfair and deceptive practices. Our navigation orders each day – ensure competition and integrity for America’s ocean supply chain.

So, how is the FMC, with this mission, relevant to the future of Virginia’s port and maritime community?

Well, under defined statutory and regulatory boundaries, FMC review and oversight allows collaborative joint venture agreements between and among competitor steamship lines. These collaborations can provide efficiencies and reduced costs to the carriers – all of which ultimately benefit U.S. exporters and saves the U.S. consumer money at the retail level. All of the container steamship lines that call on Virginia ports participate in FMC monitored collaboration agreements.

Competing Ports can also use cooperative agreements filed with the FMC to achieve efficiencies, better serve their customers in light of changing market conditions, carrier deployment of larger vessels, and the introduction of new carrier alliances.

The East Coast Gateway Terminal Agreement between the Virginia Port Authority and Georgia Port Authority is a good example of such an agreement involving joint marketing and commercial opportunities for these competing Atlantic coast ports.

I was asked to briefly touch on what – from my perspective – the next few years might look like for maritime industries. As is often observed in the maritime arena, predictions and forecasts are easy, but accuracy is difficult and elusive. With such disclaimer, my views won’t, or at least should not surprise anyone here.

To begin, the container shipping operators are financially stretched and have been for a decade. Container freight rates have been essentially flat over the past decade for the carriers, and, when adjusted for inflation, such rates are down over that period by 29 percent.

The current surplus of container ship capacity with scheduled new building – when compared to projected global trade volumes – is not projected to change. And while the US economy is projected to remain in an overall healthy range, the global economy’s growth rate is projected to slow down, with lower projected cargo volumes. Most recent on the list of headwinds is the IMO 2020 clean fuel mandate with its associated costs – estimated at 10 to 15 billion dollars, per year.

While not a “prediction”, it is fair to say that if the overall rate structure for carriers does not improve to the point that the container carrier industry, as a whole, is earning its cost of capital, then business history across any or all industry sectors points toward more consolidations, mergers, and acquisitions. And the alliance structure will look quite different.

And there may be other changes in the maritime landscape that simply defy predictions. Trade disputes, changing trade patterns, nontraditional participants such as new technology and new supply chain and logistics models entering the business – some were discussed today. All of these “disruptors” can completely upend traditional ways of doing business.

So, what does all of this mean for your Virginia Maritime Association?

The founders of the Norfolk Maritime Exchange may not have been able to predict in 1920 exactly what would happen or what the maritime industry would look like 100 years in the future, but they did know that they needed to prepare for that future – whatever it might be. And their vision and their foundational work has prepared the Hampton Roads port complex to succeed in today’s maritime marketplace.

None of us here tonight know with clear certainty what next year’s or the next decade’s challenges and opportunities will be. But VMA’s mission is – always “to advocate for continued growth of Virginia’s maritime industries and … ensure that Virginia remains competitive as it relates to maritime commerce.”

As was true for the founders of the Norfolk Maritime Exchange 99 years ago, the foundation you are preparing today –   “WIDER. DEEPER. SAFER” – will ensure an exceptional future for this great port area.

And last, as you consider the best time to implement such a visionary strategic plan – may I suggest – the best time is today.

Thank you again for the opportunity to be with you tonight, to spend a few minutes celebrating the past and, in VMA’s words, to “celebrate your future.”

Thanks and good evening.