Constant Change - Continuing Crisis

Policy makers may not fully appreciate the very challenging circumstances in which many shipping companies are currently operating 

Shipping has been enduring a serious economic downturn since the 2008 financial crisis. 2016 was another dramatic year, witnessing the collapse of Hanjin, one of the world’s major container lines. Following a spate of acquisitions and mergers, there will only be 14 major container lines by 2018 out of the top 20 that existed last year. While, despite some consolidation, there is far less market concentration in dry bulk and tanker segments, fortunes in these trades are also still decidedly mixed. 

Freight rates still barely cover operating costs, let alone the repayment of loans for the vessels themselves. The principal role of ICS is to represent the industry with governments on regulatory matters. Policy makers, however, may not always fully appreciate the very challenging economic conditions in which shipping companies are currently operating. It is nonetheless important to emphasise that there is no evidence of any decline in the quality and safety of ship operations worldwide, which continue to be impressive.

2017 looks set to be yet another very difficult year for most sectors of the shipping industry. While global maritime trade is projected to increase, this looks likely to be outstripped by the quantity of new vessels that are scheduled to be delivered from shipyards – many of which enjoy significant government support – with the result that there may still be far too many ships chasing too few cargoes. 

More positively, the size of the world order book is in dramatic decline. The danger, however, is that as shipyards cut their prices in desperation, large numbers of investors, with little experience of the risks involved, may be tempted to buy what are perceived to be bargains, which could then destroy any shipping recovery before it actually begins. 

It is often said that shipowners have no choice but to be optimists. Projections for future population growth and the long term improvement of global living standards – key drivers of shipping demand – might suggest that things can eventually only get better. Despite the fears of renewed protectionism in the wake of the election of President Trump, China is committed to spending around $US1.5 trillion on infrastructure development around the world as part of its ‘One Belt, One Road’ initiative. President Trump, moreover, has also stated an intention to inject large amounts of cash into modernising U.S. infrastructure, which should only be good for shipping.

But the fact remains that most shipping markets show little sign of significant improvement. Global maritime trade has largely continued to grow because of incredible demand from China. But in recent years there has been a notable fall in the rate of Chinese GDP growth. While this has averaged around 10% per annum since 1989, Chinese growth in 2016 was the slowest recorded for 26 years. 

As emerging economies like China increasingly come to resemble OECD economies, a larger proportion of their GDP growth is taken up by services and domestic consumption. Services now account for the majority of Chinese GDP (although this figure is typically around 75% in most OECD economies). Unlike manufacturing and infrastructure development, this does not generate the same demand for maritime trade. 

As the industry seeks to ready itself for the prospect of an eventual recovery, it is also about to be confronted with massive increases to operating costs, primarily due to important new environmental regulations. The collective cost to the industry of implementing the IMO Ballast Water Management Convention, which will enter into force in September 2017, is expected to exceed US$100 billion. The additional collective cost to the industry of complying with the IMO global sulphur in fuel cap in 2020 could be a much as US$100 billion per annum.

On the plus side, however, now that shipowners have more certainty about the timing of these major regulatory changes, they can at last take decisions about whether to accelerate the recycling of older tonnage, which should have a positive impact on the supply/demand balance – provided of course these are not immediately replaced with new builds.
To restore equilibrium in the market, it is clear that a large number of vessels will need to be recycled before the end of their normal 25 year life. But while early recycling might be good for the industry as a whole, this may not always be in the best interests of many individual shipping companies, especially if their ships are debt free, have been well maintained, and can still be operated efficiently and profitably. 

The position of ICS has always been to oppose the concept of a maximum age for ships since this could act as a disincentive to the maintenance of older vessels with implications for safety and pollution prevention. State support for early ship recycling is also potentially counterproductive if it is conditional on building more unwanted tonnage. 

It is difficult to speak in terms of shipping being in crisis when this seems to be never ending and appears to have become the ‘new normal’. However, in this time of general political and economic uncertainty, there is at least a feeling in 2017 that the industry is at the beginning of the end of this very difficult period, which is now one of the longest shipping downturns that has ever been recorded.

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