Share this
Mister Wong
Digg
Del.icio.us
Slashdot
Furl
Yahoo
Technorati
Newsvine
Googlize this
Blinklist
Facebook
Wikio
Hear this text
Export PDF
Print
E-mail
Tags
The recession has left its mark on the shipping industryHalfway through the first quarter of 2010, there were increasing signs that things were starting to look up again for the international shipping industry as the global economy began improving, but there still are many uncertainties around.
Following several years of incredibly buoyant shipping markets, for many traders the best in living memory, much of the international shipping industry has fallen prey to the worldwide economic downturn.
Inherently, shipping is linked very intimately to the ups and downs of the global economy. The contraction in trade following the recent financial crisis has led to a dramatic and abrupt reduction in demand for shipping.
The Baltic Dry Index, which measures freight rates for shipping commodities, has declined by 40% over the 10 weeks between mid-December 2009 and end February 2010 as much uncertainty still besets the equity and commodity markets.
After a brutal 2009 in the shipping industry, many shipping companies still were sticking to a ‘go slow’ policy that was adopted to help protect the bottom line. The policy has had the added benefit of cutting down on carbon dioxide emissions – pressure for which is not expected to ease off soon, if ever again.
Shipping companies such as Danish carrier Maersk are reducing their speeds at sea as a measure to cut expenses. By halving its top speed, Maersk is said to have cut its fuel consumption by almost 30% on certain routes, sacrificing time spent in transport for a more fuel-efficient trip.
The increasing use of slow steaming and super-slow steaming, however, has prompted concerns from insurers about possible damage to main engines designed for high-speed, full-load operation if these ships operate at low power for extended periods.
Transport emissions have soared in the past 30 years with the advent of long-haul shipping. Container shipping alone saw its emissions grow eightfold since 1985. According to a report in The New York Times, more than 220 vessels are now practising “slow steaming”.
The industry also still is being plagued for an overhang of new ships that many companies ordered in the good times. It is expected that throughout the next 12 months, this will persist to put pressure on freight rates as supply continues to outweigh demand.
Some players in the industry, however, remain positive about the oil tanker sector, as demand is looking stronger in that area. Some even indicated their intentions to expand their tanker fleets to keep pace with the needs of the market.
Peter Borup, managing director and senior vice president of Norden Shipping (Singapore), was reported to have said: “The important thing is to buy back in at the right time. We also find that the asset prices in those markets are coming down to a level where, from a historical perspective, it makes sense to buy back in.
“And, of course, we are aware that we will not hit the bottom, but if we can get within 10% of that, then I think it’s good.”
He bought three secondhand tanker vessels to cater to growing demand for fuel shipments, a sign that the company is back on an expansion path after selling 17 vessels and shedding 15% of its staff during 2009.
But in the long term, growth in the dry bulk segment will be driven mainly by China, which Norden sees as sustainable.
The impact of economic cycles
The demand for seaborne trade is linked closely to the health of the global economy, and the demand for shipping was impacted upon heavily by the economic crisis, triggered by the financial crisis of the end of 2008.
An estimated 80% of total trade volume globally is carried by sea, which reached 8.02 billion tonnes in 2007 and this translated into 32.9 tonne-miles, according to a report by the International Maritime Organization (IMO).
The report, under the title “International Shipping and World Trade: Facts and Figures” produced in October 2009, states that the fleet of merchant ships has been growing steadily over the years in a number of ships and deadweight tonne (DWT), enjoying a boom in shipping.
It stated that it was clear the surplus in shipping will continue to widen and “one can expect to see further cancellations of ships from the order book and a substantial amount of increase in scrapping of further tonnage being laid up in order to adjust the market and provide some recovery of freight rates.”
The results of the report “confirm a recent analysis by Clarksons for the dry bulk market, where distress demolitions reached 7% of the fleet in 1978 and 13% in 1983. The current projection for 2010 is around 18% of the current fleet in terms of DWT. One table projects 15% to 17%, depending on trade development.
“The results are further supported by research into the ship scrapping market, where the probability of scrapping shows an inverse relationship with earnings for all main scrapping locations.”
Inexperience of crews
The report states further: “The expected decrease in shipping activities will ease the demand for seafarers, in particular the shortage of officers which is estimated to be 83 900 by 2012 by the 2008 Drewry Manpower Report, and which was one of the areas of emphasis for the IMO campaign to attract entrants to the shipping industry (November 2008). The estimate, however, assumes positive fleet growth, which is unlikely in the current situation.”
The use of inexperienced crews remains a concern for many analysts and, in some respects, the economic recession ironically has increased this problem.
Before the onset of the economic downturn, crews were in high demand, but there has been a steady reduction in the number of seafarers over recent years, which led to even inexperienced crews being in high demand.
Now the financial crisis has left many shipowners in a fairly dire financial situation, and in a bid to cut costs, some have looked to employ cheaper crews. Cutting costs, however, comes at more than merely a financial price, since many of these crews are cheap because they are inexperienced.
The situation is worsened by the retirement of older and more experienced seafarers.
Side effects
One of the side effects – or a symptom – of this recession-induced situation in the shipping industry could be observed in the developments around the cargo carrier “Seli 1”, which ran ashore off Table View late last year. As the months dragged on, the ship remained stranded, as plans to refloat her ran aground.
Refloating the “Seli 1” would have been a major and very expensive operation. Her age and value made it unlikely that such an operation could be launched in an economically feasible way. Both she and her cargo were not worth enough to keep insurers interested in going to the expense of saving the ship, simply to have her scrapped afterward anyway.
If the “Seli 1” had met her unfortunate fate two or two-and-a-half years earlier, it may have been a different scenario. The charter rates that were available at the time might have made it worth the insurers’ while to refloat her and get her seaworthy again as quickly as possible.
Ship economic cycles are determined by the continuous adjustment of demand and supply for shipping services, where demand is related closely to the world economy along with other factors; and supply by the supply of vessels, fleet productivity, shipbuilding and scrapping. “In very simplistic terms, the freight rates will determine the equilibrium between supply and demand,” states the October 2009 IMO report.
The report adds that it is difficult to quantify the value of volume of world seaborne trade in monetary terms, as figures for the trade estimates are traditionally in terms of tonnes or tonne-miles, and therefore are not comparable with monetary-based statistics for the value of the world economy.
“However, the United Nations Conference on Trade and Development estimates that the operation of merchant ships contributes about US$380 billion in freight rates within the global economy, equivalent to about 5% of total world trade,” it states.
Notwithstanding the current doom and gloom, the longer term outlook for the industry remains very positive. The world’s population continues to expand, emerging economies continue to increase their requirements, there is already talk that China, supported by countries such as India and Brazil, is leading the world out of the recession – this will continue to increase the industry’s requirements for goods and raw materials that shipping transports safely and efficiently.
The fact that shipping is the most fuel-efficient and carbon-friendly form of commercial transport should work in favour of an even greater proportion of world trade being carried by sea.
Leon Alberts
