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Economic conditions and climate pressures could slow down the shipping industryA combination of factors such as the global economic downturn, increasing capacity stemming from the boom times and cost pressures associated with calls for a cleaner and greener shipping industry, could make for a tough year or more for the freight sector. But, it is also the time to prepare infrastructure for the upswing ahead.
As evidence mounts that the present downturn in the global economy is not only deepening, but may last markedly longer than initially anticipated, it can be expected that international ship freight tariffs will be subjected to downward pressure for most of 2009 and even into 2010.
In late January, there were indications that some tariffs may be recovering from a 22-year low in December when the Baltic Exchange’s chief sea freight index, which tracks prices to ship major dry commodities, inched up.
The London-based index, which gauges prices to ship resources like iron ore, coal, grain, cement and fertiliser on major export routes, rose 10 points or 1%, to a three-month high of 1 014. But analysts warned that a sustainable rally depended on a recovery in global steel prices.
At the same time, however, the short- to medium-term news from the World Economic Forum in Davos, Switzerland was of bleak predictions for a not-too-soon recovery of global economic activity.
The outgoing head of South Africa’s Transnet, Maria Ramos – who was about to take over as head of the country’s largest bank, Absa – warned that it could take 18 to 24 months for a turnaround to take effect.
Downward pressure on tariffs were, apart from the general economic malaise, also expected to come from a substantial increase in freight capacity in the months or even few years ahead.
Despite the mini rally of January, freight costs for dry commodities were still 91% below a record high during 2008. Apart from sluggish global demand, brokers’ seaborne freight was expected to come under pressure from ballooning ship supply after frenzied ordering of new vessels in the boom years.
Massive deliveries are due in the course of 2009, with 870 merchant ships or 68 million deadweight tonnes to be added across the dry-bulk fleet.
Large numbers of new ships will be coming from Asian builders, including huge containerships and ore carriers. It can be expected that the changes in the fundamentals of supply and demand will put considerable downward pressure on freight tariffs.
Ship scrapping or retirement of older vessels, however, has already started to accelerated in the last few weeks of 2008 and early 2009.
This is in sharp contrast to the situation that existed up until a mere three months earlier. On the back of what seemed to be an ever expanding global economy and record-high freight tariffs, shipowners were keeping their vessels operating for as long as possible. Often scrap dates came and went as owners attempted to generate as much revenue as possible from older ships.
This situation led to another undesirable practice whereby owners, while trying to keep ships productively at sea for as long as possible, delayed structural surveys and routine dry-docking. During the boom times, this practice exacerbated the situation, with pressure on large dry docks making it difficult for appropriate slots for ships to be found.
The fact is, that in the short term, new ships are expected to far outweigh deletions. There is plenty talk in the industry about cancellations of orders with shipbuilders because of the economic crisis. This could become a significant factor, although it is more of a medium-term possibility.
Conferences under pressure
Price pressure can also be expected from moves by the European Union to outlaw the inter-liner co-operative shipping conferences.
These have been in place for more than a century on the trade lines between South Africa and Europe. Such a move will bring increased competition and pressure on freight tariffs.
The overall short-term outlook remained bleak with a recovery predicted by most optimistic industry analysts to only begin by
mid-2009.
These predictions are based on some expectation among steel analysts that there will be a rebound in China’s steel demand during the second half of this year, following a stimulus package implemented by the Chinese government.
In August last year, BHP Billiton, the world’s largest mining group, still expected demand from developing countries, led by China and India, to offset the weakening demand from developed economies.
At the time, there were analysts who warned that slowing demand from the United States and Europe will feed through to developing economies, via a reduction in demand for their exports.
Others however, argued that China’s economic growth is not primarily export-led, but driven by domestic demand.
The slight recovery in January is not a result of an increased Asian demand, but rather from steel mills and traders taking advantage of lower freight and lower iron ore prices. For a real and sustained recovery, there will be a need for more substantial strength in steel markets, which did not seem eminent.
Steel market fundamentals remained quite poor, prices have fallen a long way and production statistics are well down. Trade credit is also still a problem with banks not lending money.
Capesize-class merchant ships are the largest class of vessel that ferry iron ore and coal, which are key drivers of the Baltic Exchange’s index and which pushed it to its record high during May last year, mainly on Chinese demand. As a matter of fact, the Capesize sector fell during January this year, although some brokers linked this to the Lunar New Year holidays in Asia.
Cleaner and greener
The shipping industry can also expect pressures on the cost side of its operations, with demands for cleaner and greener operations mounting. New momentum in the drive for cleaner transport seems to be eminent from the new Obama administration in Washington.
Calls are growing louder to include both the shipping and aviation industries in any new international dispensation aimed at cutting greenhouse emissions. Neither is presently covered by the Kyoto Protocol, which expires in 2012.
The clean-up proposals for the world’s estimated 60 000 ocean-going and other marine vessels are said to be watched closely by major Asian ports such as Singapore, Shanghai and Hong Kong.
The proposals could substantially add to business costs, which could give other centres a competitive advantage unless the new controls are adopted and enforced by all trading nations.
There are still many arguments and disputes floating around about the real extent of CO² emissions by the world’s marine fleets. A report by former World Bank economist Nicholas Stern to the British government concluded that CO² emissions from ships contributed to merely 2% of the global total, compared to 15% by the transport industry as a whole in 2000. Some critics, however, insist it is substantially higher and that this figure fails to take note of the 50% growth in seaborne trade during the past 15 years.
Environmental groups also claim that ships account for between 8% and 10% of all sulphur emissions from all types of fossil fuel and 30% of global release of nitrogen oxides. Some critics of the industry claim that black carbon or soot, another pollutant from ships, can heat up the atmosphere many times more than the same amount of CO².
More red tape?
While some fleet owners and British government officials have warned that a conservative approach should be followed in the face of the potential cost involved, other experts predict a proliferation of uncoordinated local and/or regional regulations, which will be difficult to navigate, unless there is speedy progress with clean-up programmes.
Such developments will inevitably lead to more red tape, and slow down shipping and marine trade – in turn leading to increased costs.
This comes at a time when the International Maritime Organization’s (IMO) facilitation committee, which focuses the organisation’s work in eliminating unnecessary formalities and red tape in international shipping, has opened its first session as a formally institutionalised committee of the organisation.
The committee’s role is to facilitate maritime traffic by simplifying and reducing to a minimum the formalities, documentary requirements and procedures on the arrival, stay and departure of ships engaged in international voyages.
In December last year, Tony Mason, secretary-general of the International Chamber of Shipping, warned that if governments and the organised industry could not come up with improved standards by the end of 2009, it could lead to “serious disenchantment with the [International] Maritime Organization process with a regulation campaign led by the European Union (EU) and the United States.”
In March 2008, the US House of Representatives approved legislation to empower their Coast Guard and its Environmental Protection Agency to develop and enforce emissions limits on thousands of domestic and foreign-flagged ships that enter US waters every year.
New legislation
In November last year, the EU called on the IMO (the United Nations agency responsible for regulating shipping and marine pollution) to do more to help combat climate change.
A report by a scientific group set up by the IMO to study the issue was due in February this year. In less than 18 months, amendments to global marine pollution laws under the IMO’s MARPOL Convention can come into place. These could include tightened fuel standards, steps to reduce funnel exhaust gases and the use of only shore-based electric power by ships in ports.
In mid-2008, a coalition of conservation groups and state attorneys-general in the US filed letters warning of impending lawsuits over the US Environmental Protection Agency’s failure to address global warming pollution from ocean-going ships and aircraft. The legal action is aimed at forcing both the US Environmental Protection Agency and some individual states like California, Connecticut, New Jersey and New York City to issue regulations to control greenhouse gas emissions from these sources.
For the shipping industry, the coalition aims
at enforcing potential solutions such as:
• Requiring marine vessels to increase their fuel efficiency, among others, reducing cruising speeds – claiming that a 10% reduction in speed will result in a reduction of 23% in CO² emissions and a 23% saving in fuel consumption;
• requiring marine vessels to use cleaner fuels to reduce greenhouse gas and soot emissions; and
• extending these new regulations to all marine cargo vessels operating in US waters, irrespective of the flag they sail under, to avoid disproportionate burdens on US ships.
