Shipping’s fortunes being squeezed

We are in the middle of Q4 which is usually one of the busiest times for the shipping industry.
However, despite all the efforts of shipowners, their crews and the various brokers that combine to run ships 24/7 around the world, the end results are a dismal economic failure. Freight rates are totally reflective of the amount of tonnage available for any given voyage, and we are now 6 years into a chronic over-supply of ships of nearly all types. Furthermore the present orderbook will not reduce that over-supply, but increase it through 2016.

What has brought shipping to this point and what can be done to turn things around?
The industry that has the biggest effect on shipping is shipbuilding. An industry that has almost entirely moved to Asia with China and Korea leading it and Japan, which originally led the way, is now in third place. The “production line” systems that the Asian yards have perfected have virtually destroyed any competition, but like any other production line it needs continuous work.

These shipyards have for many years operated aggressive sales programs and persuaded their respective governments to support them with financing for their customers.
The only barrier to entry as a shipowner is money, not operating or market skills, and it is the new abundance of money that has created the other side of the squeeze that the industry is in.
Most of the giant Asian shipyards can only build ships, or to a lesser extent, other marine structures such as rigs and platforms and they have geared themselves up to production levels that met the huge new demand created a decade ago by the Chinese boom.

Shipping changes little and slowly and the ships themselves, if well maintained, can run for 25 years or more. Thus when the shipyard capacity grew to a level that it could replace the world fleet in less than 10 years and met the new demands that the unforeseen Chinese trade caused, in only 4 years, the squeeze began.

Shipyards created every form of new design; speed, fuel consumption and sizes to meet every different trade. These were matched with aggressive pricing, both pre-delivery and post. Large numbers of option contracts were also given and flexibility over ship types was abundant. Thus the new-ship deliveries continued apace even after the Chinese boom had gone and by 2012 the world fleet capacity exceeded demand by more than 35%.

The Chinese allowed a large number of their yards to close but increased financial support for some of the remainder, intent on continuing to grow the Chinese controlled fleet to carry 70% of all Chinese imports and exports as dictated by the last government.
Although a couple of Korean yards went out of business their facilities remain managed by one of the larger groups.

With the global economies in tailspin following the great financial recession, one would have expected a greater reduction in shipbuilding, but the arrival of new money stopped that.
This money emanated mainly from the US capital markets but also to a lesser extent from Norway and was mostly equity, invested in new or existing publicly traded companies that sought to buy existing contracts for undelivered ships or take up options on others. All this on the false premise that ship prices would rise again, as they had done in the previous decade.
The only problem being that when a ship is delivered it needs to trade to pay for itself and not wait around for the markets to recover.

With the existing fleet already struggling to breakeven and many of the public companies having to resort to expensive debt to survive this new money onslaught was the second half of the squeeze that was unwanted.

What we have now are the ingredients of a permanently over-tonnaged industry funded by investors looking for profits from rising ship values that are highly unlikely to occur. Meanwhile the ships get built and delivered and need to be managed, operated and employed carrying cargoes, which because of the constant over-supply is a very marginally profitable business, that certainly fails to produce the returns that the investors expect.

As has been said many times before, “operating a ship is a temporary inconvenience between buying and selling it”.
All of the past collapses of the shipping markets have been caused by the ordering of too many new ships for which there was no employment. The same is horribly true today.
Source: Article written by Paul Slater, Chairman, First International Corp