By all accounts, 2017 was a forgettable year for shipping – which it may be the best characterization the industry could possibly have at present. Recent memorable years in shipping have not been very uplifting. Probably many people in the industry are still struggling to forget 2016 and its 296 BDI and 161 Capesize readings in March of that year, the lowest ever readings by the Baltic Exchange.
2017 was rather good for dry bulk (pleasantly great if one opts to compare it to an abysmal 2016) while tankers, containerships and offshore were mildly disappointing markets. Shipping segments are not often in sync with each other and segment gyrations are to be expected. Although the fundamentals driving each segment differ nominally, there have been a few common underlying trends across segments at present: the outstanding orderbook has been low in each and every segment, actually the lowest in recent memory. Tonnage demand keeps increasing on the strength of global economic growth. Tonnage supply keeps growing but at lower levels, so much so that tonnage demand hesitantly exceeds tonnage supply growth in certain markets. And, lack of shipping finance negatively affects all segments of the industry, further curtailing the possibility for an exorbitant wave of newbuildings. When one examines shipping closely, as a pure tonnage supply and demand equilibrium, 2018 and the near future seem rather promising.
However, shipping is an industry known to get people by surprise and looking forward there are reasons for a market participant to be concerned. Several factors, complimentary to the industry, are cause for concern; probably not as bad as to make the proverbial list “what keep’s you awake at night” but again, not an era of assured smooth sailing.
The shipping finance market has been dysfunctional for the last few years, but at present, the dislocation in the market is reaching unprecedented levels. As traditional shipping banks keep leaving the industry and institutional investors have lost any interest in private equity investments and some public market investments as well, the cost of capital keeps increasing steadily. It’s not unheard of for independent shipowners to be borrowing at 8% spread for first preferred ship mortgages with tight covenants and terms these days. For a capital intensive industry, the high cost of capital is an accident waiting to happen for shipowners and financiers alike. Also, lack of debt financing is shifting the market, even forcing smaller players to shut down and slowly driving a consolidation wave. Probably too soon to notice any immediate effect in 2018, but watching the Greek and German markets over the last few years, one can note the trend forming.
Many hopeful shipping business plans and corporate presentations pride on the industry’s low outstanding orderbook. It’s absolutely marvelous that shipowners have shown self-discipline in the last few years and abstained from speculative orders; however, the counter-argument is that shipbuilders are immediately ready for new orders and can deliver new ships as soon as within nine months. Low outstanding orderbook implies plenty of spare shipbuilding capacity. And, while there has been talk about inconsequential Chinese shipbuilders getting weeded out in the last couple of years, the truth of the matter is that shipbuilding capacity is highly elastic and all those now defunct shipbuilders would be entering again the market the minute that hot new orders start arriving. It’s a good thing that institutional investors and shipowners have lost interest in “speculative” newbuilding orders, but a strong freight market could likely incite many new orders that can start flooding the market very soon and thwarting a full market recovery. Barring an exogenous stimulus such as export credit incentives or materially lower newbuilding contract prices, a “forgettable” and un-inspiring freight market may be the safest way of navigating these narrow shoals.
While when talking about shipping the focus is on freight rates and asset prices, one cannot neglect the regulatory and operational nature of the business. The ballast water treatment management plants (BWMS) have already been costing the industry additional capital, and new emissions regulations are fast afoot. New regulations are costing the industry billions of dollars when the industry can poorly afford them, and one would expect even tighter standards going forward. Higher standards for vessel performance, tighter standards for safety and security, likely soon IT security to make ships relatively secure from hacking and ransomware, and all these, before one takes into consideration technological obsolescence factors: if for instance natural gas bunkering is the way of the future, what would happen to today’s modern world fleet? We do not want to be the Cassandras and the pessimists of the business, but one has to think about the long future very hard when ordering vessels that have twenty-five years of design life.
Further, while the vessels themselves can be the subject to higher standards and technological obsolesce, how about the cargoes and the underlying trading trends themselves? The cost of producing solar and wind energy has been dropping precipitously and jeopardizing the importance of coal, and possibly crude oil, as the world’s primary energy sources. Electric cars have slowly been passing the “novelty” phase of new products and becoming mainstream that would further impact the energy transport market. And, as shale oil and natural gas keeps improving lowering its production cost, likely to be less need for transport. Probably an isolated example, but the current polar wave of freezing weather in North America barely registered on the crude tanker market; there was a time when crude tanker rates were shooting skywards as charterers were scrambling to import more oil to the US to cover increased energy demand every time there was a cold front in North America. Energy trends take a long time to materialize, but on the other hand, one cannot dismiss that a new baseline that’s forming for the immediate and distant future.
We do not want to be pessimists and do not want to be the ones who are pointing to a half-empty glass. 2017 has been a respectable year, and, with a bit of good luck, 2018 would be equally fair. After many years of persistent fireworks in the industry, some “forgettable” years would be a welcome change. But just like navigating in unchartered waters, one has to keep paying attention to the dangers lurking in the ambient environment and under the surface of the sea.
A Happy New Year to all, especially the seafarers in the middle of the ocean an away from their families!
An edited version of this article first appeared on Splash 24/7 on January 3rd, 2018, under the heading “A forgettable year is our best option”.
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