Disruption Has Come to Shipping

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Only if I had a penny every time I had to spell out these terms to a financier dealing with commercial terms for the delivery of a vessel. It sounds almost like gibberish, but for those in the knowing, these are very clear terms and have saved many a shipowner or charterer from undue legal headaches. (For more shipping abbreviations, please see our S&P blog here!) These abbreviations are standard language and stand for All Going Well / Weather Permitting / Unforeseen Circumstances All Exempted / With Out Guarantee. They are the remnant of past reality, when Telex was the primary way of communicating commercial information in a time sensitive manner, and, text transmitted was charged by the number of the charterers consisting it. Really.

This was a time when people had to economize with their words due to technical and accordingly economic considerations. Had to be succinct since additional characters cost money; then, the telefax replaced the telex and transmitting was charged by the page, and eventually email has become the prominent way of transmitting information, which effective is free (besides a nominal monthly fixed cost for the connection). For those nostalgic of telex, Twitter had set a limit of 140 characters (now 280), but this was for other than economical considerations. And, the 280-character limit, Twitter does not stop someone for blabbing all they want; again for free.

The Internet has been changing the way the shipping industry is functioning. For starters, business has become much more transparent and efficient, and so far has affected the economics of auxiliary services such as ship-brokerage, charter brokerage, supplies and victualing, etc It has also affected documentation and certification for statutory and regulatory inspections, maintenance, communications, cargo and commercial documents, etc And, in the next phase of technology, the actual operations, management and trading of the ships are coming into focus.

When the Internet was “invented” in the 1990s and for the “dot com” mania, technology was still a novelty; too bulky and still very expensive in terms of computers and computer code, and, quite frankly, shipping was not the ideal industry for B2B (business-to-business) applications to start with. Two decades onwards, the cost of technology has come dramatically down, there are many app developers knowledgeable with new platforms, and more importantly, there has been a universal push to employ technology for both substituting for routine business and mainly “dig data” for making informed decisions. In the last decade, technology has had only an evolutionary impact on the shipping industry; however, looking forward, the impact can become revolutionary, or as they say, “disruptive”, in the sense it can disrupt existing industries from doing business “as always have been done”. Disruptive technologies effective force established industries to do business on a new set of economics and market drivers: physically hailing a taxi but now booking car service via an app (known standards of safety, security, timing, pricing, service, etc, with possibly automated cars in the future) is one of the most simplistic ways for one to understand “disruption”.

The impact of technology so far has been subdued and only limited to certain, well defined areas such as automation, digitization, etc It has just been complimentary to the industry by providing efficiencies and cutting costs, sometimes at the expense of shifting business models for a few complimentary service industries. However, looking forward, it seems we are almost of the cusp of major paradigm shifts that can change the market. For instance, brokerage – whether S&P and chartering – could be completely substituted by online platforms. What would stop a charterer from posting their business online and then get to choose the best bidder (ship) at the optimal price? What would stop a shipowner from posting their ship online for sale once the decision is made to divest of the asset? All these are commoditized products (cargoes, routes, ships, etc) and once a platform attracts critical mass, the market becomes much more efficient. And, execution of contract on an online platform, is just a formality.

As ships and cargoes getting connected, “Internet of Things” (IoT) can help with more efficient transport and optimizing the supply chain (translating to lower shrinkage, pilferage, spoilage, etc and of course lower financing trade costs). IoT can help from preventive maintenance onboard ships to minimizing to cost of repairs, but mainly can lead to automation of shipping and effectively to man-less ships. If airplanes with human cargo can be trusted on auto-pilots for most of the flight, it’s hard to see what would stop ships from navigating the seas on their own. And, one step further, “big data” and artificial intelligence can allow for predictive analysis of business trends and expected cargo movements. Probably, all these sound like a sci-fi scenarios with a remote hope of application. Instead of a counter-argument, one has to pay attention to a modern automobile and try to draw similarities to shipping. If a highly regulated and fragmented industry (automakers) with a much higher degree of human interaction can see their way to driver-less cars, it would not be too hard for ships to follow. Naval engineering remained a “bulk” and material-heavy discipline for the last several decades, just like cars used to be at Detroit’s glory days; however, a shift to more intellectual power is seems to be coming.

Ships are very expensive assets and often industry players prefer to stick with what it’s known and proven rather than take un-necessary risks; it’s an applaudable approach, but again, there is a paradigm shift when one has to jump into the future. Imaging being the last shipowner who built the last clipper ship only to see the steam engine cannibalizing the market. Change will come irrespective of the hesitancy by shipowners because other industries and companies from other industries will force their way on shipping. It is estimated that one-fifth of the containerized cargo moves on account of Walmart. While Walmart has taken a more cavalier approach to transport, Amazon has been much more aggressive and technology savvy. While at earlier stages, Amazon was completely dependent on UPS and FedEx for their shipments, now they building their own fleet of cargo planes and vehicles and hiring people for deliveries, just a step before deliveries with drones. It’s only a matter of time before Amazon will start shaking the containerized shipping industry. Would one think that other bulk commodity owners such as Vale, etc will not play the game?

Disrupted long time ago… Image credit: Karatzas Images


© 2013 – present Basil M Karatzas & Karatzas Marine Advisors & Co.  All Rights Reserved.

IMPORTANT DISCLAIMER:  Access to this blog signifies the reader’s irrevocable acceptance of this disclaimer. No part of this blog can be reproduced by any means and under any circumstances, whatsoever, in whole or in part, without proper attribution or the consent of the copyright and trademark holders of this website. Whilst every effort has been made to ensure that information here within has been received from sources believed to be reliable and such information is believed to be accurate at the time of publishing, no warranties or assurances whatsoever are made in reference to accuracy or completeness of said information, and no liability whatsoever will be accepted for taking or failing to take any action upon any information contained in any part of this website.  Thank you for the consideration.

 

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Shipping’s Best Hope of Forgettable Years

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!

Happy Shipping and Happy New Year! Virginia Beach, VA. Image credit: Karatzas Images


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”.


© 2013 – present Basil M Karatzas & Karatzas Marine Advisors & Co.  All Rights Reserved.

IMPORTANT DISCLAIMER:  Access to this blog signifies the reader’s irrevocable acceptance of this disclaimer. No part of this blog can be reproduced by any means and under any circumstances, whatsoever, in whole or in part, without proper attribution or the consent of the copyright and trademark holders of this website. Whilst every effort has been made to ensure that information here within has been received from sources believed to be reliable and such information is believed to be accurate at the time of publishing, no warranties or assurances whatsoever are made in reference to accuracy or completeness of said information, and no liability whatsoever will be accepted for taking or failing to take any action upon any information contained in any part of this website.  Thank you for the consideration.