December 31, 2009

Future Shock

An entertaining Chief Officer I sailed with long ago (the same one who put up a checklist in his cabin for going to the loo, starting with opening the door and ending with spraying air freshener) had a theory about international trade.  After a couple of months of carrying steel products into Thailand from elsewhere and then carrying other identical steel products out of Thailand to the same elsewhere, he said that merchant shipping would become superfluous as soon as people realised what was being produced next door.

I was reminded of that statement as I read conflicting reports recently: reports that made me wonder if shipping experts really had any clue of what was going on in their own backyards. All their studies bore on the dry cargo and tanker oversupply situation that is supposed to either hit freight rates badly or not affect them much in the next couple of years, depending on which expert one listens to. As many ships are on order as there are afloat now in the dry cargo market, one says. En masse cancellations are likely, says another. But orders made to greenfield shipyards don't count, says a third, pointing out that those shipyards themselves may now never be built because capital has dried up. Only twenty percent of the order book will actually be delivered, another analyst says with suspiciously remarkable accuracy, considering that nobody seems to have any remotely accurate system that would give numbers of how many vessels will finally be spewed out through the pipeline.

Whatever the experts say, it is clear to anybody that there are simply too many ships around today for the cargo on offer, and that this mismatch between demand and supply will not vanish next Monday. This is because when freight rate graphs were hitting the roof, many owners extrapolated those graphs to infinity, got excited access to the easy credit sloshing around the system and bought or ordered ships greedily like there was no tomorrow. Unfortunately, tomorrow is now here.

To compound the usual myopia, everybody forgot that it is not easy to get rid of assets when markets crash, especially large assets like ships. They even forgot that shipowning is a long term commitment and that shipping has always been a cyclical industry. The chickens have come home to roost now. To make matters worse, the last couple of months have seen fuel prices rising, more than doubling since last December. This has hit shipowners even as they struggle to dodge the sword of Damocles- tonnage in the pipeline over the next two years- hanging over their heads.

Notwithstanding the spike in rates from the second half of October that have relieved those that look for green shoots with magnifying glasses, it seems to me that things are obviously going to get worse before they get better. There may be periodic glimmers of hope, like temporary or calculated Chinese demand (again) spiking rates for a while before they drift down, or the hope that trade will improve with better than expected figures now coming out of the US economy. Freight or hire rates in different sectors may be out of sync for awhile, like what has happened with tanker rates recently as compared to bulk carrier ones. Let’s ignore box ships for now; they have been particular casualties in this mayhem. One of the same experts predicts that container companies are going to lose 20 billion US dollars this year. The fact that a record 11.7 percent of the box ship fleet is presently idle and that the containership segment will grow just 6 percent in 2009, the lowest growth rate in the last decade, speaks for itself. The same analysts expect the idle fleet size to peak by February 2010 before easing, though what will happen to the 1.8 million TEU scheduled for 2010 delivery is anybody’s guess; one can be quite sure that deliveries will be deferred wherever possible). 

But here's the thing: Whether things get better or worse in the short term, we in the maritime industry have so far been used to the surety that the long term will surely be to our advantage. That may well be true this time around too; at least all the experts seem to think so. However, I suggest that the industry could do well to factor in a couple of particular caveats into their plans this time.

The first one is actually more a paradigm shift than a caution: With the Chinese economy rivalling the US one, (some voices are already saying that it is globally the more important one of the two) there will be, inevitably, a shift in the kind of tonnage required in the future, Chinese (and even Indian or Brazilian) demand being of a different nature than that from the US. The requirement of more raw material carriage, for example.

It would be simpler if this was merely a matter of shipowners adjusting the kind of ships they buy and operate, which is what they have always done as they react to demand and supply. However, it may require greater nimbleness this time around, because I have a sneaking suspicion that US consumption will remain slow even after their economy recovers. I suspect that we have already seen the heydays of American consumerist prodigality: there will be much that the US just cannot afford now, and some scales may have well fallen off some eyes. If this happens, it will inevitably put pressure on Chinese exports, with a result that overall trade between the two behemoths may well remain sluggish. Of course, other developing countries, including India, may well pick up the slack. Regardless, shipowners will have to react to these developments with much greater agility; they may even have to predict the developments better to take full advantage of the opportunities; paradigm shifts demand this.

The second caveat is that the industry will have to factor in, much sooner than they think, one new heading under costs into their business plans. Let’s call this heading ‘Environmental Costs’; included will be many new headings of expenses including expenses related to shifting to cleaner and greener fuels and new ballast water treatment requirements.  The costs involved in both are likely to be worryingly steep. All of us know about the high costs for cleaner fuel, of course, but those who think that ballast water treatment will not be all that expensive need to think again. As an example, US laws in the pipeline will require what the American Waterways Association, a trade body, calls “extremely expensive ballast water treatment systems” to be installed on board.

Of course, there will be, probably justifiably, no let up in pressure on the maritime industries to do more to protect the environment. ‘Environmental Costs’ will keep on rising as new regulations we cannot even envisage now are enacted across the world; Shipping will not be left alone much longer, confusion after Copenhagen notwithstanding. Unfortunately, going greener costs money and impacts shipowner profitability.  If bottomlines are squeezed beyond a point, freight rates will be pressurised northwards. Is the global consumer prepared to pay more for just about everything yet?