February 09, 2012

Shipping- worse than the eighties?

"D/S Norden A/S, Europe’s biggest publicly trading commodity shipping company, hired a Supramax vessel at no cost other than fuel charges, its first such transaction in a quarter century", a Bloomberg report said a week ago.

Shipping is in the midst of its own lost decade; predictions of industry recovery, which initially forecast a turnaround of sorts by the early next year, have started talking about conditions not improving until at least 2014. My own opinion is that even these analyses- God alone knows from which hat experts so confidently pull out these years- are somewhat optimistic. It seems near certain that we are heading for times that will be more scorching than the eighties recession some of us remember with a shudder.

One major difference this time around is that shipowners will find it impossible to slash costs as they did so easily then. This is an era where a shipowner cannot find competent crews easily, a time when safety cannot be compromised as easily thanks to regulatory and PSC regimes or oily water pumped overboard so dismissively. More stringent STCW and MARPOL regulations are in place. New regulations- with ballast water, for example- come with additional costs. There was negligible focus on cleaner, more expensive fuels, carbon footprints or air quality then; environmental protection was near ignored. When seafarer competence was not a big question and training costs to shipowners- but not to the sailors- were zero. When K&R insurance did not exist. When shipping finance had not constricted as much as it has today. 

All these costs have escalated- and many new ones added. Many of these are not small; most of these will only increase with time as more States take tougher steps to protect their coastlines from substandard ships, callous or greedy owners and ill trained or incompetent crews. With the inevitable advent of mammoth ships, this process will rapidly accelerate. The industry may find that- quite soon- newer heads of expenses make for a larger piece of the overall basket than some of the more traditional ones. The industry may find, for example, that it cannot get competent crews for the new generation of technologically advanced behemoths without paying through its nose. Economies of scale may not look as attractive then as they appear on paper today.

Unfortunately, higher costs are just one jaw of the pincer; an industry can survive those if there is a somewhat proportionate rise in income- or even the hope of one in the near future. The eighties recession stabilised and reversed on the back of genuine demand- and shipping is a cyclical industry anyway- friends tell me, so why am I so bearish now? 

I am long term pessimistic for many reasons. The lesser of these have to do with the weak and shortsighted structure of the industry. Put simply, shipping is not- and has never been- anything but reactive; it does not have the structure, the visionaries, the organisation or the ability to do anything but respond to present stimulus. This is a weakness that will hit us more in the future than it did in the past simply because the demands of the future will be heavier than they were, say, in the eighties. These weaknesses will be laid bare for all to see the tougher times get.

But the larger- perhaps the largest, and this is the second jaw of the pincer- reason for my pessimism is that I simply do not see demand for goods, and therefore for shipping, picking up easily. Europe will take many years before it fills up the hole it has dug itself in. The US appears somewhat better placed, having the ability to at least print more money, but the piper will have to be paid sooner rather than later. Most of the rest of the world is in a similar situation- with the possible exception of China. But then, how long can an export-dominated economy prosper if its customers are broke? How long can it afford to feed its apparent unquenchable hunger for ore, oil and other commodities when it cannot sell as much? 

I think that some sectors in shipping- bulk carriers and tankers, maybe- will do a little better than others but only if China stays buoyant. Some countries will do well if this happens too- Brazil and Australia come to mind. Unfortunately, even two or three swallows do not make a summer. Taking a broader view, I expect trade to remain sluggish for many years, or grow slowly at best. 

After a few of these, shipping would have largely dealt with -absorbed or demolished or whatever- its humungous tonnage overhang, but I am afraid that will not solve the debilitating issues that will probably still exist: stagnant or slowly growing global trade, rising operating and capital costs and an abnormally weak industry structure that does not know how to be proactive.

Those who expect a shipping recovery in 2014 may find, when they eventually get there, that 2014 makes 1983 look like 1995.

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