Malaysia Shipping industry still struggling SHIPPING is the faithful servant of global trade and a fulcrum of economic growth, facilitating an estimated 90% of global trade volume. As such, the shipping industry is influenced by factors such as the economy, trade, consumption, production, financing and technology that drive the demand and supply of manufactured goods, raw materials and shipping services. Just as the shipping industry enjoyed a spectacular boom during the boom years during the mid-2000s when the global economy performed well, its fortunes are now also inextricably related to the recent slump in the global economy. The curtailment of economic activities and consumption has resulted in a drop of trade volumes and low demand for maritime transport. It is therefore not surprising that the shipping industry has suffered along with the global economic recession and financial crisis. The shipping industry is facing what can only be described as the longest and most severe downturn in modern merchant shipping history. Freight rates in key shipping trades such as bulk, container and trade have slumped to nearly all-time lows, as shipowner struggled with low demand for their vessels. They also have to face with high the challenge of high fuel costs which can take up 70% of the cost of operating vessels. Financing issues. With poor revenues, they have struggled to repay the loans and are saddled with vessels whose prices are much lower than when they were bought prior to the recession. Amid the tightening of credit and lack of liquidity, shipping companies also face the difficulty of raising financing to purchase vessels and for working capital. During the “golden age” of merchant shipping before the current downturn hit, freight rates in all the major shipping trades were heading skyward. Prices of vessels were at an all-time high; a very large crude carrier (VLCC) was priced at around US$160mil (the price is around US$80mil now). The shipping industry was awash with cash; banks were eagerly lending huge amounts at very competitive rates to shipowners who went on an expansion binge and aggressively enlarging their fleet. Ports were enjoying record throughputs, thanks to the insatiable demand for all kinds of goods and materials, largely fuelled by the spectacular growth in developing economies namely the BRIC (Brazil, Russia, India and China) countries. The global recession which began in 2008 has resulted in a sharp downturn in the shipping markets. Demand for shipping services has declined dramatically and freight rates have suffered a sharp drop. For example, the freight rates for Aframax tankers have declined at a 15-year low to around US$12,000 per day currently, according to the authoritative Oslo-based shipping research outfit Nordea Markets (the rates reached at an all-time high of around US$87,000 a day in 2008). The decline can be attributed to lower demand in Europe for crude oil on the back of the eurozone crisis. This is compounded by the persistent entry of huge new tonnage in major shipping trades – namely bulk, container and tanker – which has exerted downward pressure on freight rates and has halted recovery in those trades. Industry prospect Amid a flurry of negative developments such as the continued financial crisis in the eurozone, the spectre of double-dip recession and financial cliff in the United States and slower growth in China, it is difficult to be bullish about the prospect of the global economy and the shipping industry to rebound anytime soon. World Bank projected that the global economy would register a weak 2.5% in 2012 and would not grow more than 3% in 2013. With these in the background, the shipping industry looks set to carry on the bearish mood of 2012 into 2013. The combination of low demand for shipping services and persistent entry of new tonnage into the shipping markets has resulted in severe overcapacity in key trades such as bulk, container and tanker. International shipping consultant Alphaliner projected earlier this year that almost half of the container ships slated for delivery in 2012 have capacity of above 10,000 twenty-foot equivalent units (TEUs), most of which earmarked to serve the Asia-Europe trade. One such ship, the 11,400 TEU Andromeda owned by French giant container shipping group CMA-CGM, called at Westports at Port Klang. Such behemoths are the norm in the container trade as shipowners strive to attain economies of scale in servicing key routes like Asia-Europe which can offer sizeable cargo volumes and have ports to accommodate the big vessels. The delivery of newbuildings with huge capacity has exacerbated the oversupply situation in already beleaguered trades such as container and tanker. More new tonnage is expected to flood the shipping markets in 2013 and this will exert further downward pressure on the shipping industry’s attempt to recover from the downturn. Freight rates in the Asia-Europe and Transpacific routes will continue to be depressed by the oversupply of huge new ships meant to serve these trades. Main line operators are expected cut capacity and introduce rate restoration measures in these trades to mitigate low demand for their services, excessive capacity and high oil prices. Bearish outlook The picture painted is admittedly not a bright one. It would take a confident punter to wager a bet on the shipping industry rebounding convincingly in 2013. It looks like the bearishness in the industry will continue a bit longer before things get better. However, this should not obscure the opportunities and bright spots available in the shipping industry. For one, the intra-Asian and intra-Asean trade provide a reliable growth area for container players, given the strong economic performance of regional economies. There should also be strong demand for the offshore support vessel and workboat segments, amid growing exploration and production activities in the offshore oil and gas industry. Despite the overall gloom, shipping must be viewed with a long-term lens to put its prospect in the right perspective. Volatility is the name of the game in this industry, and the peaks will always follow the troughs. Notwithstanding the current downturn, the shipping industry, as key facilitator of trade, will rebound once the global economy and trade volumes pick up. Shipowners who persist amid these trying times will be the first to benefit once the demand for their services picks up steam again when the global economy recovers. Source: Nazery Khalid, Senior Fellow at Maritime Institute of Malaysia.
Posted on: Thu, 03 Oct 2013 03:17:53 +0000
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