Additional value proposition, trade data and digitalisation might pull seaborne trade volumes back from the brink of stagnation over the next five years.

By
Carly Fields & Lara Shingles,

That several ship segments are currently struggling with surplus capacity, large orderbooks and young fleets is a known problem. Can the advent of the fourth industrial revolution and its associated seismic changes to global consumer demand improve the outlook for seaborne import volumes?

Radical changes to the shipping landscape lie ahead.

Danish Ship Finance (DSF) in its latest Shipping Market Review predicts that these changes will redraw major parts of the world economy’s architecture and bring significant changes to the infrastructure that serves it.

The international political landscape has changed much since DSF’s May 2016 Shipping Market Review. It notes that while political tensions have been building for some years now, they became truly visible this year when public opinion was formally voiced in elections, triggering public backlash against globalisation.

This stance is partly explained by the low economic growth that has crystallised since the financial crisis which has led to large groups of people feeling that they have been left behind by their governments.

“The problem is, and has been for some years, that the dynamics we are facing do not solely reflect the cyclical nature of the industry.”

If these trends continue, DSF says that they may represent a “significant risk”, not just to the shipping industry but to the global economy since they have the potential to hold back economic growth and global trade in the years to come.

Growing anti-trade movements and digitalisation will also present challenges in the future. So too will new players entering the shipping industry, adds DSF: “The new players, that are expected to enter the shipping industry, are likely to be unburdened by the potential debt legacies of past shipping cycles and can be far more efficient and agile than many of the traditional shipping companies.”

Fewer trade volumes

While transitions are always difficult, DSF says that the one facing the shipping industry within the next five to ten years looks set to be very challenging.

It adds that while the shipping industry is positioned for growth in seaborne trade volumes, it is extremely vulnerable to several forces that may reduce growth in trade volumes, such as ageing customers, technological innovation and anti-trade politics.

“The industry continues to struggle with overcapacity which is stubbornly infecting most segments, from container and dry bulk vessels to crude and product tankers, gas carriers and offshore-related vessels,” continues DSF.

“The cure is simple but difficult to achieve: Limit supply to an extent that the market balance is restored. This can only be done if owners stop ordering new vessels, younger vessels are scrapped extensively or if a new market mechanism bars some older vessels from gaining access to cargo.”

DSF notes that some would argue that demand plays a role and agrees that it does. However, the short to medium-term demand outlook is “shrouded in uncertainty”, it says.

There is, it says, little to indicate that global demand in any seaborne commodity class will spike for a sustained period in the foreseeable future: “While short-term fiscal stimuli may provide some tailwind, as we have recently seen in the dry bulk market, these effects tend to be short-lived. The problem is, and has been for some years, that the dynamics we are facing do not solely reflect the cyclical nature of the industry.”

Added to this, DSF reveals that a structural shift is taking place: “We continue to argue that the world economy is not about to recover from a shock. It is about to transit towards a digital future in which artificial intelligence, robotics, 3D printers and renewable energy will gradually emerge as driving forces.”

New dynamics

In some areas, DSF says that it has seen seaborne transport volumes become supply-pushed rather than demand-driven. In the oil and gas industry, for example, vessels have been built in response to the increase in industrial capacity but consumer demand has not been able to keep up with the capacity expansion.

DSF says that the shipping industry is in the midst of a process whereby supply continues to expand while medium to long-term seaborne trade volumes seem to be “on the brink of stagnation” or “are facing very low demand growth”.

It predicts that this apparent decoupling will introduce massive changes to the competitive landscape of the shipping industry over the next five years that redefine or augment the established value propositions within the shipping industry.

Given the challenges ahead, DSF says that the general outlook for the shipping industry is bleak. Not only is the composition of the world fleet ill-suited to the expected transformation of trade volumes and patterns, but freight rates and secondhand values are also low across the board. Shipyards are also closing or reducing capacity due to overcapacity.

Industry in transition

What will the transition towards an improved market balance look like? “It is a very delicate situation,” says DSF. “For owners to sit back and do nothing while arguing that the markets are bad and things will only recover when the tide turns does not seem a feasible strategy.

“Some owners are locking in their larger vessels on long-term contracts on low rates. This strategy does not seem likely to create much value, but at least it means the cash-flow issues can be parked for a while. Few players have the capital, not to mention the liquidity, to continue down the current track for longer.”

Cost savings and operational excellence have been pursued for years now, adds DSF. But in a capital-intensive industry where most players are price takers and overcapacity only seems to have worsened over the years, DSF says that the downward pressure on freight rates and secondhand values has consumed most of the savings.

According to DSF, the race towards the lowest possible level of costs cannot continue for much longer: “Players are leaving the market. Some are closing down while others are working to consolidate their capacity through mergers, acquisitions or other capacity-pooling arrangements. Some shipowners argue that the time has come to buy low-priced ships.”

The challenge, says DSF, is that many shipping investors seem to be adhering to their traditional strategies: buy low and sell high; be close to customers; and have access to cargo. But will traditional strategies be sufficient enough to break the current cyclical trend and return the industry to profitability? Apparently not: “It might have worked if the underlying businesses that the shipping industry is serving were largely unchanged. But in today’s market, we believe that yesterday’s strategy is incapable of solving tomorrow’s problems,” it says.