The changing tide of risk

The shipping industry endured a tumultuous year in 2016. Russia’s increasing assertiveness, a rationalisation of Chinese economic growth plans, further Islamic extremist attacks in Europe, the Brexit referendum result and the election of Donald Trump as US president – all political and economic headwinds that had an indirect impact on commercial shipping.

Last year also saw the bankruptcy of Hanjin Shipping. While this could be viewed as a ‘Darwinian’ adjustment, where the least efficient and least adaptive companies are becoming extinct, the Hanjin debacle could herald even greater concerns for the shipping sector going forward, if global marine practice Marsh is to be believed.

Looking ahead to what this new global environment is likely to yield, a recent report by Marsh reveals several matters that will have an impact on most sectors in the shipping industry. Increases in bunker prices and international regulation, for example, will be felt throughout and the outlook for both is not positive, it says.

What’s more, if bunker prices increase, which according to Marsh is likely to happen continuously over the course of 2017, then this should be reflected in strengthening freight and charter hire rates to cover such costs. However, such strengthening in rates would present difficulties in many sectors, where competition is fierce between operators with a surplus tonnage.

Subsequently, 2017 will likely see any profit margins for operators squeezed tighter, as costs increase but rates do not.

Marsh also notes the coming into force of two international regulations in 2017, including the second stage of the Maritime Labour Convention (2006), which entered into force at the start of the year, and the Ballast Water Management Convention, entering into force on September 8.

Adding to these concerns is the possibility that the Annex VI of the 1997 Protocol to the MARPOL Convention will come into effect in 2020, says Marsh. This is not only due to the costs that will be incurred when complying with these new regulations, in fact, there are questions as to whether the regulations can be fully complied with at all.

Sustainability

Overcapacity is another development that is having an effect on the shipping industry and marine insurance markets worldwide. By general agreement, Marsh reports that marine insurance rates are currently at levels that cannot be sustained over a long period, yet they show little sign of increasing.

“The past three to four years have seen relatively few major catastrophe losses and have been benign years for underwriters, which has done little to focus attention on the quality of tonnage being insured or the terms being offered,” it says.

“An ever increasing level of risk retention by the non-traditional marine hull and cargo markets (rather than transferring those risks to the historical markets such as London, Paris and New York) is an indication that the current level of losses are considered by those non-traditional markets to be sustainable.

“The entry of such new players into the market has further spread the available cover and increased competition and capacity to the point that we believe that a single marine catastrophe would not now be enough to see significant rate rises being consistently applied.”

The Protection and Indemnity (P&I) market is experiencing better results, with almost all the major mutual associations avoiding the need to impose general increases for the 2017/2018 year.

“Indeed, some mutual clubs, being non-profitmaking associations, are now giving returns of previous calls back to their members,” continues Marsh. “While this is good news for hard-pressed shipowners, concerns about the effects of new regulation hitting the marine industry over the next few months and associated, perhaps unforeseen, risks are a concern.”

Over-optimistic

The dry bulk sector in particular employs a greater percentage of the world’s tonnage than any other type of vessel. In fact, according to Equasis, more than 34% of the entire world’s gross tonnage is dedicated to the transport of raw, dry bulk cargoes such as iron ore, bauxite, coal and grain.

These cargoes are the primary method of supplying the world’s manufacturing industries, thus providing the first indicators of global economic upturns and downturns.

During the global financial crisis in 2008, freight rates for these vessels collapsed and have failed to recover substantially, even though demand in Asia continued to increase, says Marsh.  

Further, while considerable attention was focused on Hanjin’s container ship operations in 2016, the company was also a considerable operator of dry bulk carriers. “The woes that led to the collapse of the company’s container ship operations were exacerbated by an unhealthy dry bulk market throughout 2016,” adds Marsh.

“Earlier that year, we saw bulk shipping freight rates reach record-breaking lows, causing dire warnings of a wholesale collapse of the sector, with operators struggling to survive. Although the result was not as dire as originally predicted, there did appear to be a much healthier reassessment of newbuilding orders in the dry bulk sector.”

By February 2016, Marsh says freight rates reached “ruinously low levels”, as an oversupply of tonnage weighed down on an already struggling industry. So far, 2017 shows little sign of substantial global economic recovery, it continues, and, although the ordering of new tonnage has largely ceased, the delivery of already ordered tonnage will continue to depress the market.

“Some analysts believe that the dry bulk market has already reached its worst possible nadir and that 2017 may be the year we start to see an improvement in the sector,” says Marsh. “However, we fear that this may be over-optimistic for all but one specific size of vessel.

“In June 2016, the newly expanded Panama Canal lock systems were finally opened, allowing vessels of far greater size to transit the canal system. Bulk carriers of 80,000 to 150,000 dwt (neo-Panamax size) will now be able to transit the canal, and we are likely to see these vessels increase due to their greater efficiency.”