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Masamichi Morooka: Predicting the Fortunes of the Shipping Industry

Because shipping can reflect trends in growth and demand across the globe, it gives us clues about the health and direction of the global economy. But demand isn’t the only factor affecting the shipping industry. Here are four developments operators should look out for in the years ahead.

 

 

International shipping — the movement of raw materials, energy and manufactured goods by sea — is the servant of world trade. Long-term prospects for the industry are therefore good, because demand for shipping is directly linked to the growth of the world economy and the world’s population.

But at the moment, much of the shipping industry is still experiencing modest freight rates. While some tanker operators have recently received a (possibly short-term) boost due to the demand from speculators wishing to take advantage of the dramatic fall in oil prices, other sectors — including many iron ore and coal carriers — are barely covering their operating costs.

The current level of generally unimpressive freight rates is mainly due to oversupply of shipping tonnage, rather than any shortage of demand, which has doubled in the last 15 years and has continued to grow — even since the post-2008 downturn. That said, freight rates in shipping are cyclical, highly reactive and notoriously volatile. When there are too few ships to carry what the world needs to move, freight rates can be very high indeed, as they were in the mid-2000s. But when there are too many ships chasing too few cargoes, freight rates drop dramatically. And given that the average age of the world fleet is currently only nine years (the typical life of a ship being at least 25), relatively little of the current surplus is likely to go for early ship recycling in the immediate future.

What predictions, therefore, is it safe to make with respect to the fortunes of shipping in the future? With one exception — that the cost of operating ships will become much more expensive — there are actually very few safe bets. But there are several other key developments that will probably have a major influence on the decisions that shipping companies will need to take in the years ahead.

1. Environmental costs will increase.

The only real certainty is that shipping will have to comply with an avalanche of new environmental regulations, which are all about to impact at more or less the same time. Shipping enjoys a uniquely global regulatory framework provided by the UN International Maritime Organization (IMO), whose rules are genuinely enforced on a worldwide basis. New rules requiring the use of low sulphur fuel, and the installation across the world fleet of expensive new ballast water treatment systems to prevent the unwitting movement of invasive species, are expected to cost the global industry over $500 billion to implement during the next decade. There is also the possibility of some kind of charging system being applied for shipping’s CO2 emissions, notwithstanding the fact that shipping is, by far, the most carbon-efficient form of commercial transport and is the only industry to already have (since 2013) a mandatory global regime in force to improve ship efficiency.

2. Oil prices will affect decisions about investment in alternative fuels.

Until the present fall in oil prices, and in wake of the U.S. shale gas revolution, it had recently been assumed that, for many ships, LNG would become the eventual fuel of choice — serving as an “interim fuel” until some new carbon-free alternative emerges that we cannot yet anticipate, perhaps sometime after 2050. However, if the current low price of bunkers persists, this could make LNG fuel less attractive.  On the other hand, if bunker prices bounce back to the level where they were at the start of 2014, many predict there will be significant take-up of LNG as a fuel for ships during the 2020s — especially as new sulphur regulations mean that ships will increasingly have to burn distillate (diesel) fuel, which is about 50 percent more expensive than the residual fuel which most ships are currently permitted to use.

3. The relationship between GDP growth and demand for shipping will change.

Even if the world economy continues to expand, there is evidence that the link between global GDP and shipping growth is changing. For example, until the 2008 crisis, a 1 percent increase in global GNP used to mean an increase in demand for container shipping of almost 3 percent. But this multiple is now diminishing, as emerging economies mature and service industries become more dominant. As economies such as China mature, they may also source more of the components they use for manufacturing locally. Supply chains will become more complicated, but many of them may shorten.

4. Unexpected events will remain critically important.

Unforeseen political events can fundamentally change trade patterns, as the industry saw when the Suez Canal was closed from 1967 to 1975 and during the OPEC crisis in the 1970s. Hardly anyone foresaw the dramatic fall in oil prices in 2014, or recent events in Russia and the Middle East. Demand for international shipping, with its inextricable link to political developments and the fortunes of world trade, will remain especially sensitive to “black swan” events.

Masamichi Morooka (Japan) is Chairman of the London-based International Chamber of Shipping (ICS), the principal international trade association for shipowners, representing over 80 percent the global industry with the intergovernmental regulatory bodies that impact on shipping, including the UN International Maritime Organization. ICS membership comprises national shipowners’ associations in 36 countries.  

(Top image: Courtesy of Thinkstock)

 

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