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China’s economic expansion has been slowing for several years: the pace of growth has slipped to an unverified 6.9 percent for 2015, while exports declined from 35 percent of the economy in 2007 to less than 22 percent in 2015.
Economic growth has come to depend on efficient import of raw materials and export of finished goods, however, an underlying trend in China’s reform process has been established that cannot be monitored and measured through the maritime industry alone. What does this mean for shipping? It means the most significant source of demand for dry bulk, and a major contributor to the wet bulk and container sectors, is changing.
China’s burgeoning economy had a more significant influence on the health of shipping – dry, wet, containers, heavy lift and project cargo, and general cargo – than any of the other five factors. Reduced demand for shipping from this source, in combination with the maritime industry’s failure to react in time, has forced many vessel operators, shipyards, and related businesses to rebuild their future scenarios. It is not yet clear what kind of shipping will be needed by a more internally focused Chinese economy, although the transition will take years to be finalized.
A second trend, continuing low prices of crude oil, have had a devastating impact on the offshore sector, but crude oil shipping is healthy.
The second element of the maritime double whammy has been the collapse of crude oil prices. This was sparked by Saudi Arabia’s refusal to continue its traditional role as global swing producer, especially when rival producers and exporters – most notably the United States’ shale oil, Russian oil and gas, and Iranian crude – threatened to increase their share of an already overcrowded market.
This has been a good news story for crude oil shipping. Freight rates have been strong, the fleet of ships has been able to handle demand rising at a forecast 1.2 million barrels/day year-on-year, and newbuilding deliveries are entering the market at a steady pace. There are virtually no ships being used to store crude oil, although slow steaming and port delays provide an unintended storage.
IHS Maritime and Trade believes it’s not the actual price of cheap oil that matters as much as the length of time prices of Brent and WTI remain below $50 a barrel. The past 18 months has seen significant change in the crude oil and refined product markets and in the offshore exploration and production sectors; shipyards that specialized in advanced construction of rigs and drill ships and in construction for the offshore wind sector have had to reassess their business models; skilled and experienced workers have left the business. The concern for the commercial shipping sector at the end of 2016 and into 2017 is whether the increased pace of newbuilding deliveries will have a significant impact on freight rates.
Charter market weakness drives consolidation. Survival in several sectors of the shipping business will depend on mergers and acquisitions.
Desperate times call for desperate measures; this is true of shipping as much as it is of any other business. Several high-profile mergers have been announced in the container shipping sector. The most unlikely, although the most necessary merger, is between the two South Koreans, Hanjin Shipping and Hyundai Merchant Marine.
The dry bulk sector is far more fragmented than containers. A prolonged period of low freight rates is now weakening vessel owners’ resolve. In Singapore, BW Group, riding high on the back of oil and gas revenues, is openly in the market to snap up distressed assets as vessel values fall in tandem with dry market rates.
The tanker business is generating sufficient revenue to avoid the merger merry-go-round, but the offshore oil sector has suffered catastrophically since the oil price plunged in September 2014. This is a sector where acquisitions are expected when the upturn comes, and that will happen when the crude oil price rises – but there’s no sign of that coming in 2016.
It is also expected that the ship construction sector will also bring a slew of acquisitions as builders seek to dispose of poorly-performing assets to cut debt.
As shipping absorbs ever-larger vessels, supply chain businesses are exploring the challenges.
IHS Maritime and Trade data shows that four vessels of 14,000-18,000 TEU were delivered in 2013, with 14 in 2014, and a further 18 in 2015. Twelve more are expected to be delivered this year, with a peak of 25 in 2017, and 23 in 2018. Given there are a limited number of ports and terminals able to receive these ships and handle as many as 10,000 containers from one call, mega-ships are challenging the very supply chain they were ordered to serve.
The arrival of larger vessels has also stimulated a surge in investment in new terminals with larger quay cranes, deeper approach channels, and more extensive storage areas. This has driven improvements in handling efficiency, but has challenged logistics businesses at every stage of the supply chain.
Shipping has come late to the Internet of Things party, but it’s catching up fast.
Gathering data on its own leads to paralysis as opposed to informed action; making sense of data and connecting disparate pieces of data will enable shipping to gain actionable insight. According to Patrick Thomson with the advanced analytics team at IHS, shipping businesses need a new role, a maritime analytics leader, to “combine detailed experience on the quantitative side with detailed expertise on the industry side.” Until that role is defined, he said, “the industry will continue to make decisions on the basis that the flaws and discontinuities [in data] are routinely ignored, that the paucity of data is unfailingly accepted, and that the research and forecasts we cling to are biased and opinionated.”
Shipping is becoming technology-intensive; beside companies’ new maritime analytics leader, whole new digital businesses are expected to be set up, with no assets under ownership but providing operational control.
Further, as a ship becomes a system of interconnected systems, connected not only to each other but via satellite to a shore-based control center, the need to provide different levels of protection becomes urgent.
Understanding the ships of the future begins with advanced engineering in the aviation and communications sectors, and overlaps with them. Training the next generation of engineers alongside the next generation of maritime lawyers and business leaders must begin early, rather than leaving it to the very end.
Source: IHS Maritime & Trade
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