By any measure 2011 has been a tumultuous year for shipping:

By any measure 2011 has been a tumultuous year for shipping. The Arab Spring uprisings are reorienting global geopolitics and bringing the issues of energy security and transport logistics into sharp focus. Meanwhile, the thorny matter of piracy continues to increase not only the financial burdens placed on ship owners and governments but also the amount of time spent considering steps to contain and minimise the threat.

However the impact of these developments on the maritime industry is marginal compared to that of the Eurozone sovereign debt crisis. The inability of EU policymakers to come up with a workable means of writing down Greek debt and recapitalising banks exposed to indebted governments has created volatility in the global equity markets, uncertainty in business circles and slowdowns in all the region’s economies.

Hit by rising levels of taxation, inflation and unemployment, European consumers are finding that their savings are earning “negative” real returns. Furthermore, the Eurozone crisis has become a global problem due to the EU’s pre-eminent status as a trading partner. The US and China, the International Monetary Fund's largest shareholders, have a vested interest in helping solve the crisis. All are agreed that the chosen solution must be one that also spurs economic growth, job creation and trade.

In the meantime, most shipping sectors are struggling and Europe’s quandary is not helping. Average container ship freight rates worldwide have plunged 70% since a 2010 peak. Fleet container-carrying capacity, already oversupplied, is set to rise by 30% over the 2011-2013 period as the newbuilding orderbook is delivered. At the same time growth in the demand for container ship space over this three-year stretch is not expected to exceed 18%. Fleet supply and demand are not due to be back in balance for at least five years.

Evidence of the extent to which shippers are benefiting from ship owner misfortunes is given by the fact that it now costs only USD 650 to ship a 20-foot container from Asia to Europe in contrast to USD 2,100 some 18 months ago.

The trickle-down effect will ensure that the owners of the smallest ships, i.e. those vessels of 1,000-2,000 TEU engaged in the coastal distribution trades, bear the brunt of this depressed container ship market. A large percentage of the current orderbook is comprised of ultra-large container ships of 10,000 TEU and above. On delivery these vessels will go into service on the major deepsea trade lanes, displacing mid-size ships in the process. The mid-size vessels, in turn, will move into the regional trades, providing stiff competition for the existing small ships on these routes.

In the face of continued fleet overcapacity and depressed freight rates, container ship owners are weighing up a range of contingency measures, including scrapping older tonnage. A significant amount of consolidation, especially in the small ship sector, seems unavoidable.

Although oil demand may be peaking and going into decline in the West, oil use in emerging markets is growing. This seismic shift in oil consumption, and the associated longer distances that oil generally has to travel to reach these developing nations, are supporting some additional demand for tanker shipping. However, they are not enough to absorb anything like the volume of newbuilding tonnage currently entering what has become a very depressed shipping market, especially at the very large crude carrier (VLCC) end of the spectrum. High oil prices, which are unlikely to decline significantly in future, also have a stultifying effect on trade volumes.

Tanker newbuildings will be filtering through in the years ahead at a robust rate. So far this year the overall crude oil and product tanker fleet has expanded by 5% while the rise in global movements of crude and refined products is barely reaching 2.5%.

There are currently 130 VLCCs on order and 570 such vessels in service. Delivery of the new tonnage, including over 50 this year, will maintain a downward pressure on rates which have slumped to record lows on the benchmark Middle East Gulf to Japan route in recent months. At various times this past summer returns have dipped below operating costs and fears have been expressed about the sustainability of the large tanker sector, especially as overall cargo volumes are not growing to any great extent.

Operators of bulk carriers find themselves in an overtonnaging predicament similar to that besetting the VLCC fleet. In fact the current bulk carrier orderbook relative to the in-service fleet is even greater than the tanker ratio. However what the dry bulk sector has going for it which tanker shipping does not is growing trade volumes. Having said that, if it wasn’t for healthy Chinese imports of iron ore, coal, nickel ore and ferrous scrap, the dry bulk sector would be in a much more parlous state.

The one segment of shipping that is bubbling at the moment is gas transport. After a two-year hiatus in which no new vessels were contracted, over 50 new LNG carriers have been ordered so far this year. The LNGC newbuildings will be added to the current 370-vessel fleet over the 2013-2015 period and the demand for gas is such that their entry into service is unlikely to adversely affect freight rates.

Charterers seeking LNGCs for spot cargo deliveries and short-term employment are now paying the going hire rate of USD 125,000 per day, a threefold increase on levels of a year ago. The ship supply/demand balance is currently so tight that these robust returns are likely to be sustained for at least the next two years and could well continue to climb.

The Japanese earthquake in March, another of the year’s traumatic events, has helped buoy LNG shipping. The closure of several of the country’s nuclear reactors and the temporary shutdown of others have boosted Japanese LNG imports by over 10% and the world trade in LNG by about 4%. However a number of other factors are at play, to the extent that Japan is likely to account for only one-third of the rise in global LNG trade volumes in 2011.

While Europe struggles to come up with a viable solution to its sovereign debt crisis, ship owners in the non-gas sectors are searching the horizon for positive signs. Trade growth and the willingness of the region’s trading partners to assist in a resolution of the problem will play a key role.

The US, with its relatively weak currency, is seeking to emulate Germany and boost exports in a drive to reinvigorate its own ailing economy. The country’s large volumes of newly discovered shale gas will undoubtedly help as will the import needs of the growing economies of Asia and Latin America’s developing nations.

China, sensitive to the negative impact of the European malaise on its own export volumes, still expects domestic growth to be maintained at the current annual level of 9% in 2012. Indebted nations, which are virtually all trade-deficit countries, would like to see China utilise some of its massive foreign exchange reserve holdings to boost imports of manufactured goods, thus giving them a chance to grow their economies and pay off their debts.

Ship owners stand poised to service the reinvigorated world trade that all parties desire.

Source: The Balkans. Sourced from BIMCO. 28 October 2011

http://www.balkans.com/open-news.php?uniquenumber=124664