Data To Lead Bulk and Tanker Shipping To Success Path

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  • COVID-19 and commodity-related trends are likely to depress medium-term demand.
  • But companies that can leverage deep market insights will have the opportunity to outperform in the postcrisis economy.
  • Data is more accessible than ever, means companies can access deep market insights around economic and commodity trends, shipping analytics, and customer information.
  • Industry players that invest in analytics can use data-led insights to seize opportunities in four main areas.
  • They are finding attractive subsectors and niches, optimizing vessel portfolios, improving commercial choices, and operating existing vehicles more effectively.

According to a recent McKinsey & Company news report by Arjen Kersing, Steve Saxon, and Qiao Xie Data is to decide the success in the next normal of bulk and tanker shipping.

COVID-19 challenges

Bulk and tanker shipping slowed due to COVID-19, a challenging economic environment likely to persist in the next normal.

Declining demand

Declining demand has led to sluggish growth in bulk and tanker shipping during the past decade. COVID-19 has compounded many of these issues; the slowdown in global economic growth has further decelerated demand for key bulk commodities, leading to a sustained oversupply of shipping capacity.

The bulk shipping market grew at a CAGR of just 1.3 percent between 2015 and 2020, for example, and growth rates are expected to hover at around 0.8 percent per annum until 2030, with the fall in growth driven largely by declining Chinese demand for coal and iron ore.

Despite slowing demand, the supply capacity of the dry bulk shipping market is expected to continue to increase.

Decommissioning will remove

Shipbuilding is expected to add 3 to 4 percent to active capacity annually in the next ten years, while decommissioning will remove around 1 to 2 percent.

The comparatively low rate of ship scrapping is due both to the relatively young age of the global dry bulk fleet (average ship age is 10.2 years ) and to the low price of scrap. Overall, therefore, supply will increase at a CAGR of 1 to 3 percent.

Mismatch between weak demand

This mismatch between weak demand and growing supply could depress rates over the coming years.
Rates for dry bulk shipping experienced a surge before the 2008 financial crisis because of the strong demand for many commodities (including iron ore, coal, and grains), but have remained low since, and are not expected to rebound in the coming years.

Tanker shipping sector

The tanker shipping sector also faces significant challenges. COVID-19 and a number of recent geopolitical challenges have had a significant impact for major commodities such as crude oil (Exhibit 2).
Shipping demand has contracted sharply and—despite a slight short-term rebound—is expected to remain at a low level in the medium term, and then decline further after 2032 as a result of the energy transition.
Tanker shipping capacity is likely to grow steadily, driven by a large number of outstanding orders.
Again, this low demand growth and steady supply growth will likely lead to a sustained oversupply of tanker shipping capacity in the next five years.

Companies that invest in analytics can use data-led insights to seize opportunities in four main areas.

Despite the challenging economic environment, there are still opportunities to buck the overall industry trend. We see four areas of potential performance improvement, all of which require sophisticated analytical capabilities:

  1. Finding attractive subsectors and niches through insight into end customers
  2. Optimizing portfolios based on relative attractiveness and risk level of different vessel classes
  3. Improving commercial choices
  4. Operating vessels more effectively

1. Finding attractive subsectors and niches through insight into end customers

Despite the global industry outlook, some submarkets remain attractive (Exhibit 3). Iron ore, for example, is a large, stable, and profitable market—though it will start to shrink during the coming years.
Our modeling indicates the Chinese market drives around 70 percent of the global seaborne iron ore shipment.
Chinese iron ore imports are expected to fall from 990 million tons in 2019 to 769 million tons in 2030 (a decrease of around 2.4 percent per year), however, because of China’s declining demand for steel, increasing supply of scrap, and rising adoption of the electronic arc furnace.
  • Collect data that is as granular as possible
  • Be open to new cargo categories and new routes
  • Get closer to customers

2. Optimizing portfolios based on relative attractiveness and risk level of different vessel classes

Shipping investments are by nature risky. Shipping companies often make long-term commitments to vessels without securing similar long-term commitments from customers.
Demand patterns, geopolitics, and regulation can all shift significantly over the approximately 25-year life span of any individual vessel.
Scenario planning can be used to capture the range of possible outcomes, and this should include an in-depth analysis of the relative attractiveness of asset classes across different scenarios.
The risk and return of different vessel portfolios are determined by four factors: macrodrivers, demand outlook, supply outlook, and profitability (Exhibit 4).
For each scenario, a plot of the risk and return of different asset portfolios can be helpful in identifying the optimum portfolio for any given level of risk.

3. Improving commercial choices

In the aftermath of the 2008 global financial crisis, most larger shipping companies (and ship owners) have demonstrated increased risk aversion and are no longer prepared to gamble on economic growth.

Companies now typically choose one of two models—stable or cyclical—to manage risk. Both models can be effective, but the choice of model has substantial implications for commercial decisions (see sidebar “Stable or flexible—two possible risk management approaches”).

Digital and advanced analytics can help shipping companies develop insights that may give them an edge over competitors.

Data can be gathered and used to sharpen commercial decision making in many innovative ways.

  • Analyzing competitor ship positioning
  • Using algorithmic prediction to find cargo in spot markets
  • Using satellite or drone pictures to monitor moves along the value chain

4. Operating vessels more effectively

Improving asset efficiency and cost competitiveness is key to success, especially during the current market downturn.
Shipping lags behind most other industries in its use of data to inform operational decisions.
Data and analytics should be used to inform decisions about vessel operations in a number of ways:
  • Improving vessel utilization through competitive analysis
  • Improving bunker fuel consumption efficiency
  • Optimizing demurrage cost
  • Collecting onboard data using sensors

The path forward for bulk and tanker companies

The four opportunities outlined above all have data and analytics at their heart. Superior performance comes from a deep understanding of submarkets, end customers, competitors, and ship performance.

Getting these right will require new skills and a much more advanced IT and analytics capability than many bulk companies have today.

Realizing the potential of data will require investment and reorganization across a number of fronts:

An investment in hardware and software to make the most of the new types of data will require onboard sensors and data links, as well as the capability to transform data into insights. Analytics capabilities should include the ability to use artificial intelligence techniques and machine learning on some of the larger, more complex data sets.

An expanded commercial team can build closer relationships with customers and provide insights into likely future demand, developing opportunities to work closer with the customers on logistics solutions, including value-added solutions.

A dedicated team of supply and demand analysts, based centrally, will monitor demand signals, competitor ship movements, and the progress of new shipyard orders.

A 24-hour MOC is where all insights from live operations are monitored and evaluated.

The initial investment will be significant. Larger players that can spread investment across multiple ships are likely to be at an advantage, and this—as well as the continuing oversupply of shipping capacity—may encourage further concentration within the industry and improve the overall industry structure.

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Source: McKinsey & Company