Shipping is an Old Industry with Endless New Challenges

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shipping

In today’s fast-changing world, crystal balls are less reliable than ever, but sitting with two panels of shipping veterans at the recent Lloyd’s List Hong Kong Business Briefing, there were prophetic visions of the industry to be heard.

One of the most buzz-making topics was inevitably Donald Trump.  His victory in the US presidential election has sparked fears over a waning global trade, adding another layer of uncertainty to the already clouded shipping outlook.

While most agreed that the real impact remains to be seen, some detected bright spots.

To dry bulk owners — Precious Shipping managing director Khalid Hashim and Pacific Basin Shipping chief executive Mats Berglund — Mr Trump’s push for a $1trn infrastructure plan might well create some demand.  For Mr Berglund, it is specifically in cement shipping.

Ince & Co partner David Beaves united opinion that the new pro-protectionism of the US president elect will add momentum to China’s One Belt, One Road Initiative, a source of hope for the next wave of growth in world trade.

Beijing’s ambitious strategy, with a minimum spend of $1.4trn on infrastructure investment across 64 countries in three continents, was the “best thing that happens in this world in a very long time”, and can restore the world economy to a growth rate that it has lost in the past decade, according to Mr Hashim.

The view is supported by Standard Chartered Bank head of Shipping Finance Nigel Anton, who said that his bank was highly committed to OBOR.

Fresh challenges also exist in industry fundamentals.

Tonnage oversupply and yard overcapacity certainly remain a big headache.  But more importantly than ever in today’s market are structural changes in the demand side, such as China’s new normal of moderate growth, which is affecting all shipping sectors and perhaps has distorted the traditional shipping cyclicality, according to Henriette Brent-Petersen, global Head of shipping and offshore research at DVB Bank.

Although the factors and impact vary in different sectors, Ms Brent-Petersen argues that shipping in general is temporarily out of cyclicality and it will return only when the belief in it stops.

Micro picture

From a more micro perspective, challenges remain.

On the regulatory front, new rules set for green shipping are doubtless good for the environment.  But for shipowners, concerns have mounted over the heavy financial burden they are facing in order comply.

Moore Stephens partner Richard Greiner estimates the total amount of funds needed for owners to install a ballast water treatment system is between $75bn and $100bn, with some even predicting higher figures.

The IMO’s global 0.5% sulphur cap is no cheaper as retrofitting an existing ship with scrubbers costs between $2m and $5m.  That has resulted in owners preferring to use cleaner fuel, according to Mr Berglund, although prices for distillate fuel oil are currently more than 50% higher than for heavy bunker oil.

At the same time, shipping companies are also facing a conundrum of whether bigger is more beautiful amid such dismal market conditions.

To Robbert van Trooijen, head of Asia Pacific Region for Maersk, consolidation is “a good thing”, which can “get rid of some of the fragmental nature of the industry”.

However, it appears to be a tall order for the bulker sector due to its tramping nature, according to Mr Hashim and Mr Berglund.

As a financier, Bill Guo, executive director of shipping at ICBC Financial Leasing adores consolidation.  Not only does it make the freight market less volatile, but also the lessor prefers to do deals with bigger clients with better credibility.

Mr Guo also notes the changing pattern in the ship financing:  individual owners used to get loans from a bank consortium, especially for a big project, whereas now they are often dealing with a single lessor for each financing deal.

Mr Greiner says that as financing gets more and more difficult, owners now have to listen more carefully to the needs of their lenders.

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Source: Lloyd’s List