Understanding the power structure in the shipping industry

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Dr-R.-Vis-CEO-of-Viswa-Lab1.jpgOn 90,000 ships, over 900,000 officers work on the Navigation and Engineering side.  More than 30,000 technical staff ashore keeps running these 90,000 ships.  While the staff ashore may have a good idea of how the shipping industry runs, who are the stakeholders and what is the interaction between them, most of the staff on the ships and even many in the office may not know and may not even bother to know this.  This could be the most fundamental education one should have in the shipping industry.

Ships are assets. Ship Owners are those who own the ships in full or own a controlling interest with the rest held by banks and financing institutions.  The assets must get the business which means get cargo to transport. The well-known fact is that 90% of all the goods carried are carried on ships.  Every time a global business goes up by saying 1%, it is claimed that there is an additional requirement of 1,000 to 1,500 ships.

So ships need cargo.  This is where the charterers come in to secure the cargo and charter the ships to carry them.  They have no interest in the asset that is the ship.  They are required to fill up the ship’s tanks with bunker fuel.  Obviously they are not going to buy the highest quality fuel since protecting the asset is not their job.

Then come the ship managers who are hired by the ship owners to recruit the staff, run the ships and engines in the most efficient manner so that the operating costs are held to a minimum (with the exception of bunker fuel which is supplied by the charterer).

While the above is the standard structure of the shipping industry, new entities and new players have entered this industry.  These are equity investing companies which anticipate what type of ships will be needed in the market in the next 1/2/3 years and they place orders on shipyards by paying just the advance amount.  As the demand for a certain type of vessel increases they are able to sell these vessels with a premium and make their margins.  The equity industry is very busy ordering ships, acquiring ships and leverages this position to make a spot profit and exist.  They have no vested interest in the industry and its long-term stability, operational efficiency etc.

While they have every right to do business the way they choose, the consequence seems to be that more ships are available than the cargo available thereby ensuring that the freight rates are always depressed. This means that no shipping company will make a handsome profit which will incentivize them to stay in the shipping industry long term and benefit from the cycles in the freight rates.  Interestingly, the freight rates and the bunker fuel prices are treated exactly like stock market indices and the equity investors take advantage of the volatility.

Given this scenario what will happen in the future? It is possible that strong shipping alignments will take place cornering shipping route segments and ensuring that the freight rates are maintained at a profitable level.  The benefits of volatility are harvested by the Equity investors and ship owning companies fail to benefit from the volatility.  It does not appear too very rosy or promising.  OPM (Other People’s Money) will start controlling the industry using ship managers who have no capital but have to provide the labor needed in the industry.

While the above covers the structure of the industry, there are several regulating agencies such as IMO, Classification Societies, ISO, CIMAC etc. who control various aspects such as safety, security and health and ship staff welfare.  This will be covered in a separate blog.

 

2 COMMENTS

  1. Very good information for a common man to understand how the Shipping growth is linked to Global economy is elated to

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