Operators need to stop blaming the shipyards for excess capacity and find a way to exercise restraint in ordering to quash the perennial problem of fleet oversupply.
The shipping industry needs to wake up to a world where excess shipyard capacity is always available and find a way to resist the urge to over order, rather than play the blame game with competitive yards for today’s glut of tonnage.
With all sectors either oversupplied or facing the threat of oversupply, ship operators repeatedly hold shipbuilders accountable for the problem as yards undercut on price to lure in orders.
Speaking recently at SeaAsia, Andreas Sohmen-Pao, chairman of BW Group, said we need to imagine a world where there is excess shipyard capacity forever. “How do we cope with that,” he asked. “Any sector that does well for five minutes will be overwhelmed with tonnage. We saw it in dry bulk, we’re seeing it happen in containers, we’ve seen it happen in LPG and will it be tankers next? There is no corner to hide.”
“Any sector that does well for five minutes will be overwhelmed with tonnage. We saw it in dry bulk, we’re seeing it happen in containers, we’ve seen it happen in LPG and will it be tankers next?” Andreas Sohmen-Pao, BW Group
AP Moller-Maersk Group’s Claus V Hemmingsen agreed that the industry needs to assume that yard capacity will always be available, but this, in his view, could be turned into a positive: “In the short term supply/demand will ruin optimism, but in the long term the efficiencies of shipping will prevail.”
He believed increased capacity will lead to a renewal of the fleet which will pump up the efficiency of shipping and “actually make trade thrive”.
Pacific International Lines’ managing director SS Teo added that while oversupply is there, many operators will still survive. The key to this will be judicious scrapping of slightly younger ships; if done correctly operators will survive in the medium to long term, he said.
Mr Teo added that while Chinese yards have been singled out in the excess capacity blame game, banks also need to take a share of responsibility. “I’ve seen in the last few years that some of the lines that should not have been able to order ships have through some imaginative financing. That’s why we haven’t seen blood on the street. Hopefully we will see more discipline from the shipbuilding and the financing side and hopefully the ship owner will be a bit more responsible when ordering ships.”
China may also inadvertently help the situation through its continuing support of big national yards to the detriment of smaller, private yards. “That should help in the rebalancing of supply and demand,” said Mr Teo.
But Tom Boardley, marine director of Lloyd’s Register, warned that the industry should now be looking beyond China for excess yard capacity. “Japan has become super competitive, but I think the spotlight now is on Korea. In Korea the yards are largely controlled by the banks and with the offshore bonanza truly over that’s where the overcapacity is really most glaring.
“Korea has been a success story for the past 10 years – a bit unexpectedly. The Korean economy has done extremely well with the Won appreciation so I think this is the area to watch.” He believed that China will become less of a problem as it moves towards self-sufficiency, providing orders for its own yards.
The panel – speaking at Sea Asia in Singapore – moved on to discuss oil prices, speculating on when prices might recover and who hurts the most from lower rates.
Precious Shipping managing director, Khalid Hashim hoped that oil prices would stay around $60-70 per barrel long enough to allow the world economy “to come out of this mess”.
“China used to be the mainstay of the dry bulk market but starting this year, iron ore was up a measly 2%, coal was down a massive 40% and steel was just about at the same level as last year. That is really bad news for the dry bulk market,” he said.
Mr Sohmen-Pao said the market needs to “get used to” current pricing: “Most people are saying that we have enough oil now and that at $70 per barrel we will not run short for quite some time to come.”
Mr Teo saw the current oil prices as a return to normal levels, rather than the collapse described by many. “They remained too high for too long and one of the reasons was too much money playing in the paper market.”
A lower oil price has been a particular boon for one sector of shipping: tankers. The reduced price has encouraged more movement of oil as countries stock up reserves, which has been a timely fillip for tanker operators.
With a fleet of 10 VLCCS and 45 product carriers, BW Group has welcomed this move: “Where we see oil price volatility being very good for shipping is that you start to see more arbitrage and more movement in cargoes just because of the price differentials,” said Mr Sohmen-Pao. “The oil price affects different sectors differently. For tankers, it’s been great. Our biggest cost is fuel and it’s come down.”
But there’s a downside to these lower prices as countries that had previously been growing fast supported by high oil revenues – such as in Latin America and Africa – are now suffering under a $60, $70 and even an $80 per barrel oil price.
“That’s definitely visible in the trade patterns and the volumes that we see,” said Mr Hemmingsen. “There’s a lot of potential within these regions but it requires shipping – bulk, tankers, or containers – to be efficient and at a low cost in order for those trades to thrive.”
Mr Hashim added Iran and Russia to the list of countries that are hurting from sub-$60 per barrel crude oil rates. Consequently, he warned that geopolitics could come into play and keep oil rates lower for longer than most people expect.