BIMCO depicts a dry bulk sector in deep crisis with a dwindling need for middle men
The demise of fossil fuels and upcoming environmental regulations are worsening the current crisis in the dry bulk shipping industry, reveals BIMCO.
In its most recent Road to Recovery report, BIMCO says the dry bulk shipping industry has been delivered two enormous blows at a time when it can least afford it.
The first comes from various countries’ will to end the use of fossil fuels, and their closing of coal-fired power plants due to declining political and social acceptability.
While the second comes from the incoming environmental regulations surrounding ballast water, which has required the shipping industry as a whole to invest heavily in equipment.
“Shipbrokers are already facing challenges due mostly to the effects of supply demand imbalance across almost all shipping sectors, and consolidation is only expected to add to their problems.”
As a result, BIMCO predicts that many shipowners will be forced to scrap their ships prematurely.
Although this will have a negative financial impact for many individual owners, it will be a positive move towards rebalancing the supply side of the market and hasten freight rate recovery in general, says BIMCO.
BIMCO predicts that the sector will likely return to profitability in 2019. However, this depends on whether shipowners are able to deliver “zero supply side growth” year-on-year, it says – something that has only been achieved in three of the last 35 years.
The changes brought about with the current multi-year crisis, meanwhile, are likely to have a significant impact on how dry bulk shipping business is conducted in the future, it adds.
Big game players
While the existing business model is set up to service the requirements of the smaller shipowner, BIMCO recognises a number of significant benefits from size and scale for larger shipowning companies moving forward.
“Larger owners will seek to develop long-term direct relationships with major customers without the requirement of an intermediary or broker,” it says. “They will have the resources and capability to deliver creative, flexible and value-adding logistics solutions.
“The larger owners will eventually develop more balanced and trusting long-term relationships with these customers and, as a result, have more power at the negotiating table.”
At the same time, BIMCO says major shipping customers will want to work directly with fewer shipowners, each of which can provide a significant part of their shipping transport requirements.
Subsequently, BIMCO predicts the key stakeholders in large shipowning companies will require a more sophisticated business model with a greater focus on risk management. According to BIMCO, this will be achieved through the availability of better quality information and by putting a charter portfolio strategy in place.
Shipowners will also seek to better control their commercial risk via freight agreements, currency and bunkers hedging and counterpart checking, among more, says BIMCO. Larger owners may wish to reduce risk and capital requirements by operating a fleet of pooled ships alongside their own.
This paints a very different picture to the one we have today.
“It will be a demand-driven industry with most ships purchased against long-term charters by large and sophisticated businesses that are better able to forecast future market demand,” concludes BIMCO.
“This will ensure that supply and demand are much more closely linked in a mature market where large and unforeseen trade fluctuations are rare. Ultimately, this will mean a less cyclical industry where the peaks and troughs are dampened, leading to a steadier and more predictable Return on Capital Employed for the larger companies.”
This does, of course, present a real risk for smaller shipowners, as the business model will become far less attractive over time due to three reasons: finance will not only be harder to find but, as a stand-alone company, small owners will also be unable to participate on the major routes for the major commodity sectors. Thirdly, the large and frequent shipping cycles that made the asset play so profitable in the past will be dampened in intensity and reduced in frequency.
Eliminating the middle man?
According to BIMCO, shipbrokers are already facing challenges due mostly to the effects of supply demand imbalance across almost all shipping sectors, and consolidation is only expected to add to their problems.
As mentioned, consolidation is not only expected to bring with it bigger shipowners in all the major shipping sectors, but also the desire by owners of big dry bulk fleets to deal directly with larger customers for commodities on the major trade routes.
“They will want to own the customer relationship and reduce the cost of doing business by eliminating broking commissions,” says BIMCO. “The larger organisations will have the scale and resources to manage their key customer relationships directly.”
It further speculates: “Maybe these larger owners will also have the resources to deal directly with shipyards and shipbreakers in the future too.”
BIMCO adds that there is pressure from the shipping customers to eliminate brokers from their supply chain, with Vale having recently put in place very long-term Contracts of Affreightment (COAs) with Cosco, China Merchant Group and ICBC for more than 50% of the Brazil-China iron ore trade from 2018. “It is only a matter of time before there will be similar moves to control the Australian iron ore and coking coal trades,” it says.
It may also be difficult for brokers to add value on standard fixtures, says BIMCO, adding that is where digitalisation may gain the first foothold into an otherwise reluctant industry.
“For instance, where a large exporter frequently ships under standard terms to the same discharge port, a digital portal for tenders and offers may facilitate doing business without the assistance of a broker,” it says. “Also, it is possible that the resale of ships and shipbreaking could be handled through online auctions.”
Make or break
While it’s difficult to have an optimistic outlook for dry bulk shipping in the coming years, it’s important to remember that the industry is very much in charge of its own destiny.
Each and every shipowner will need to make tough decisions in the days, months and years ahead to help deliver year-on-year zero supply side growth and, in turn, hasten recovery under a potentially new business model.
“This is where shipowners stop ordering new tonnage, and there are at least as many ships demolished as there are delivered – something that has been achieved in the dry bulk industry just three times in the last 35 years,” says BIMCO.
In addition to resolving the supply situation, BIMCO adds that dry bulk shipowners must face up to the substantial changes needed to their business in “a rapidly evolving macro-economic environment affecting future demand.
“This may well be intimidating for those involve,” it concludes, “and many may choose to take their dwindling capital elsewhere.”