The dry bulk industry would be foolish to put its faith into proclamations of a sustained recovery
At London International Shipping Week 2017 a group of senior executives at global bulk shipowning companies injected a dose of realism into the hype that a sustained recovery is all but guaranteed.
Speaking at a panel discussion concerning the dry bulk sector at the 10th Annual Capital Link Shipping, Marine Services and Offshore Forum held during the week, Jens Ismar, chief executive of Western Bulk, said: “It’s a bit scary, actually, sitting here and everybody kind of agrees that we’re in for a good run going forward. [But] you really need to ask yourselves what’s the black swan because the black swan always pops up when you least expect it.”
Andreas Sohmen-Pao, chairman at BW Group, added his word of caution, noting that while there is a lot to be optimistic about on the future of shipping, the industry needs to be mindful of the risks. “Too often,” he said, “we are swinging from euphoria to despair. Demand growth is very uninspiring and too much depends on China.”
There is, he added, a “good chance” that China will slow down and currently there is no other country that could replace it in terms of shipping demand.
A lack of clarity on regulation remains an issue
And as demand growth has slowed, ship supply has held at historically high levels. “We have seen a maybe halving of shipyard capacity since the peak, but it grew by four times to get there in the first place,” said Mr Sohmen-Pao. He added that the yard capacity necessary for the world fleet to grow in line with demand would only be about half of the current capacity.
“If you take where we are today and assume the yards work at 70% capacity, we will have double what we need to meet current demand rates for shipping. Putting this supply and demand together, I think the world will remain oversupplied with ships for some time to come yet.”
That said, some hopes were pinned onto incoming regulations. It was noted that ship operators seem to have reached a begrudging acceptance of new legislation, not least because there is a growing realisation that a stricter regulatory environment will force some owners out of the market. Herman Billung, chief executive of Songa Bulk, thought that the International Maritime Organization’s (IMO’s) low-sulphur fuel requirement for vessels – which will come into force from the start of 2020 – would lead to an increase in ship recycling. Additionally, Albert Stein, managing director at AlixPartners, noted that shipowners who stick with the industry, despite the new regulations, will reap benefits.
However, a lack of clarity on regulation remains an issue. Mark O’Neil, chief executive of Columbia Marlow, saw the continued uncertainty regarding regulation as a “real problem”.
“When you’re asking owners and operators who have all had ten years of extremely low financial rewards, if any, to now spend huge amounts on these latest environmental requirements and there is a lack of clarity, they have to take the worst-case scenario, which will always be the most expensive,” he said. This, he said, is why so many operators put off regulation-related investment until the eleventh hour.
Laura Bugden, risk management consultant, was similarly concerned about the clarity problem with regulation. Discussing ballast water management regulations, Ms Bugden said: “If you are asked to manage a risk that is not just ill-defined, but undefined, you are unlikely to do anything about it. That’s the trend of regulations being thrown at the industry at the moment.
“Shipowners have to manage these risks in bite size chunks, not throw money at it.”
Nick Shaw, shipping group partner at Reed Smith, added: “The cost factor is going to be key. Any owner that is short of cash is not going to commit unless he’s forced to.”
The trend to push back against legislation – for whatever reason – has, however, caused its own problems. “We end up going in cycles and it’s damaging on so many levels,” said Mr Sohmen-Pao. “It kills innovation and technology as there is too much stop and start. You end up with a patchwork of legislation.
“Owners are not seeing that there is a benefit to the industry as a whole. It raises the bar and helps the supply side by getting rid of excess tonnage. If you keep moving the bar you can make sure there is rationalisation,” he said.
However, while regulations were obliquely welcomed, ship operators agreed that they would like to see more cost-benefit analysis from the IMO before any further new regulations are introduced. Without that, ship operators face an uncertain future, where they will again be asked to jump through hoops before any clear and robust guidance is in place.