Choppy outlook for shipping

The shipping sector is set to go through some rough waters in the year ahead.
Transporting some 90% of the world’s trade by volume, the shipping sector provides a reliable barometer on the health of global trade and economy.
Thus, the sector is heavily influenced by the drumbeats of world trade and given that the global economy continues to be in rough waters, the shipping industry is expected to register slower growth this year.
Since the global economy started to slump, triggered by the Wall Street crisis in 2008, the shipping industry has taken a big hit as demand for goods and services dropped.
Although there have been flashes of rebounds, such as in the container and dry bulk trades, they have not occurred on a sustained basis for pundits to be convinced that the shipping sector is well and truly on a path of recovery.
It would take a betting person to wager a bet on the shipping sector to turn the corner in the next 12 months.
The world economy is expected to grow very moderately in 2012.
World Bank has trimmed down its initial forecast on global economic growth in 2012 from 2.7% to 1.9%. This revision was made on the back of the eurozone debt crisis which shows no sign of a resolution, despite the best attempts by German Chancellor Angela Merkel and French President Nicolas Sarkozy to keep the euro intact and prevent the eurozone as a unified fiscal entity from collapsing.
Throw in other potential spanners in the work of the global economic recovery such as recession in the United States, soft landing of China’s economy, prolonged crisis in the Middle East from the Arab Uprising, and tension in the Straits of Hormuz and South China Sea, it is hard to be bullish about the prospect of the global economy roaring and breathing fire in the Year of the Dragon.
Forecast from renowned shipping brokers and research houses point to slower growth in the year ahead for the shipping sector.
In the dry bulk cargo sector, trade growth is expected to moderate from 5% in 2011 to 3% in 2012, no thanks to expected slower demand of iron ore from China.
Should China’s economy grow slower than expected (Swiss bank UBS recently pared down its forecast of China’s GDP growth in 2012 from 8.3% to 8%), the dry bulk sector would take a bigger hit. December 2011 figures for China’s imports showed slower growth at 11.8%, the lowest in two years.
It is not just China’s economy that will be under scrutiny in 2012. World Bank has suggested that the world economy will grow this year largely on the back of the performance of developing countries, as matured economies such as the United States, the eurozone and Japan reel from the global recession and financial crises. Should the developing countries, especially the economies of the BRIC group of nations (Brazil, Russia, India, China) grow slower than expected, even the modest 1.9% global economic growth forecast would prove hard to attain.
Turbulence ahead
Amid the bleak statistics, the shipping sector will have to bear the brunt of a misfiring world economy and global trade slump.
A discouraging sign for shipping punters is that ship owners have trimmed down their fleet size and this downsizing of capacity is expected to continue well into 2012. Some owners have cancelled orders from yards on newbuildings and some have even sent newly completed ships straight for scrapping . These areas are as clear as a sign of distress can get.
Such pessimism was observed in 2011 in several shipping segments.
Vale, the world’s largest iron ore producer, was reported to plan to cancel 19 of the 35 very large ore carriers (VLOC) it has ordered.
The Brazilian giant has decided that taking delivery of these behemoths, each with a whopping capacity of 400,000 dwt (deadweight tonnages), would not be cost effective in these times of uncertainty.
These vessels, meant to carry coal from South America to China, have found themselves to be unemployed thus far.
It was also reported that shipyards in South Korea, the world’s largest shipbuidling nation in terms of orderbook, suffers cancellation of orders for 24 ocean-going vessels in various segments worth US$3bil.
The container trade has been feeling the brunt of the global recession more than other sectors in shipping. Since the economic downturn began in earnest in 2008, the trade has gone through a slump said to be the worst since the introduction of container shipping. Although there have been periods of rebounds, such as in 2010 when container players made impressive profits, such recovery proved to be a flash in the pan.
In August 2011, the average freight rates of a unit of TEU (twenty-foot equivalent units) container from Shanghai to Western Europe was US$830 seems like a major improvement from the days when container shipping companies were charging zero freight rates in 2009 while trade dropped sharply, it is still a pale shadow from the average freight rate of US$2,170 in March 2011 for that route.
Compounding the situation is the entry of huge new capacity in global shipping from orders placed several years ago during better economic times.
Alphaliner predicted that the global container shipping trade will add 1.28 million TEU of new capacity in 2012, in contrast to the 6.5% growth in the demand for container ships.
With the less-than-rosy outlook for world trade, the box trade is not expected to turn glorious anytime soon this year.
The tanker trade is also expected to be depressed, continuing from where it left off in 2011. Last year, owners of VLCC (very large crude carriers) faced a tough operating environment as demand for crude oil dropped in tandem with lower global demand and disruption of production in Libya.
The International Energy Agency (IEA) trimmed its forecast of global oil demand in 2012 to 90.3 million barrels per day (bpd) in 2012 (89 million bpd in 2011).
Imagine, the average charter rate of VLCC between the Gulf and Japan was US$17,000 in 2011 while the average cost of operating such vessels was RM50,000. Compare this with 2007 when the charter rate for VLCC reached as high as US$300,000!
Amid the bleak outlook for the shipping industry, there are several silver linings. The gas trade is expected to register a strong performance in 2012.
Bloomberg forecast that global LNG consumption will grow 7.5% this year to 258 million metric tonnes on the back of rising global demand for alternative and green energy and increasing production.
Last year, charter rates for LNG (liquefied natural gas) were hovering at decent levels. Maersk, the giant Danish shipping company, was reported to charter its LNG tanker to BP at the rate of US$140,000 a day, while an LNG tanker owned by Sweden’s Stena was reported to be chartered out at US$130,000 a day.
Such strong rates are expected to prevail this year, in line with the bullish prospect in the trade and projected growing demand for the commodity, especially from Asia.
Long term view
A very challenging operating environment awaits shipping companies in 2012 as the world economy continues to reel from the recession and financial and debt crises hitting major economies.
However, the shipping industry needs to be viewed using long-term lens to appreciate the bright spots within it. Those who defy the trend by investing in fleet and improving and diversifying their service offerings during these challenging times will stand to be the first to gain when the world economy rebounds and trade volumes pick up. Peak and troughs come and go in the shipping trades, but the resilient, patient and perceptive players always stay the course and outlast the short-term rough weather.
When the going gets tough, the tough goes sailing!

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