The world’s most famous shipping analyst presents Splash readers with a compelling picture of the challenges facing the maritime industry today.
It looks as though we have passed the trough of one of the longest cycles ever, certainly in the dry bulk market. But it’s more than that. We all have a feeling that things are changing today and that in some way this will affect the maritime industry. Those who have managed their way through the cycle with decent balance sheets, can start to think about what happens next. It might be “business as usual”, but personally I don’t think so. The world is moving along and we need to look carefully at where our customers, the 200+ nations around the world who transport cargo, will be going and what they want from sea transport, and what restrictions there will be.
This is such a big topic let’s start by looking at how the maritime industry has dealt with change in the past and the way investment and corporate structures changed as a result.
The world in 1966 – understanding the nature of change
A half century ago the world was recognisable but different. Footballers still kicked a ball about but football authorities when England won the World Cup 1966 were very different from FIFA of today. People dressed differently; and manufactures promoted their cars differently. A mix of evolution, fashion and revolution.
In 1966 the liner industry was on the verge of a revolution. Blue Funnel, the Maersk of its day, launched its Priam class multideck liners in 1966. They represented 100 years of successful evolution of the liner business. And they were dinosaurs. But it wasn’t the ships were wrong it was the system. The liner companies struggled with the change and few survived.
Tramp ships faced the same demise. They were big business in 1966, but it was the end of the road.
Another business which had operated successfully for generations was about to disappear. The tramp companies had to decide what to do next. Running big tankers and bulkers on the spot market seemed an impossible goal.
Malcom Maclean kick started the new system in 1966. Containers were to dominate liner transport, but it wasn’t obvious to the liner companies of the day. There were so many practical problems. How did you deal with the bulk cargoes which liners carried; what about cars, forest products ; what would they do with the multipurpose ships and who would pay for containers and repositioning? Worse still the container sounded like a commodity! Pallet ships, barge carriers, roro ships were all promoted as the way forward. But the simple solution of containerisation general cargo and specialised ships won in the end.
For many companies it proved too difficult to make the jump from the old system to the new system.
Most disappeared. Hamburg Sud, one of the few survivors, has just been gobbled up by Maersk (at the time Mr Moeller was keen on pallet ships).
In the bulk business the first VLCC went into service in 1966. It was ‘industrial shipping’. Cargo owners either purchased their own ships, or time chartered them from independents. The resulting transport system was awesomely efficient and in 1973 85% of the tanker fleet was on time charter. Professor Zenon S Zannetos, the MIT-based shipping guru pronounced in 1971 that “tank ship ownership is one of the safest businesses I know because the ships are all on timecharter”. But industrial shipping was just a phase as the market moved from fleets of small T2 tankers to very big ones. In the 1970s the cargo owners stopped the time charters, leaving bulk shipping investors to operate on the spot market and raise finance without the security of time charters. It’s been a juggling act. And it’s useful to remind ourselves that today’s spot market is probably just another phase in the centuries long evolution of sea transport.
The maritime transport system challenge in 2017
What’s happening today reminds me of the 1960s. Once again the industry is concentrating on ships to solve its problems, but ships are not really the issue. Liner companies are trying to solve their cost problems by building 20,000 teu vessels, but unfortunately they are heading into diminishing returns and do not produce the needed economic improvements. And in the bulk shipping sector the focus on ecoships and the EDI is up against mature technology with little to offer. In summary, the industry needs to accept that today’s problems will not be solved by better ships, what’s needed is a better transport system. The challenge is to change a transport system which, using a 19th-century neoclassical model, is a poor fit for the needs of the 21st century transport market.
I will cover five topics below. Firstly the cycles are getting bigger and increasingly problematic for investors trying to manage a capital intensive industry. Secondly sea trade growth is slowing, and we are also seeing a regional trade change, away from the OECD towards the non-OECD countries.
Thirdly the shipyard capacity problem is once again hanging over the industry and acerbating the shipping cycle problem. Fourthly the transport system must find a way to deal with climate change.
Fifthly naval architecture and engineering technology are mature, but shipping is uniquely well placed to put the digital revolution to work.
The shipping cycle problem
The question we have to discuss here is not just when the market is going to recover – we know that will happen eventually, maybe in another three years. The key issue is whether today’s business run by shipping cycles (and that seems to include containers as much as bulk cargo) is the right business model for providing tomorrow sea transport services.
Cycles over the last 25 years have created a very skewed business environment. The Clarksea index shows that the 16 of the last 23 years the market has been trending below average earnings.
Let’s take a closer look. The supramax market since 1993 shows average earnings of $14,330 per day, and the required rate to cover operating expenses, depreciation and interest has been $10,205 a day. For 15 of the 23 years the average earnings were below the required rate. This is not the sort of climate in which to run a sophisticated service business! Investors did get a 27% margin, but it all came in a few years. It raises lots of issues.
The part played by speculative investment in creating the situation is clear. Heavy ordering averaging 15m dwt has continued through the years since the credit crisis.
Sea trade patterns are changing
World industry has grown more slowly since 2011 and that has contributed to slow the growth of trade. The 5% growth trend of the last decade has halved to only 2.6% growth over the last couple of years.
The growth trend of the last 50 years has averaged 3% per annum, but with a few deviations from trend, which were the source of the booms and busts in the shipping industry. (Or at least one source).
But regional seaborne imports today are unbalanced and changing fast. The OECD imports today are about 3.5 tonnes per capita, whilst in the non-OECD only imports 1 tonne per capita. And the multinationals that organised industrial shipping 50 years ago are in retreat as the regional pattern changes and their trading partners become more astute.
Back in 1966 the OECD controlled 75% of seaborne imports. Today that has halved to 37% and is going down at a rate of 1% a year. The potential growth area of the future is Asia-Pacific.
The recent trade negotiations are of crucial importance. This is an ideal maritime
region, and many of the economies are ready to break ranks and develop into substantial economic units.
Today seaborne imports of around 10.5bn tonnes. If the 3% growth trend continues, by 2066 trade will be 46bn tonnes. A massive market for shipping. But with the pressure of climate change and the trend is towards protectionism, another scenario is possible.
Shipbuilding capacity management
To stabilise the business, we need a better capacity management system for the shipyards.
Shipbuilding is a long-running battlefield, with China the dominant new entrant today. But the shipbuilders have problems.
During the boom of the 2000s shipyards built up output from 50m dwt per annum to 163m dwt per annum. More than half the growth came from new facilities. Today they have cut back to 100m dwt per annum and under a great deal of pressure. This pressure results and burdens which sustains surplus capacity and undermines the balance sheets of shipowners.
Is it possible to deal with this problem? The only solution I can see is for cargo owners to re-enter the business, as they did in the 1950s, and provide a greater cargo discipline to the planning of transport capacity.
Climate change: shipping needs answers
I don’t want to spend too much time on this, but it must play a part in the shipping industry’s business in future, unless there is a massive change of heart politically. Shipping’s problem is that it is a traditional technology – and marine engineering and naval architecture – have little to offer. And new fuels like LNG do not really address the carbon problem. My feeling is that information and management is the only route to go down – more of which is coming up below.
Digital shipping – the only solution in sight
Historically each ship has been a separate business unit for most companies. The master ran the ship and shore-based staff had only a limited ability to participate in day-to-day operations.
The new digital technology, which includes satellites and telematics devices, plus information management systems looks as though it may well finally break down this barrier. 10 years ago the technology wasn’t really veritable. Today it’s there perhaps 75%, and there’s every indication that it’s going to get better and better over the next decade or two. The problem is that the business model running through shipping cycles is not a suitable platform for introducing this new technology.
There are three ways to change this business model. Firstly, smart ships; secondly smart fleets using the integrated management systems, as used, for example, by the car industry. And thirdly smart global logistics; which integrate door-to-door transport. Something we were promised in the 1960s, but companies had no hope of implementing.
The basic technology is there but it needs an enormous cultural change in the industry to put it to work. Telematics sensors are the easy part – a big container ship has over 2,000 of them, but most of the information is rarely used.
The smart ship uses this technology to manage the operation and maintenance of any sophisticated systems onboard a merchant ship. I’m convinced that once companies really get into this, they will be astonished at how great the performance improvement really is.
The smart fleet management moves from a set of independent small business units, run by a team of 15 or 20 people to a large integrated company, working together to transport cargo. At the heart of this is the ability to collect, process and make available the information needed to make 1,000 better decisions.
The smart global network takes us into even more challenging tech territory where shipping has to integrate with other industries.
Tomorrow’s business model will empower people
Ultimately business is about putting people to work more effectively in achieving corporate goals. But don’t believe any of the things I’ve discussed are going to happen quickly. Malcom MacLean took the first big step in 1966 and it was really 30 to 40 years before the industry developed a global system. And they still haven’t finished the job. But it can deal with the issues of climate change and it can, I believe, take the performance of the business both financially and in terms of customer service, to a level never before anticipated.
Hi Martin,
Thanks for your article. I think one of the most damaging effects to the shipping market over the last 30 years has been an ever increasing pressure on reducing the trading age of vessels. Ships have gone from a 30 year trading life to almost half that today. This places an overburden on order books and ultimately an oversupply of tonnage. Ships need to be built to last, well maintained and staffed by well paid professionals. We need to start utilising the vessels full design life to enable owners and banks to recover their investments. Brgds Harald Svensen
It also completely changes the financial models used by banks in assessing residual risk / balloon refinancing, which in turn leads to lower debt: equity ratios. These things all play together.
The reduction in ship life expectancy is related to the reduction in the cost of newbuildings in “real terms”, as opposed to monetary terms. I have commented here before now on the reduction in man hours needed to build a ship, and on the globalisation of component supply, and on the reduction in yard margins, which has had the effect of making the purchasing manager the most important man in the shipyard from the point of view of the bottom line, as whatever can be made from component purchasing had become the yard’s main profit centre. These three things have cut the cost of a ship in real terms, and with that goes the urge to maintain a valuable asset and the urge to spend more in the yard to make sure that the ship will be easy to maintain. So – cheaper ships with shorter lives.
I understand Andrew’s point and see the (financial) relationship clearly between a “cheaply built ship” and a short life span. Frankly, they are one and the same. “Cheap” does not last. Mr. Svensen’s comments ring much louder with me. I am admittedly biased towards the long life ship, since I am in a pilot group that actually handles many ‘older’ American built hulls everyday (35-40 years old) … and then some real CHEAP Chinese built ships that are literally on their maiden voyage and are already rusting and falling apart. Gentlemen, there must be some sane middle ground, that benefits both owner and yard. But this is an issue best dealt with nation to nation, not one size fits all. For the record (please save all the attacks about “Jones Act” issues) my life experience as a ship’s officer and now a pilot is that the US Flag hulls built in US yards have lasted as long as they have simply because they are built exceptionally well. Most of the US built ships that I handle have hulls that are still solid performing platforms, that have many years left in them. THAT is true because the owners have paid to maintain them well and their crews have been given the ‘ability’ to care for them. This is not my ‘opinion’ but the statements from dozens of Masters and C/E’s over my career. Also regulatory requirements and inspections here are set at a higher bar i believe.
For the record, I have worked aboard many fantastic Japanese and South Korean ships that were well thought out and built.
I would also question the financial return on a 40 year old ship. One must think that these ships have long since paid for themselves over and over again. In fact, isn’t that part of the equation? I have always assumed that after a certain time frame in the life of the ship, it’s construction has been paid off and the owner is enjoying greater returns…after maintenance and operation of course. But I digress and admittedly, this is NOT my area of expertise.
One other point about ‘cheap ships’ that I have learned. It seems to me that a cheaply built ship with an expected short life span is operated by owners that have little desire to re-invest in maintenance. This fact underscored by the known end of life of the ship. So owners put less into maintenance…only that which is required to get them through the next “inspection” to keep her running. Thus, it ends up being a self fulfilling prophecy. The cheap ship, maintained poorly, has a short life more from reality of operation, not be design or intent. It simply comes to a point after 8 to 10 years where it is costing the owner more to maintain than he desires, so opts to build a new ship(?). Meanwhile, the ship is shuffled off to a new owner, a less reputable flag state, and a new coat of paint thrown on the hull with a new name and she enjoys a few more years in the second hand market, struggling to get by and turn a profit in some lesser known trades. These ships are the ones that pose the greatest problems for everyone. I’ve handled too many of them. Most have had no business being afloat and rightfully deserve a one way trip to the bone yard.
Otherwise, Stopford has a great article here and I understand and surprisingly agree with much he has stated here. Good read!! Great contribution to the issues at hand.
I bet everyone reads this! The Thoughts of Doctor Stopford – and not behind a paywall!
Martin’s long view is very much worth pondering. These secular changes are associated with others, such as the spectacular fall in the global fertility rate over the same time – from an era when most women bore five children to today’s average of two and a half children, and the spectacular reduction in poverty over the same time.
“Digital shipping – the only solution in sight”
There are many solutions emerging and with the right commitment and support we would have zero carbon new builds before 2023. Digital Shipping can not even be called a solution, but only an option for marginal improvements.
I will certainly agree with the thesis of having longer lasting ships to make the business sustainable for all stakeholders as well as to protect the environment ( building a ship negatively contributes to the environment, and the best ship recycling is to buy a second hand ship for further trading!).
I will also fully agree with Martin’s thesis that in a world under accelerating shift, the business model of the industry must change.
Although shipping, as already he wrote above, is a slow, monolithic industry, with very little technological disruptions (standard designs replacing custom ships, block building replacing keel and skin building, fuel change from sail to coal to oil and now may be to other fuels, etc), i think that the disruption will come outside the industry. We are witnessing a tremendous and global shift in the labour market by AI, internet of things, robots etc. Investment bankers loose their jobs to algorithms, barristas loose their jobs to robot arms and ckever coffee machines, and bank branches are filled with unfriendly screens and cokd slots.
It will be no wonder that trade protectionism that is raising now, will lead to the development of fully robotised factories for finished goods and the business model of containers moving TVs from China to the West will cease to work. The production will be indifferent of the local human labour cost.
Likewise, technology can track VLCCs, track demand for crude and supply for crude, can automatically perform voyage calculations and can fix ships on a perfectly competitive manner, leading to the death of the broker. And even may replace the shipowner who bases his decisions on his gut feeling with an algorithm who manages the funds of silent investors.
And ships may receive spares by 3D printing on board where a skeleton crew will be just to monitor and intervene in emergency, whilst the ship will be moving as a drone and port captains will take look from time to time from their office or home.
SciFi? May be, but lately i started believing that i must rule out nothing
Brgds,
Kostis
Chinese shipyards because of leaner orders book do face either closing or being more competitive on international market. The point is that their learning curve is high and they have a good chance to outpace on quality issues other strong players like SKOREA pretty soon. That is a trend I can observe personally doing inspection works on both markets right now. I believe the chinese yards will be ready and probably major players for so called smart ships projects as soon as the new orders will appear. And their standards will depend rather on the owner and class work then on cost of labor.
I have spent 15 years in digitising the Fixed Income markets.
Similar setup, buyers/sellers/brokers. Asymmetrical information flow. Illiquidity issues when transacting in size. Game theory.
Would be interesting to apply what I have learnt to shipping in fact!
The liner business first abrogated customer contact to consolidators and now more recently the large players are selling space on Ali Baba. To my mind Liner companies must examine process and cost of sale only lean and efficient empowered operators are going to survive
In the dry bulk segment too scale. closeness to customer, cost effective assets, and paper trade offsets all used complimentarily can provide a successful strategy ( Look at Oldendorff Carriers against the Market quoted Dry bulk carriers to compare success and performance).
There is as always continued hope for organizations that don’t do what every one else is doing and to that extent I don’t agree that simply smart digital technology can swing the case for shipping to be profitable