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.