Home' Ships and Shipping : February 2011 Contents Nazery Khalid, Senior Fellow at the Maritime Institute of Malaysia
shares his outlook on the shipping industry in 2011
The year of shipping laboriously
2010 proved to be a year that provided a little bit of respite to the
shipping industry. Battered by the devastating impact of the
global financial crisis and credit crunch triggered by the crisis on
Wall Street in 2008, players in the industry enjoyed some
breathing space when the global economy rebounded.
Given that most of the world’s trade is carried by seaborne
transport, the spillover effect from the economic recovery enjoyed
by the shipping industry last year should not come as a surprise.
However, the modicum of recovery in global trade and economy
was at best mediocre and may be further halted by several factors
which will have an impact on global trade and hence the shipping
industry. The economic woes of the US, the projection of slower
growth in China, the Eurozone crisis and overall uncertainty over
the prospect of recovery of the world economy may dampen
recovery in the shipping industry.
Shipping is essentially a service which is demand-derived. Given
that the demand for shipping tonnage and seaborne transportation
depends on the demand for the very products and commodities
they carry, the shipping industry is subject to the influence of
factors determining the demand for the world’s goods. As such,
the attention of the industry players will be on the economic
policies and developments of countries that will exert influence on
global economic and trade performance.
The spectre of huge new tonnage coming into the market in
trades such as container and dry bulk will also test the resolve of
players in these trades. The legacy of ‘binge ordering’ of
newbuildings of the pre-global recession and credit crunch period
will continue to dog the industry.
Despite the spate of cancellations of orders by many owners
when the economic downturn hit, there is still a considerable
amount of new shipping capacity coming on stream in 2011. This
will come at a time when world trade and economic recovery is
still tentative at best. At the rate things are going, it will take some
time for the demand for cargoes in key trades to match the huge
supply of vessels available to carry them.
On the economic radar
The quantitative easing (QE) measures of major economies will
also have a telling influence on world trade, hence also on the
shipping industry. Measures taken by China to slow down its
breakneck economic growth to prevent overheating and to ensure
more sustainable long-term growth will inevitably cause a ripple
effect in the global trade and economy.
China provided much of the momentum that generated strong
Asian volumes that helped shipping lines, especially in the box trade,
to generate profits and high margins last year. Likewise, efforts
undertaken by the US, the world’s biggest economy and consumer
nation, to steer its economy from inflation and to boost employment,
private consumption and capital expenditure, will also be influential.
The QE measures in these countries and elsewhere will affect
industrial production, trade finance, consumption patterns and
business and consumer confidence; which in turn will influence
global trade and the shipping industry. Trans-Pacific trade, in
which most of the giant container vessels are deployed, may come
under pressure should US economic woes continue and China’s
economic growth juggernaut come to a halt.
The Eurozone crisis will also be on the radar screen of shipping
industry players. Should the woes of Greece and Ireland trigger a
contagion effect to countries like Spain and Portugal, the impact
on trade and hence shipping would be considerable – especially on
trades such as Asia-Europe and Asia-Mediterranean which have
provided some silver lining to players amid the dark clouds
hovering over the global shipping industry.
The support from investors and financial institutions towards
the shipping sector will be equally crucial. Amid uncertainties in
the global economy and tight credit control, investors and lenders
can be expected to be extra prudent in making investment
decisions, especially in capital-intensive sectors such as shipping.
Should investors and banks hold back on financing trade and
shipowners, it would put paid to the recovery in global trade and
the shipping industry.
Oil’s not well
High oil prices will also pose another challenge to the shipping
industry. In an operating environment of low freight rates and
thin margins, players in the industry will have to grapple with
high operating costs arising from persistently high oil prices.
Foremost in their minds will be how to reduce the operational
costs of deploying their vessels. They will have to plan their routes
carefully to maximise vessel loads and employ strategies like slow
steaming, weather routing, slot sharing and route configuration to
minimise fuel consumption.
High oil prices will also trigger high costs all along the
maritime supply chain in activities such as logistics services,
warehousing and cargo distribution. Take the logistics sector:
although players have recorded profits amid the global trade
recovery, their margins will come under pressure from rising fuel
costs. Rising transport costs as a result of higher fuel costs will
offset profits earned from higher volumes emanating from the
global economic recovery.
The growing concern over climate change will test the resolve
of shipping industry players. As the industry, through the
leadership of the International Maritime Organisation (IMO), steps
up efforts to reduce its carbon emissions, significant changes can
be expected in the way that industry participants plan, invest and
operate. It would be interesting to see if they would abide by IMO’s
agenda to keep the oceans clean and to spearhead efforts to reduce
the carbon footprint of shipping.
Doing so will come at a considerable cost and will challenge the
status quo in the industry. It will also demand that many
traditional set-ups and ways of doing things in the industry be
reconfigured, amid an already tough operating environment.
Initiatives to bolster security along the maritime supply chain
will also be a key issue. Greater emphasis on security will result
in more checks, higher costs, more time and less efficiency in
the flow of cargoes along the chain. Security of ships in key
trade lanes such as the Gulf of Aden will continue to be a matter
of paramount concern. Should the risk to crews, ships and
cargoes traversing the Gulf of Aden (which has been dogged
with a spate of pirate attacks in recent years) remain high, this
will drive up the insurance cost of transporting goods through
Barring dramatic shifts in the order of things, the recovery theme
of 2010 should continue into 2011. However, all eyes will be on the
factors discussed in forecasting the direction of the shipping industry
in the first year of the second decade of the new millennium.
This is the Year of the Rabbit in the Chinese calendar. It will be
interesting to see if the year will turn out to be a productive one
for the shipping industry to match the industriousness of the
animal associated with 2011!
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