FROM CHAIRMAN



FINALLY !


The most significant step towards a healthier market was arguably the decline in global shipbuilding capacity




In our 2015 review we called for ‘elimination’ not ‘consolidation’ – and it is finally happening. Hanjin Shipping capped a long list of competitors ‘rationalised’, and we counted more than 15 liquidations or closures in 2016 compared to just a handful in 2015 when restructuring was the name of the game. Meanwhile vessel ordering activity was the lowest since 2009 as owners retrenched.



However, the most significant and important step towards a healthier market was arguably the decline in global shipbuilding capacity, from an estimated 1,150 active yards in 2000 to around 630 yards in 2016. This represents a 35% decline to an estimated 45 million Compensated Gross Tons (CGT). The trend continues with an estimated 3 million CGT set to disappear in 2017.

BRS would argue that effective yard capacity is much lower, however, as only savvy well-experienced owners would venture new orders today, and they know the danger of making down payments to bankrupt or non-performing yards. The effective supply of reliable yard capacity is clearly being rationalised. BRS research leads us to believe that up to 50% of South Korean capacity, 20-30% of Chinese and 10-20% of Japanese capacity will disappear by 2018.

Another key rationalisation is in the maritime financial sector, both in the public and private finance markets. The supply has shrunk dramatically and most of the remaining financial institutions are concentrating on saving themselves rather than helping their clients buy more vessels. Many have announced their exit from shipping fi nance, or the sale (at serious discounts) of their portfolios. The barriers to entry have gotten steeper and it will lead to less supply of tonnage over the coming years.

Much more expensive financing is, of course, available through the capital markets but forecasted returns have served, at least this year, to restrict these sources. Debt and equity capital markets raised around $5 billion for maritime transport in 2016, versus more than $10 billion in 2015. New banking regulations with Basle 3 ratios and compliance obligations have essentially made access to funds impossible unless, ironically, you don’t need them. This is a huge brake on supply which will continue over the foreseeable future.

Meanwhile, the recent flood of Chinese capital seems to be aimed at re-financing existing fl eets. The Chinese are taking advantage of today’s prices and using their foreign currency surpluses to invest heavily in the key component of their party's goal of creating "one belt, one road". There is an element of nationalisation as the Chinese take more and more control of their supply chains. As an example, state-owned ICBC Financial Leasing, which will back the construction of 10 VLOCs for Vale, says it is investing between $3bn to $4bn per year in shipping. Taken together with the other emergent Chinese lenders, this is not far off the total amount provided by the capital markets in 2016.

Speed levels are another complicating factor in the effort to achieve a sustained recovery. Changing operational speeds can have a profound impact on supply. Since January 2015, the standard Capesize fl eet has sped up by 1 knot; this may not sound much but it represents the equivalent of 7% more supply being added to the fl eet (see graph on page 34 of the dry bulk chapter).

The new clean water ballast restrictions coming into force and the ensuing costs are already leading to the elimination of uneconomical vessels. New Sulphur Emission Control Area (SECA) zones and navigational speed limits are also contributing to balancing supply. Traditionally, the supply of carrying capacity has been easier for us to follow than demand, but as we have seen during the course of this year, small adjustments in speed, trades, weather delays, and repair and maintenance times can make for significant shifts in supply-demand balances, highlighted by the freight spikes seen at the end of the year. These are clear indicators to us that the bottom is behind us but it does not mean that there is a sustained recovery in the near future.

Demand in the major bulk and tanker markets has remained strong with some surprises and some evolving trades that have been positive and which should continue to absorb oversupply. Due mainly to environmental pressures but also pricing, imports of the key seaborne steel making commodities (iron ore, coking coal etc, which represent as much as 20% of world seaborne trade) grew, as coal and iron ore mining around the world was rationalised. Despite geopolitical uncertainties, ton miles grew in dry and wet markets. The container and offshore markets have been the worst in class, but it seems they are now also ‘rationalising’ through mergers and bankruptcies. Scrapping and lay up and rationalisation are set to accelerate in these sectors.

On the back of complicated geopolitical trade issues and a growing anti-trade nationalism, the industry is trying to come to terms with disruptive technology that could change supply chains and ‘rationalise’ intermediaries. Logistics companies, major freight buyers, container companies and many newcomers are exploring ways to harness efficiencies with electronic platforms, blockchain, and technology. It will be a complicated few years as the industry works out what is most efficient.

Commodity houses, freight traders and brokers, all experts in anticipating inefficiencies, will be under pressure to find other revenue models in order to participate in the steady growth of world trade and the corresponding world fleet. Tim Jones
Chairman