Uncertain waters for shipping sector

Slow global growth and China's shift to a service economy pose a serious threat to the industry

Shipping companies all over the world are scrambling to stay afloat as the consequences of years of overoptimism catch up with them. Many new vessels that were ordered when business was good are only now coming online, and sit empty as trade continues to slow.

Companies in the industry went on a spending spree more than a decade ago, ordering larger ships based on the assumption of increasing global trade in consumer goods and raw materials - in large part from China but also from developed and developing economies that were enjoying boom times.

Shipbuilders, port operators and container lines were all eager to profit from China's insatiable demand for everything from iron ore to designer shoes.

From 2004 to 2008, exports of cars, machines, construction materials, handbags and food skyrocketed, lifting charter rates along with them. Global trade grew about 6 percent per year. But within two years of the collapse of Lehman Brothers and the onset of the global financial crisis, the trend had taken a sharp turn downward.

Today, the global economy remains sluggish and the economic slowdown in China means that the country is still the largest, though a more moderate, contributor to global growth. Shipowners that bought vessels during the heyday of global trade now have too much space to fill.

"How can it be worse?" says Luo Meifeng, director of the IMC-Frank Tsao Maritime Library and Research& Development Centre at Hong Kong Polytechnic University.

"The whole world economy is bad. Trade is pretty low. Every country is trying to improve through the virtual economy rather than increase production. Nobody wants to buy," says Luo, who is also an associate professor with HKPU's department of logistics and maritime studies.

"The whole world is not in a good situation. It's like the 1930s - nothing new is pushing us forward."

That may sound pessimistic, but it may also be true.

From the 1990s to the global financial crisis, exports only increased, and quite rapidly at that. Trade between countries grew at an average of about 6 percent a year. Most of it was delivered by sea, and two-thirds of global seaborne trade was carried in containers.

But in 2012, growth rates in global trade dropped sharply to 3 percent - half of what they once were. And in 2015, for the first time since the 2008 recession, global GDP grew faster than worldwide container-shipping traffic.

Shifts in manufacturing have also contributed to the shipping industry's decline. Companies are increasingly building factories locally in the markets where products are sold. US giant General Electric, for example, is building factories in Asia to avoid shipping products from the United States.

Exports as a percentage of global GDP dipped from 30.7 percent in 2012 to 29.3 percent in 2015, according to data from the World Bank. That may not sound like a significant change, but global GDP in 2014 was an estimated $77.6 trillion. So even this small drop in the value of trade as a percentage of GDP adds up to over $1 trillion in trade that did not happen. That is a lot of containers not moving.

Meanwhile, China's economy is expected to grow by a little more than 6 percent this year and next, according to the International Monetary Fund - in sharp contrast to its double-digit growth in the past decade.

The country is transforming from an economy based on manufacturing and exports to one that is services oriented.

China is buying less oil, iron ore and other raw materials that had provided an essential push for the growth of emerging economies like Brazil and Russia. The latter two are currently in deep recession. The plunge in oil prices is also affecting Saudi Arabia and other oil exporters like Malaysia.

Countries with less income will import less from other countries. And while other sectors have sought to adjust to this difficult cycle, it has had no mercy on the shipping industry, which was caught at a critical moment, ordering more ships and expanding capacity.

Some companies are undergoing major overhauls of their business structure. Maersk Line, the world's largest container shipping company, plans to make around 4,000 jobs redundant within the next few years.

Merger and acquisition activity is high, such as French container shipping operator CMA CGM's $2.4 billion purchase of Neptune Orient Lines, a global transportation company that was established in 1968 as Singapore's national shipping line. Mitsui OSK Lines, NYK Line and Kawasaki Kisen Kaisha in Japan might also merge under the pressure of their investors.

Such mergers are helping companies stay afloat in this painful period through cost reduction and shared resources. Complex financing structures and low-cost leasing have kept capacity figures artificially high.

But none of these moves solve the problem of overcapacity and a general lack of flexibility to adapt to the changing global economy.

"I don't think there's going to be a big change in the industry as governments are still helping the big (shipping) companies. These big companies are risky because governments always help them. But I think the only way to rebalance the supply and demand now is to throw away old ships," says Yang Dong, assistant professor with HKPU's department of logistics and maritime studies.

Instead of being scrapped, the excess ships are being bought and managed by shipping companies. And there is a continuing list of orders for new construction, with investors harboring unrealistic expectations for double-digit returns.

The high oil prices of a few years ago led shipping companies to order more efficient, energy-saving vessels, even bigger than before. Mediterranean Shipping Company's Olympic series of 20 ultralarge container ships, for example, each have a capacity of 19,200 containers. The idea behind so-called megaships is that they reduce the cost per unit transported.

But few vessels now manage to fill their container slots. This size-based strategy poses a great danger to the already sinking industry, as further increases in surplus capacity in the market will inevitably push shipping rates even lower.

In mid-February 2015, the cost for shipping a container from Shanghai to the US West Coast was $2,265. By late August this year, that price had plummeted nearly 50 percent to $1,153. In early September, rates bounced back up to $1,746 but remain far below the earlier peak, according to the Shanghai Containerized Freight Index.

Ships operating on the main routes, such as those between Asia and Europe, are sailing without full loads. Hamburg Sud, for example, recently transshipped 10 percent fewer containers than a year ago, due to the slower economic growth in China and also the sanctions on Russia and Ukraine.

Some vessels are sitting idle in ports, a business nightmare for shipowners. Expiring charter contracts are either not being renewed or are being renewed at only a fraction of previous rates.

In early February this year, the Baltic Dry Index dropped to less than 300 for the first time in its history. The index measures cargo rates for raw materials and is a key indicator of changes in the global economy.

The index is significantly lower than it was even in 2008, the year of the financial crisis. This year was set for a major recession in the shipping industry right from the beginning.

As China's growth direction moves away from manufacturing and toward a more self-sustained economy, and with no other economy likely to replace China as the world's growth driver, it is unclear how the shipping industry's future will pan out.

For China Daily