Sailing Against the Tide

The shipping industry comes to grips with global trade reality but a tangible game plan can help it race against the waves.

by Radhika Rani G

The news trickle of a hijacked ship rescued by US and British Special Forces within a day of capture, added to the cheer of an international shipping summit gala dinner in Mumbai October last. Spyros Polemis, as the chairman of the International Chamber of Shipping representing more than 80 per cent of the world merchant fleet, raised a toast to the fraternity gathered that evening.

The Greek god of shipping with family roots in the business running over two centuries, he had earlier in the day stressed the need for navies to act robustly against piracy, especially complying with the best management practices.

That the 23 crew members, including 10 Indians – all sealed in an armoured area on the Italian bulk carrier plying in the Indian Ocean – were finally freed, lent hope to his point. The arrest of the 11 pirates, led by a message-laden bottle tossed by hostages from a porthole, thus brought a happy ending to the high drama on the mid sea.

Surprises unfold

But more dramatic events seem to follow into 2012. The shipping industry, on a rough voyage of falling fortunes in the midst of a dip in demand for its services and a string of austerity measures in the Eurozone, looked prepared to face the unexpected. But it did not anticipate events that would unsettle international rules, regimes and protocols for clear answers on incidents concerning safety of life at sea.

“What we had not foreseen,” says Spyros, “was that the year would begin with the tragedy of the Costa Concordia and that the safety record of the industry would be put under the spotlight in the most dramatic way imaginable.”

Closer home, the killing of two Indian fishermen on ‘mistaken identity’ as pirates off the Kollam coast in Kerala by Italian Navy marines is snowballing into a diplomatic row. The incident occurring 14 nautical miles off Alappuzha, within India’s contiguous zone and not a danger band by territorial standards, begs for answers on safety and accountability of shipping, its crew and the littoral governments at large.

Add to this the ripple effect on ocean transport – price war, rate volatility, burgeoning tonnage and tight lending – caused by a near 10-per cent decline in global trade. And now, the impact of Iran trade sanctions on insurance coverage for Indian shipping firms. Sailing against the uncertain trade winds and delivering the result has since been the agenda of many a walk-the-talk sessions the world over.

Glut stays put

The world fleet today stands at 50,000 merchant ships, registered in over 150 nations and manned by over a million seafarers of virtually every nationality. It will, as per a Deutsch Bank report, see a 12 per cent growth in 2012.

This oversupply of vessels with far too few cargoes to carry is now a contentious issue for shipowners and charterers. Analysts have been crying loud that dry bulk freight rates are suffering as a glut outpaces commodity demand.

As per the latest update, the Baltic Exchange's sea freight index – that tracks rates for shipping dry commodities – fell for a fifth straight day as rates for both Capesize and Panamax vessels went down. A temporary lull in iron ore imports into China, which is already saddled with a huge inventory, partly explains the anomaly.

"The rates continue to bounce around near the bottom as vessel availability outweighs demand," Deutsche Bank’s Justin Yagerman reiterates in the report.

Dry bulk order book for 2012 is more than 30 per cent of the existing capacity as against 7.5 per cent growth projection and tankers’ is 20 per cent as against 2.5-3 per cent growth. Only in container lines, is the demand-supply ration proportional at 9 per cent.

The situation in the dry bulk is extremely bad, says Sabyasachi Hajara, CMD of Shipping Corporation of India, the premier shipping line holding one-third of Indian tonnage. The country’s largest energy transporter with a fleet of 17 bulk carriers and 43 tankers, SCI faces a precarious situation as a Capesize vessel, a Panamax bulker and a Supramax, all attract a similar rate, of less than $10,000.

So, do we seriously need a moratorium on new orders, especially on dry bulk carriers, until the crisis is over? But industry reports point out that only a fewer new orders are being placed and those delivered currently are the older ones signed during the trade boom. On the other hand, the demand for product tankers, according to Drewry, is likely to grow in Asia and Middle East regions with upcoming refinery capacity additions.

Since shipping has always seen a cyclical pattern with periodic crests and troughs, the current distorted demand-supply equilibrium is seen as just another phase.

“This too (overcapacity) shall pass,” says Shipping Secretary K Mohandas. “The glut in the shipping industry will end in two years,” he predicts. “There are delivery cancellations already happening.”

Good deals

But global giants with deep pockets are seeing good opportunity in the chaos – cashing in on low shipbuilding prices and therefore economical vessels. For instance, shipping tycoon John Fredriksen of Norway is investing hundreds of millions of dollars in new ships. He has recently placed a $610-million order – six oil tankers from STX offshore & Shipbuilding Co for $210 million and two LNG vessels from Hyundai Samho Heavy Industries Co for $400 million.

His new venture Frontline 2012 is reportedly placing its first order for 10 new medium-range tankers for oil products. Though Fredriksen seems to be making a big gamble with the restructured company, analysts say Frontline 2012 will reap big benefits once the slump is likely to end in 2013.

Similarly, the Swiss firm MSC Mediterranean Shipping Company has been quietly building a fleet of giant container ships, and with its 43-strong armada today, it has dwarfed Maersk’s current fleet of 21 ships above 11,500 teu.

According to Alphaliner, the gap is likely to widen as MSC plans to boost its 11,500-14,000 teu fleet to 56 during the course of 2012. In contrast, Maersk will not receive any new ships of this size.

As per latest reports, the Danish major which had last year ordered 10 Triple-E ships of 18,000 teu capacity from South Korea’s Daewoo Shipbuilding and Marine Engineering, will drop the option to order 10 more ships considering the overcapacity prevailing on the Asia-Europe trade.

To restore its profitability in the prevailing glut, the container giant has indeed cut down its capacity on the Asia-Europe trade lanes by 9 per cent. This adjustment, according to Maersk Line CEO Soren Skou, will help the firm improve vessel utilisation without giving up any market share gained over the past two years.

The largest container ship in the world is also considering additional opportunities such as redelivery of time charter tonnage, use of lay-ups and slow-steaming.

Meanwhile, CMA CGM is reshuffling its services on the Asia-West Mediterranean trade in partnership with Maersk Line. The reorganization, according to the French container company, is part of its “commitment to keep providing its customers with the best quality of service on the Asia-West Med trade.”

In the Far East, Kawasaki Kisen Kaisha (K-Line), the Japanese shipping major, is scrapping and redelivering some vessels to downsize the fleet and concurrently operating more flexible fleet by increasing its own tonnage and short-term charter portion. It is deploying five large container carriers between Asia and Europe this year as part of efforts to improve sales and enhance efficiency.

OOCL has announced a new China-Bangkok Service (CBS) to extend its service network between China, Thailand and Vietnam. The new service will be jointly operated by OOCL and Regional Container Lines (RCL) with three 1,200-1,300 teu containerships covering strategic ports in China, Thailand, and Vietnam.

MSC and Zim have announced a new cooperation venture on the South America East Coast-USA trade comprising of 2 main loops – US Gulf-South America East Coast Service and US East Coast-South America East Coast - to meet customers’ needs. The new joint service, according to the shipping lines, will offer comprehensive ports’ coverage to partners’ hubs and wider scope of direct links connecting South America East Coast and the US.

Back in India, the Ruias-led Essar Shipping is pulling back its two very large crude carriers (VLCCs) from the spot market to long-term contract in the wake of the freight market slump. With this, the company's fleet of 25 vessels of 1.8 million dwt, will work in the long-term charter.

Bailing out

In the midst of a crisis-hit financial system, the Shipping Secretary feels there is need for bailing out Indian shipping companies by offering them sops, such as giving cargo support. “We are examining how to provide the support,” Mohandas says. Foreign direct investment can flow into the sector and ships can come for flagging here.

In a survey, entitled ‘The Way Ahead’ done by international legal practice Norton Rose Group, the shipping sector is looking to new sources of finance in place of bank funding. While 43 per cent of respondents said they expect their primary source will continue to come from bank debt over the next two years, 31 per cent said they expect this would come from private equity and 18 per cent from export credit agencies. Another 42 per cent of respondents believe that a lack of available funding poses the greatest threat to the stability of their business and 40 per cent say the cost of borrowing is their primary concern.

“Repossessions and enforcements will increase into 2012 and insolvencies are likely to follow. However, the position in South-East Asia remains relatively positive and we believe that this region will experience the quickest recovery in the shipping sector following this extended (and still deepening) crisis,” the survey notes.

All this should bode well in the short term for an industry getting ‘bolts from the blue’. Calling upon the World Shipping Congress to be realistic and grounded, Spyros counsels, “The worse thing we need is fear about the future.” Can’t agree more!

Published in the March issue of Maritime Gateway (www.maritimegateway.com)