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Navigating choppy waters

A recovery in the maritime industry will hinge on the outcome of China's economic restructuring.

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"The visibility into the demand side of the market is low at the moment. A restructuring China, which is the most important nation for the dry bulk market, holds the key to any positive or negative future market development." - Peter Sands, chief shipping analyst, Bimco

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"I have no doubt that Singapore will maintain its position (as the region's maritime hub) going forward based on its strategic location and business-friendly environment." - Joachim J Skorge, managing director and regional head, DNB Markets, Investment Banking, Singapore

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"The one industrial sign that could point to a higher level of demand especially for bulk ships is the 'One Belt, One Road' silk route that Chinese leader Xi Jinping has hung his personal hat on. This will do quite a few things not just for China but for the rest of the world." - Khalid Moinuddin Hashim, managing director, Precious Shipping

EVEN as the shipping industry continues to cope with the bugbears of oversupply and sluggish demand, industry players believe that there are some bright spots on the horizon.

These include an ambitious China-led plan to develop infrastructure in the region, and increased activity for crude tankers because of depressed oil prices. Orders of new vessels also seem to be coming down on the back of more restrictive bank financing and a more sober investor environment. Experts also expect more consolidation in the sector going forward, driven by the larger players' superior access to debt and equity financing.

That said, the challenges facing the shipping sector are still significant. The cyclical nature of the industry appears to have been disrupted this time around, as poor demand has postponed a recovery after years of doom and gloom. In particular, profitability within container shipping continues to be under pressure and the market for drybulk shipping has been particularly challenging, with spot rates at times dipping under operational expenses.

Going forward, the outlook for the shipping sector very much hinges on the impact of the ongoing restructuring of the China's economy, one of the biggest drivers of demand for the industry.

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"The visibility into the demand side of the market is low at the moment. A restructuring China, which is the most important nation for the dry bulk market, holds the key to any positive or negative future market development," said Peter Sands, chief shipping analyst at Bimco in Denmark.

Khalid Moinuddin Hashim, managing director at Thailand's Precious Shipping Public Company, added that the risk of China slowing down on the industrial and infrastructure front as it transitions to a consumption-led economy cannot be over-stated. "This, coupled with China's desire to clean up its environment by restricting coal imports, has already landed a body blow to the dry bulk sector," he noted.

Impact of oil prices

Oil prices have plunged by over 70 per cent since June 2014, and are hovering at around US$30 a barrel currently. Persistently low oil prices have so far been a double-edged sword for shipping lines.

After many years of depressed rates, crude tanker owners have recently been benefiting from increased trade and, in some cases, oil tankers being used for storage.

"Owners of crude tankers have had a good run lately after many years of depressed rates and asset values. Rates have come down since December due to more vessels being delivered and a decline in Chinese chartering activity, but the outlook for crude tankers is still decent," said Joachim J Skorge, managing director and regional head, DNB Markets, Investment Banking, Singapore.

He added: "The outlook for product tankers and chemical tankers is also positive on the back of growth in the respective trades."

Meanwhile, prices of bunkers - a low-grade fuel for ships that is derived from crude oil, and thus has a high price correlation with the commodity - have also become cheaper and lowered the costs of operating a vessel. However, shipping lines do not gain windfall profits from cheaper fuel as market conditions dictate that much of these savings are passed on to their customers.

Furthermore, lower bunker prices led to some market players speeding up their ships, which puts downward pressure on rates. "It goes naturally that this works against a recovery of freight rates, as faster ships can move more goods," said Mr Sands.

One Belt, One Road

The China-led "One Belt, One Road" initiative is an infrastructure development of US$10 trillion spread over 10 years linking Asia to Europe. It will encompass between 30 and 60 countries via a massive land bridge that is to be built. Under development is a planned network of overland road and rail routes, oil and natural gas pipelines, as well as other infrastructure projects that will stretch from Xi'an in central China, through Central Asia, and reach as far as Moscow, Rotterdam and Venice.

"The one industrial sign that could point to a higher level of demand especially for bulk ships is the 'One Belt, One Road' silk route that Chinese leader Xi Jinping has hung his personal hat on. This will do quite a few things not just for China but for the rest of the world," said Mr Khalid.

"All the activities (involved in One Belt, One Road) would require larger movements of iron ore, coal, limestone, coke, wood and other minerals like nickel ore, alumina etcetera than what are being shipped presently and that would benefit the dry bulk markets tremendously."

Singapore maritime hub

Despite the choppy waters facing the shipping sector, industry players are confident that Singapore will be able to retain its leading position as the region's maritime hub. Beyond its world-class port and refineries, the republic also boasts an ecosystem consisting of owners, brokers, banks, insurance companies, lawyers, ship managers and many other service providers supporting the industry.

"I have no doubt that Singapore will maintain its position going forward based on its strategic location and business-friendly environment," said Mr Skorge. However, industry players warn that the city-state cannot afford to rest on its laurels as competition in the region heats up.

Mr Sands said: "Some of the things that you have done can be copied and there are many contesters to your top spot. But we are all here - this is where we meet. This is why Bimco too has on office here, to be close to our members."

Mr Khalid noted that rising costs in the industry is an emerging issue that the government has to deal with. Another is the need to attract more talent to the sector by inspiring young graduates to consider a future in the maritime space. He said: "This will eliminate the current job hoping for marginally better prospects which is hurting the companies that have made Singapore their home."

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