We don’t have to look beyond Shipping Corp of India (SCI) to understand the turbulent waters the world shipping industry continues to negotiate. The overcapacity in every segment of the industry, particularly in the dry bulk area in times of demand recession for vessel space, has forced SCI not to place any new orders for ships beyond its already committed capital expenditure plan of Rs 2,500 crore for 21 vessels. Imbalance in global supply and demand for shipping capacity beside, the losses that SCI is piling up since 2011-12 has left it with no alternative but to put a stop to further capacity acquisition. The experience of most of its global peers is equally distressful.
Moody’s Investors Service in an industry outlook report on shipping says: “A sustained oversupply of vessels combined with high bunker oil prices will pressure margins in most shipping segments in 2012.” As the shipping market is estimated to have 30 per cent excess supply compared to requirements, freight rates, periodic spurts notwithstanding, will remain under pressure through next year. Citigroup says in an identical tenor that “dry bulk shipping remains in severe oversupply. In the container sector, too, capacity management needs to be a lot more aggressive in order to restore the demand and supply relation”. The ground reality by way of mounting losses and limited but expensive finance are stacked so much against shipping companies that new builds have perforce to slow down. Broking services provider Clarksons Hellas says shipping trading conditions have become so difficult that investments in new ships are no longer a “straightforward endeavour”.
There are mid-sized shipyards and there are yards dedicated to building very large carriers. Deal flows to the mid-sized ones are still comfortable, but they are finding it difficult to meet price expectations of ship buyers. In every kind of dry bulk carriers ‘capesize, panamax, handymax and handysize’ deliveries in the current year will be ahead of 2011. This does not bode well for a sector already feeling the crushing impact of overcapacity. For example, panamax deliveries likely to total 417 units in 2012 will be 52 per cent more than last year’s 274 units. (Terminals around the world are getting ready to host larger panamax carriers with longer length of 366 meters against 296.5 metres now and draft of 15.2 metres, compared with the current 12.6 metres as Panama canal expansion is completed in 2014.) At the same time, according to Clarksons, the shipbuilding industry has to contend with no signs of recovery in large crude market and speculative LNG demand “coupled with an increased pressure on new building prices” due to attractively priced offers of old designed vessels from over-exposed owners.
No wonder, shipbuilding groups in South Korea, China and Japan have come under the weather. Seoul has found it necessary to inject liquidity into the beleaguered shipbuilding industry. It has also asked Exim Bank to lend to shipbuilders a much higher percentage of their equity. Incidentally, South Korean income from ship exports in the first eight months of this year is down more than 20 per cent. There are cases of some shipbuilders going into liquidation or feeling the compulsion to merge to save on operational costs. In the context of the Euro area fearing a negative growth rate of 0.5 per cent, the US expecting to grow at 2.1 per cent and BRIC (Brazil, Russia, India and China) countries settling for modest progress of their economies in 2012, the Baltic Dry Index (BDI), a measure of cost to ship dry bulk commodities like iron ore, coal and food grains losing over 55 per cent this year is not unexpected. But what scared the shipping companies out of their wits was the index falling at one point in 31 straight trading sessions.
Some improvements in the index of late are, however, no cause for celebrations. “What we are seeing is no game changer. At the most we have to come to know the absolute floor for BDI,” says a shipper. Interestingly, the dry bulk shipping market was not denied of some exuberance even on announcement of 1.07 per cent fall in world steel production to 124 million tonnes (mt) in August and perhaps more significantly the 1.7 per cent setback in Chinese output to 58.7 mt, both on year-on-year basis. Any dispiriting news about steel should normally impact the seaborne trade in iron ore and coal which is forecast to be 1,112.5 mt and 1,068 mt, respectively in 2012.
Brushing aside any such concerns, brokers started booking ships at higher rates finding solace in new stimulus measures announced by some countries. These include China clearing infrastructure projects to claim investments of $157 billion, the US commitment to buy bonds worth $40 billion every month and Japan announcing economy shoring up spending of $127 billion. Since all such stimulus spending is directed at manufacturing and construction, steel stands to be a major beneficiary. Ships as a result should get more iron ore and coal cargoes. The concern is while the world is contending with surplus capacity the current year will see deliveries of 105 million deadweight tonnes (mdt) of dry bulk capacity. That simultaneously 32 mdt will be consigned to scrapping will, therefore, not be of much relief.