China Daily newspaper published a small piece of news earlier this year: a minor steel factory in Hefei, capital of East China’s Anhui province was closing and its 5 000 employees were being laid off. This resulted in a small scale unrest in the area. Just a few column piece of news, but in fact the story of steel industry in China today. Bit by bit China is seeking to meet steel capacity reduction targets as it is turning the source of its economic growth from building, manufacturing and infrastructure to services and domestic demand. By 2020 total 500 000 workers from steel industry will be laid off.
The Chinese economy is still growing. In absolute terms the growth is still significant, and at a much higher level than most countries in the Western world. The east coast of China has seen rapid urbanization, with enormous building projects that have moved millions from the countryside to the cities. Building has slowed down, but there is still untapped potential in inland China. There is also President Xi Jinping´s infrastructure and trade bid towards Eurasia named “One Belt, One Road”.
China dictates the direction
Inevitable or not, the slowdown in Chinese economy has had a huge effect in the world trade. China is the second biggest economy in the world and the biggest exporter. As an economy of such magnitude, any effects of a slowdown can be meaningful and felt worldwide. The international shipping industry is digesting the effects aplenty. When demand drops, shipping companies feel the pinch first. The dry cargo market is hugely dominated by Chinese appetite for importing iron ore and other raw materials. The slowness of global trade expansion hurts containership market. Slow growth can be directly translated into depressed rates for shipping. Also pulling the industry down are still the consequences of global financial crisis of 2008, whereby now central banks have even resorted into negative interest rates policies to stimulate growth. At the same time, many shipping banks and ship-owners are dealing with bad shipping loans and excess tonnage capacity. The shipping market has not fully recovered and is now confronted with problems of less work load and lower charter rates.
Shipbuilders, container lines and ports all have had unprecedented advantage from China’s growth. Before the down cycle, growth in global trade pushed up freight rates and new vessels were frantically ordered. Now excess capacity does not match with the demand. Undoubtedly one big engine is missing, describes the situation Basil M. Karatzas, the founder and chief executive of New York based Karatzas Marine Advisors.
Getting on without a driver
“China has been the primary driver for shipping and for the moment there is no other economy that can substitute them as a driver,” says Basil Karatzas. “That is one of the cardinal reasons for the crisis in the shipping market. There is not much demand for imports from China, as the European economy and world economy in general are also slowing down at the same time. In the short term and at the risk of being too simplistic, the market has changed forever. Projecting the changes happening now, one can see that present developments will lead to major industry shifts and in five or ten years from now, it will be a different market environment.”
Baltic Dry Index, which measures the cost of shipping materials across the globe, is followed by many as a barometer of the world economy. Baltic Dry Index has now confidently risen well above the all-time low earlier this year, but is still materially lower than in the boom years. The Baltic Dry Index is produced and published by The Baltic Exchange, renowned London based maritime information powerhouse. Baltic Exchange chief executive Jeremy Penn describes the current situation in the shipping industry in optimistic terms.
“Shipping is a tremendously old industry,” Jeremy Penn says, “It is absolutely bound to world trade. We know it is prone to significant booms and recessions, but at the same time shipping doesn’t go away because of slow down in various economies and markets. I think we should not lose sight of the fact that as an industry we are going to be here tomorrow and in 50 years’ time. Our problems are in the end temporary, even if they are significant as well.”
Bigger vessels trend
Over the past few years, the promising prospects fueled by rising economies like China and India impelled the shipping industry to build ever bigger vessels to satisfy the need for growing global trade. The intent was to enhance cost efficiency by moving more goods in one go. Expanding the dry bulk capacity happened also partly because financing it has been easier and cheaper and it was widely assumed that global trade would just keep expanding. Recently it has not been as easy to raise money neither from private equity or public market.
Big vessels now dominate the global ports, but most sail only half full. With excess vessel capacity and continued pressure to lower freight rates, the container shipping companies are looking for ways to adapt. The current trend has been to design and build ever bigger ships, but as Jeremy Penn of Baltic Exchange reminds, they are not always the most efficient.
“I think it is quite hard to see that ships wouldn’t continue to get bigger, especially in the specialized bulk business and in trade. But an interesting observation is that a mid-size ship can cross several natural market areas: grains, dry bulks, coal, and iron ore and so on, and really serve a wide variety of markets and ports. People who will make money are the ones who order ships with clear understanding of the trades which they are targeting. The first step is to understand the business you are aiming and not just order any ship. Instead order one that you believe that you will trade well in a particular arena. I know owners who are now focusing on the African trade and are buying ships that are specifically intended to the African ports.”
Looking for innovations
In the current situation, investing in more cost efficient solutions is seen as a good way to improve competitiveness of the vessels, especially in the long term. Digital technologies in the shipping provide the industry possibility for big leap in operational efficiency. This is a big trend, says maritime finance adviser Basil Karatzas, who has long experience working in the industry in various roles, including ship brokerage, raising capital for ship-owners and advising shipping banks and investors.
“I think there will be much more technological innovations for ships. Looking at companies like Wärtsilä and others, you can see how much improvements they have made not only to engines in terms of fuel efficiency, but also to electronics on the engines that can communicate with ship owner office offshore. Digitalization in shipping industry has to happen. For the vessels, not much has changed over the last 20 years. It has been said that ´ships are like dinosaurs with big bodies and small brains that became extinct.´ We are living in a world that is coming much more technologically sophisticated and demanding. The shipping industry has to catch up with technology. And for now in the time of crisis, as the industry has to cut expenses, digitalization and innovation are issues that need to be addressed by the market players looking to establish a competitive advantage – while the competition is pre-occupied with survival.”
Many areas of shipping contain an aspect of huge amount of data, be it contents, cargos, origins or destinations. Collecting and utilizing big data, digitalizing port operations and even running vessels more efficiently from the shore provide the industry new interesting prospects. Industry forerunners are also focused on minimizing their impact on the environment. There is a shift to gas based technology also happening. The service market outlook for vessels continues to look positive as well.
And finally it all comes down to trade. There will be economic development and growth in several parts of the world, as Jeremy Penn, CEO of Baltic Exchange reminds.
“There is still huge global demand for infrastructure. China will continue to build, you have South America with still huge growth and development and infrastructure opportunities. There is Africa with enormous continuous opportunity. India should not be dropped from the list. We should not think that some great era is over. Countries continue to develop and I think that favors shipping very well.”
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