SMM takes an optimistic stance in difficult times

SMM – to be held between 4 September and 7 September in Hamburg – faces contrasting pressures. Dr Martin Stopford, managing director of Clarkson Research gave his view:. “I think we are moving towards the 2012 SMM event from a unique position. In the first quarter of this year more ships were ordered than in any quarter in the history of the shipbuilding industry. In that sense it was a record and a great success.”

He went on to point out that in another sense, the contracting state of shipping in general was putting pressure on the industry, and forcing changes. “I do not think there has ever been a time where shipbuilding and shipping industry have faced more challenges in that way. I think the shipbuilding and ship equipment industries have to adapt to new circumstances.”

Dr Stopford likens shipping to a Shakespearean tragedy, with a cast of several players, each with a different position. There are the shipowners, some of whom made little investment during the last boom period, so are comparatively cash-rich, but see few investment options. There are others, maybe in debt, with cash flow issues, who are in deep discussions with their bankers. Debt finance, a principal driving force for shipping in the last 40 years in on hold, hard to get and very expensive. Over the last two or three years shipbuilders have had full order books and have been able to take their time. Now things are more pressing. Finally, there are the investors, big funds in Asia and the US which still see shipping as an attractive option in the long term, but are uncertain whether this is the right time.

The market has gone from a situation 8-10 years ago when the average ship earned $22,800/day to about $10,000/day during the last four years. In the last 12 months earnings have been dropping further. Up to about a year ago, shipping was a good cash generator, and only since the third quarter of 2011 has cash flow fallen below the requirements to fund the ship. This is likely to put pressure on owners, bankers, and also shipbuilders.

The world economy is now more promising, with world GDP and sea trade bouncing back after the recession. China in particular saw imports grow in 2010 by over 30%, with a 4% growth in the global economy, a rate which forecasters expect to continue. Europe feels a little nervous whether this is a realistic scenario. One major factors in world economic growth rising oil prices, important for shipping, with bunker coats rising from $200/t to over $700/t, and regulations forcing the use of even dearer fuels, close to $1,000/t. Secondly, the cost of capital Shipping finances itself based on the London interbank market rate (Libor), which today is 0.7%, compared to 16%-17% in the 1980s. These low interest rates help to ease the pressure on indebted owners and encourage the banks to move things forward, effectively reducing the cost of the ship.

Although the oil trade is slowing down, the bulk trade is growing slightly. Containers arestill the fastest growing sector, still showing 7%-9% annual growth.

Leaving aside the cycles, Dr Stopford sees a a positive outlook. Focusing on how the forecast world 4% growth will affect shipbuilding and marine equipment, the yards are winding down after an enormous boom. Investments, and hence new orders, have fallen sharply, while the yards are delivering record numbers of ships. Nevertheless, there have been big investments in offshore followed by containers and gas carriers, with relatively little investments in tankers and bulkers.

China, South Korea and Japan lead in deliveries, but the orderbook is down to 21% of the existing fleet. Dr Stopford noted the game is going on between the big yards in China, many with government support chopping their prices against the yards in South Korea, while Japan is actually number two in bulk carriers with more sophisticated production engineering.

At present, says Dr Stopford, the world fleet is growing at 9% per year – but a 9% capacity increase against a 4% trend in trade is not good for the market.

Additional challenges are future globalisation, with Europe and North America at risk of being overtaken. Falling capital costs and rising fuel costs turn traditional shipping economics on their head. Add to this the environmental issues that must be addressed, but despite positive moves like the EEDI, the industry is still struggling to decide on the best technology.

There are no magic solutions, says Dr Stopford. “It sounds tough but the cycle makes us deal with these problems, whether we like it or not. We are humans. We do not do it unless the market forces us to.”

Stefan Bülow, board member of the German Shipowners Association VDR, spoke on the state of German shipping. Germany is number three in worldwide tonnage and number one in containers, a total fleet of 3,784 vessels, or a combined 88 million gt. German shipping volumes have been growing in line with the development in Japan and Greece, seeing a significant upward trend since the 1990s. “We do not have a crystal ball showing where it will take us at the end of the day, but nobody should underestimate the innovation and ideas of the German shipping industry, although the situation is fairly difficult right now,” said Mr Bülow.

The average age of the Germany fleet is eight years, compared to the 15 years of the world fleet. Germany’s maritime cluster directly employs 400,000 people and has a turnover of some €85billion, forming a significant player in the German economy.

Mr Bülow stressed the importance of a global framework, not regional initiatives regarding any decisions made on environmental issues. “We will not reach anything if we come up with individual solutions from certain countries or areas because the main contribution (to greenhouse gases) comes from the worldwide trade, and this is a worldwide industry. Therefore we have to come up with a global framework to be successful.”

“Every internal engine measure to reduce NOx will increase CO2 emissions. We have a contradictory problem here, and still need to find a practical solution,” he added.

Regarding the EEDI he said this is the right way to go although there are still a lot of technical problems. On the financial costs of a cleaner environment, Mr Bülow stressed that the shipping industry should pay its fair share, and not subsidise other industries. He was also worried about local environmental restrictions, specifically the planned ECA sulphur restrictions. Mr Bülow expressed his concerns that these may force cargo from the sea onto the roads.

Concening piracy, statistics showed that German-owned ships were prime targets. There were currently 12 German vessels held, with 173 crew held hostage “We are very concerned right now how this issue will continue,” Mr Bülow said.