Is it just shipping or it is the whole world that seems to be melting down?

The bad news is that it’s the whole world – the good news is that you are not alone in your misery. Commodity price indices had their largest fall in September 2008 but they recovered well until 2011; a further fall after September 2015 was the last nail in the coffin for many in shipping. To give you an idea, worldwide fuel and non-fuel commodity index in September 2016 is at similar level as in September 2005, except that in 2005 it was racing upwards!

Shipping sectors’ dependence on different types of commodities that are so varied means that, at any given time, there will be some sector in shipping that will be suffering. Contrary to popular belief, the market for tankers goes up when crude oil price comes down but the market for bulk carriers falls in line with a drop in the prices of raw materials like iron ore and coal. The major sectors in shipping traditionally were just the general cargo and dry bulk ships and the tankers. Unlike traditional shipping (i.e. tramp shipping) that has survived every turbulence of mankind, the ‘liner’ service model is similar to that of commercial aircraft, which has led to many airlines going out of business.

The liner shipping business model is predominantly only in container shipping, passenger ships, ferries and some PCC/RORO services. Container liner companies were always involved in other types of shipping such as bulk or tankers. Once containers were introduced, they adapted to make the industry dependent on them rather than the other way around.

Of the top 20 container shipping lines of the world, the most recently formed are CMA CGM (formed in 1978) and Hanjin (formed in 1977), with Hanjin being the latest large victim of the poor shipping economy. This could make you wonder whether there was any need for new players in the container market in the first place. The existing players in every sector have increased their capacity and the finance was available for building all types of ships before a fall-off in demand caught up and rates fell to unsustainable levels.

COSCO, now the largest shipping company in the world with more than 1100 ships after merging with China Shipping Container Lines (CSCL), has set the trend for mergers in the container industry. Ironically, it was the same Chinese competition regulators who blocked the proposed P3 alliance among the world’s three largest carriers Maersk, MSC and CMA CGM in 2014, who then sanctioned the COSCO merger. The combined entity of COSCO/CSCL is in fourth place in the container carrier sector with a total fleet capacity in excess of 1.5 million TEU, giving a world share of around 8%.

Though there could be more camaraderie in container liner services than in any other sectors of ‘traditional’ shipping, they are facing tough headwinds, with consolidation through mergers gathering pace. This year, German container line Hapag-Lloyd signed a binding agreement with Arab peer UASC to form the world’s fifth largest shipping company. French company CMA CGM has taken over APL (American President Lines owned by NOL) and Singapore’s Neptune Orient Lines this year. Economists would call this strategy as a shift from ‘Play to Win’ to ‘Play not to Lose’.

The continuous boom or bust cycle has been at the heart of shipping’s problems for more than a hundred years. In recent years, global economic volatility has increased in frequency and has put further pressure on shipowners to time building of new capacity to match forecast demand.

As a result of the uncertainty, shipping analysts have found it difficult to accurately predict the number of ships needed to meet demand for raw materials, energy and manufactured goods.

The present lull is a result of demand not catching up with supply, presenting to the market what seems like an oversupply that needs to be rectified. This leaves many questioning: Why did the supply increase so much without a clear idea of demand? Why did demand not catch up in spite of commodity indices being the same as 10 years ago when inflation has been rising year on year?

Where we are in shipping, it may become necessary to have a few casualties. There is no scope for ‘bail-outs’ in shipping nowadays. Even if your company is running well, you are as good as being in a safe house in Syria – you are fortunate to be there but you don’t know how long it can last. The crisis comes at a time when there are many other external factors that seem to head towards the discussion that a perfect storm is around the corner. Talk of the low oil prices, political unrest and war in Middle East, currency crises in many African countries, Brexit, and even the USA elections, will contribute and provide enough material to write a book.

Shipping, as we know, has survived many storms but when you are in one of the storms, you never know how long it will last and how much damage you will sustain before you come out of it. Some companies are well-prepared and will come out of the crisis intact; others will not.  One thing is for sure, life in shipping will go on.