Back to SSG 20

Prospects of cheaper freight

Shipping seems to spend around 60 per cent of time in recession. A wise perception made by the Clarkson Research supremo, Dr Martin Stopford, of what seems to be a way of life to many in the business. I first met Dr Stopford when he was wrestling with supply/demand figures for British Shipbuilders in the early 1970s. Back then he was a young economist on a mission. Several shipping recessions later he is steadily enhancing his reputation. Shipping listens to what he has to say. Shipping forecasting is an extremely fickle business at the best of times with a seemingly unending number of equations. When markets get into balance, it becomes harder still, sometimes obstinately so. Dr Stopford has long acknowledged this, but has now decided the time was right to issue a warning that it is time to prepare for a new recession. How deep is anybody’s guess. In that sense Dr Stopford remains on a mission in that it is his duty to speak his mind.

Perhaps the signs are more ominous in tank than in dry bulk, at least in the short-term. Based on current projections – an ominous word in itself – the market requires around 11 million DWT of new tonnage per year. Instead it is getting between 25 and 30 million DWT In fact, the fleet is growing by 6–7 per cent annually, while demand increases by 3–4 per cent. The upturn has lasted for too long and owners have a tendency to remain optimists until they hit the wall. Also, conflicting trends may have confused punters. But logic has never been a prevalent feature in the shipping market and this is perhaps why second hand prices for tankers have soared by more than 100 per cent in some cases without anyone batting an eyelid.

Many do not understand why the ship owners do not take action to reduce supply to retain freight earnings. A free, international shipping market is always prone to over-supply of tonnage. There are too many forces at play. It all starts with tempting new building prices from the yards and the owners go in hook, line and sinker, because no self-respecting owners must be seen to say no to a bargain even though he or she may not strictly need the vessel. From then on one thing takes the other and we end up in the present predicament with to much tonnage and too high yard capacity.

China has added a new dimension to both the demand and supply side of the market. The Chinese have underpinned the dry bulk market since 2003/2004 and now offers relatively cheap tonnage to owners still looking for a bargain. The new demolition regime and tanker phase-out will make a dent in the surplus. But believe me, it will take a fully-fledged recession to shift an owner in a more constructive direction. An added problem this time around is that owners are cash rich – particularly the Greek – and no one will be the first to say no. In any case the full coffers will cushion the blow when it come. One can sense that the Greek are beginning to manoeuvre to be in the best possible position when the rot sets in. Maybe even cheaper seaborne transport is not what the world needs right now. But we are going to get in anyway in the next year or so.

//Petter Arentz