Too many ships, too little China
Large parts of the world’s merchant fleet are becoming redundant and unprofitable as the cost of shipping plummets
The global shipping industry, which underpins most international trade, is apparently collapsing before our very eyes after a period of unprecedented expansion. The cost of shipping has plummeted in the past few weeks to the lowest levels on record, meaning large parts of the world’s merchant fleet are becoming redundant and unprofitable.
The largest ships – called Capesize because they can’t fit through the Panama or Suez canals and pass either the Cape of Good Hope or Cape Horn to traverse between oceans – saw their average earnings per day fall to the region of $2 700 (R45 000) this week. A year ago, it was $9 000.
According to the authoritative global shipping research group Clarksons, a level of $4 000 would already see a lot of ships making losses.
Industry commentators worldwide have been sounding alarm bells, but the panic doesn’t stem from concern for shipping companies.
Shipping prices are viewed by many as a “leading indicator” for international trade – an early warning that trade volumes have collapsed.
The Baltic Dry Index is the most popular international measure of what’s going on in the world of shipping. It gives a broad measure of the cost of moving bulk dry commodities such as iron, coal and grains by sea. It has fallen by 25% since the beginning of the year – and was already at a record low late last year. It is now lower than it has been at any point since it was created in 1985.
The index combines the daily earnings of the major types of ships on the big trade routes.
The problem is that no one is entirely certain why shipping earnings are crashing.
There is a massive oversupply of ships following a historic bout of overinvestment in new ships ( see graphic), and most of the world’s bulk carrier ships are less than five years old, according to the UN Conference on Trade and Development.
China’s economic slowdown also means less demand for these ships. The combination is pushing prices down, but there is no way to really know which element is the most to blame until trade data are released months after the fact.
At the same time, the cost of bunker fuel, which is used for most large ships, has
2 000 000
1 600 000
1 200 000
1992 been plummeting in line with the oil price, meaning the dropping rates could be due to this saving being passed on without necessarily causing massive global shipping bankruptcies.
One of the major problems with shipbuilding is that ships are only delivered years after being commissioned, meaning positive business cycles can lead to investment in capacity that only sails out of dry docks after the good times have dissipated.
The shipping glut mirrors the global overinvestment in steel, which was also largely driven by China.
Since 2000, global steelmaking capacity has grown from about 1 trillion tons a year to well over 2 trillion tons.
Only 67% of this capacity is currently being used, according to the World Steel Association’s statistics from November. The last time this many of the world’s steel mills were idle was in 1982.
The stagnation in trade by ship is also being felt locally, even though South Africa has little economic interest in the shipping business.
South Africa’s major bulk commodity export terminal, the Richards Bay Coal Terminal, this week announced it was abandoning projections that it would be able to ship more coal in the next two years.
Instead of growing export to 81 million tons by next year, and eventually 91 million tons, as it had planned, it will now be lucky to stay put at last year’s level of 75 million tons.
China stopped all its imports of South African coal near the end of 2014.
Jan ’00 Total fleet Oil tanker Bulk carriers General cargo Container ships Other types of ships
Global shipping has a distinct division of labour. The ownership of ships is dominated by companies in Greece, Japan, China and Germany. Put together, those four countries account for about half of the industry.
Ships are, however, generally registered at “flags of convenience” countries, shipping’s equivalent of offshore financial centres.
Panama and Liberia have the most ships on their registers, which has spin-off benefits such as local service industries, shipping jobs and tax income.
Shipbuilding mostly happens in China, Korea and Japan. Ships that are scrapped tend to end up in India, China, Bangladesh and Pakistan. Plummeting sea-freight costs could hypothetically be good for many industries, but South African importers would find any gains outweighed by the rand’s simultaneous decline. The cost of shipping a ton of yellow maize from the US to South Africa was $36 (R421 at the exchange rate at the time) early last year. This week, it was $28 and falling. In rand terms, however, the price has risen to R470.
Winners and losers