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

CityPress - - Business - DE­WALD VAN RENS­BURG de­wald.vrens­burg@city­press.co.za

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

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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.

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