Why the Global Shipping Industry Will Be Tough to Salvage

7 MINS READMar 27, 2017 | 09:30 GMT
A loaded cargo ship heads out to sea from New York Harbor. Over the past decade, the world's available shipping capacity has grown faster than global trade has.
A loaded cargo ship heads out to sea from New York Harbor. Over the past decade, the world's available shipping capacity has grown faster than global trade has.
(SPENCER PLATT/Getty Images)
Forecast Highlights

  • The next two years will be difficult for the global shipping industry as it struggles to address problems of excess capacity.
  • The uncertainty and adjustments to global trade caused by the United States' growing isolationism will only add to the pressure building on the sector.
  • Meanwhile, German banks and Chinese officials will take steps to protect their national interests from contagion, to the possible detriment of the global shipping industry.

The political order that defines the world is changing, and with it, the global shipping industry. The advent of container shipping in the mid-1950s propelled the age of globalization forward as the world's biggest economies forged new and closer trade links with one another. International trade is now undergoing another massive overhaul as the rise of Western isolationism, the restructuring of China's economy, the weakening of European growth and the Fourth Industrial Revolution alter how goods and services flow between countries in the coming decades.

But these fundamental shifts won't change the fact that the cheapest way to move things in large quantities is over water. As a result, the shipping industry will continue to putter along, struggling to stay afloat as countries with competing imperatives — whether shipping, shipbuilding, shipbreaking or banking — pull it in different directions over the next few years.

A Glut in Global Supply

Since 2007, the world's available shipping capacity has grown faster than global trade. Amid the explosion of trade that accompanied globalization, international shipping companies ordered the construction of new vessels — orders that were placed before the financial crisis of 2008-09 but weren't completed until after the downturn hit. Around the same time, the container industry began to advocate the use of bigger and bigger ships, arguing that they would boost efficiency and lower operating costs. (This logic holds only if the ships are fully utilized.) Thanks to the extra space the gigantic vessels provided, shipping costs and shipyard fees declined, encouraging companies to capitalize on low prices by buying even more boats.

Their purchases exacerbated the world's ballooning overcapacity problem. By 2016, about 10 percent of the global shipping fleet was out of service, whether scrapped or laying idle, a record high in the industry. And despite the International Monetary Fund's expectations that the volume of global exports will rise by 3.5 percent this year (compared with only 2.2 percent last year), the shipping sector's excess capacity is unlikely to disappear by the end of 2017 as container space growth outpaces the uptick in shipping traffic once again.

Carriers have had to ride out boom and bust cycles before. But the severity of the current downturn has spurred an unprecedented amount of consolidation in the industry as companies work to make better use of the larger, more efficient ships they ordered nearly a decade ago. Even so, these efforts were too little, too late for many firms, and in August 2016, Hanjin — one of the shipping industry's biggest carriers — filed for bankruptcy.

Hanjin was not the only company in dire financial straits, though its high-profile collapse helped to shed light on just how long the industry's road to recovery would be. In fact, 18 major container carriers have seen their fortunes reversed over the course of the industry's downturn. Even Maersk Line, considered one of the healthiest operators in the global fleet, posted a $376 million loss last year. Hoping to plug the leak, Maersk cut back its capacity and acquired Hamburg Sud Group to address the underlying causes of its financial problems.

This type of consolidation is expected to become even more common this year, something industry experts say will be necessary to restoring balance to the shipping sector. If all of the mergers and acquisitions planned for 2017 are completed, only 13 major carriers will be left. Those firms may then choose to join forces with one another as a new set of cooperative deals comes into force on April 1. The alliances will doubtless make room for the more efficient use of the world's half-empty container ships, and perhaps even cut down on the purchase of extra capacity by requiring firms to seek approval first.

Building, Breaking and Banking

Shipbuilders and shipbreakers will also play an important role in correcting the imbalance in the industry. Orders for the construction of new container, bulk and tanker ships fell sharply in 2016, a dip that will help to address the shipping industry's problems but will damage the shipbuilding sector in the process. Though there is usually a two-year delay between the order of a new ship and its actual delivery, some shipyards have already finished filling the orders on their books. And with no new purchases on the horizon, many have had to shut their doors for good. Desperate to protect the industry vital to their economies, countries like Japan, South Korea and China will continue trying to attract buyers and bolster national shipbuilders, regardless of the fact that doing so would widen the shipping industry's supply and demand gap even more.

For the shipbreaking sector, on the other hand, 2016 was a banner year. More than 500,000 twenty-foot equivalent units' (TEUs') worth of cargo capacity was demolished in container shipping alone, much of which came from relatively new ships. Between the expansion of the Panama Canal, which led to an overabundance of Panamax-sized vessels, and the glut of ships on the market as a whole, companies that couldn't afford to maintain unused vessels were forced to scrap ships as young as 7 years old — a historical record. Countries with sizable scrapping industries, such as India and Bangladesh, welcomed the additional business, even if it was a product of international shipping companies' misfortune. But the boom of 2016 probably won't last for much longer, since companies can afford to get rid of only so many ships. 

Dwindling purchases and heightened scrapping have yet to fully right the shipping industry. At the same time, they have put shipbuilders — which are crucial producers for many countries — in a difficult position. Without new vessels to build, shipyards have had a hard time staying up and running, even with the help of government subsidies. China Ocean Shipping Co., China's third-largest shipbuilder, will be closing three of its yards by 2020, while Mitsubishi Heavy Industries is weighing the possibility of restructuring its company. Hyundai Heavy and Daewoo Shipbuilding, moreover, may lower their prices to bring in more buyers. If they succeed, the addition of new ships to the global fleet may help keep shipping rates low — at the industry's expense.

Nevertheless, companies in search of new ships must be able to find the capital with which to buy them. Firms also have to meet their payments on existing loans, a reality that inextricably links them to the world's banks. Because German banks own roughly a quarter of the container shipping industry's outstanding loans, they are particularly vulnerable to the sector's financial troubles. And with the country's crucial elections set for later this year, German banks will no doubt take steps to protect themselves from default, choosing policies that best suit their interests rather than the shipping industry's.

Staying the Course

As the world's oversupply of shipping capacity gradually shrinks, carriers will find some measure of financial relief as prices — and profits — begin to rebound. But the industry will still have to adapt to its new international environment. The growing need for corporate partnerships will prompt the globe's shipping giants to invest in technology that will increase transparency and efficiency. (Maersk has already worked with IBM to incorporate blockchain applications into its business practices.) Moreover, the ships themselves will change as companies make use of alternative fuels such as liquefied natural gas to meet Europe's environmental standards. They may even become fully automated someday; in fact, Norway recently opened its first testing ground for waterborne automated vehicles.

Each of these changes will better prepare the industry for a year that is shaping up to be tough for global trade. The United States' decision to pull away from transnational trade initiatives such as the Trans-Pacific Partnership and perhaps renegotiate NAFTA has given rise to greater economic uncertainty, as has the United Kingdom's impending initiation of the Brexit process. Meanwhile, countries that rely on exports for their economic success — chief among them, China — will need to seek out new markets elsewhere. And as the tides of global trade shift, the shipping industry will strain to keep up as persistent overcapacity problems continue to weigh it down.

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