The Globally Competitive and Volatile Shipping Industry Essay Sample

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Abstract

In this globally competitive and volatile shipping industry, it is supported by the four significant shipping markets. Although these markets possess different business characters, they may share the same trading players, i.e. the ship owners. Hence their activities are closely correlated. (Stopford 2009)Any fluctuations or changes in sentiments will affect the cycle of the markets. Based on the article by Reyes, B. (2013), „Scrapping activity slows to a crawl‟ in Lloyd‟s List, this paper aims to discuss the relationship between the two of the significant markets- the new-building and demolition market, looking into how the two markets affect one another and why ship breakers are losing interest in taking in vessels at higher rates. Finally, the paper will touch on the trends in the ship demolition markets mainly located in Bangladesh, China, India and Pakistan.

Introduction The new-building and demolition market are very different in terms of economic structure. (Stopford 2009) Both markets directly affect the supply of vessels. Throughout the years, there are fluctuations in the both markets. These fluctuations are part of the mechanism in attempt to adjust the supply to the ever changing demands in the world trade. As reported in the article by Reyes, B. (2013), demolition market was observed to be critically slowing down. It can be said that the volatility of the shipbuilding market contribute to the plunge in the scrapping activity to a large extent and the market trends in the developing countries such as India, Bangladesh , China and Pakistan.

Relationship between new-building and ship demolition market The new-building market plays a more vital role in the supply capacity adjustment and it is closely linked to the freight market.(Nguyen 2013) The supply capacity of the building market will in turn affect the demolition markets that take in old ships that no longer have profitable value and purposes. For example, if freight market is good which means demand for vessel is high; owners will start ordering new built vessels to increase supply. As a result, ship scrapping will fall. That is how the two significant markets relate with one another. Figure 1 indicates the general relationship of the markets.

Figure 1.Role of scrapping and newbuildings in the supply/demand balance
(Source: I.L. Buxton 1991)

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From the past, shipbuilding cycles have been changing together with the world trade fluctuations and output volumes in response to the changing demands in the market. As technology is getting advance, new built vessels armed with the latest technology are introduced into the markets when at its peak. At the lowest point of the market cycle, due to the overcapacity,the old and obsolete vessels will be removed. This is an important but unstable mechanism to adjust the supply and demand in the industry.

The downside of this mechanism is the uncertainty of demand of vessels.It takes several years to build the new vessels. It is hard to speculate if the demand for the new vessels still remains by the time they are ready to be delivered. This usually results in oversupply of vessels when there is a plunge in demand. Volk (1994) commented that the fact that „shipbuilding is characterized by heavy fluctuations of demand in the short-term period and by high level of supply‟ brings short phases of prosperity but long period of depression. It is tough for shipyards to adjust the capacity to fit nicely with the demand which is also highly influenced by market expectations and shipping freight rates. (Stopford 2009)

During good or bad times, when the market sentiment is strong, many other players will think and act along the same lines. This is also why the shipbuilding order book is inevitably volatile. The pattern of orders by Compensated Gross Tonnage (CGT) – Figure 2, illustrated that there is a tendency of ordering new-build ships when freight rates are high before the economic downturn in 2008.

Figure 2.

Pattern of shipbuilding orders.

(Source: Kasra, P. 2011)
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The orders are illustrated above are based on the time when the orders are placed and those vessels are only entering the market now. There is a possibility that the freight market could change during the few years by the time they are delivered. As shown in Figure 1, the ship orders began increasing from 2005 until 2007 when it reached the peak where it is not sustainable, it fell dramatically since then.

As shown in Figure 3, the huge flood of ship orders in 2008 reflected that a large number of fleet are speculated to enter the global market in the next few years. Therefore, cutbacks and adjustments have to be done to bring the industry back on a sus

tainable path.(Maritime connector 2012). Figure 3. World tonnage

additions and reductions 1998-2011 ( indwt) (Source: ISL shipping statistics and market review 2012)

It was reported that the volume of orders placed has been decreasing since 2007. It was tabulated in Table 1 that the world order book has shrunk by 42% as compared to 2008. However, many owners refused to scrap their ships in hope that the demand and freight rate will revive.(Maritime Connector 2012) Hence, even though the volumes have shrunk in all sectors, large volumes of vessels still contribute to the existing fleet capacity in the short term due to the orders placed previously.

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Table 1. World merchant fleet by ship type as of January 1st, 2008 and 2012 ( Source: ISL shipping statistics and market review 2012)

During the recession, charter rates plunged and the demolition made a bounce-back. Evident in Figure 2, 33 million dwt was reportedly broken up in 2009, 29 million dwt in 2010 and reached almost 41 million in 2011 which was the third highest peak of the demolition market. Based on the Lloyd‟s aricle, clarksons commented that shipbreakers are not keen to purchase vessels at high price.(Reyes, B. 2013) The overcapacity is likely the main factor causing the ship scrap value to fall.

Trends in the ship demolition markets The year 2012 was a busy year for the demolition markets. The volumes of tonnage broken down are almost 40% more than the volumes in 2011. (Platou 2013) The plunging freight rates due to massive supply of new vessels, is the key factor of the increasing tonnage to be broken up. Scrap prices for dry-bulk ships have fell by 13 percent in 2011 as a result of oversupply and unprofitable charter rates, forcing owners to demolish vessels. (Bloomberg 2012) According to Clarkson, a 34 percent increase in fuel prices in year 2010-2011 has boosted scrapping as the older vessels are too expensive to maintain due to higher oil consumptions than the newer vessels.

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India/Bangladesh

Demolition prices in year 2012 were highly volatile due to unstable currencies (shown in Figure 5) and steel prices, especially for India. (Platou 2013) The fluctuation of the demolition prices is shown in Figure 4. It began with $500/ldt for tankers and containers ship until midyear when the price dropped by $100/ldtand continue fluctuating between $400 and $450/ldt for the rest of the year.

Figure 4. Demolition prices for tankers from 2003-2012 ( Source: Platou 2013)

Figure 5. Rupee against dollar (2010-2011) (Source: Econintersect 2011)

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The Indianshipbreakerscome under pressure with the rupee‟s plunge in 2011, as such, vessel purchases became more expensive in rupee. The increase in scrapping is not reviving the charter rates. “It is still very difficult to absorb the new tonnage coming in” said Nicholas Duran of FearnleysAsia( Singapore) Pte. He speculates that the demolition rates will not go up to $500 anytime soon. “There‟s always another owner who‟s willing to sell” even if an owner rejects selling the vessel at lower rates.(Bloomberg 2012)Furthermore, a shipbreaker in Alang commented that despite the high volumes of tonnage, there are „no profits‟. It is very likely that the revenue did not greatly exceed the operating costs.This can possibly explain the dip in the India rates.

Bangladesh has been the leading ship demolition nation from 2004- 2009.Globally, 700 vessels are scrapped annually and more than 100 of them are done in Bangladesh. The industry contributes almost 60% of the country‟s steel demand. (Anbarasan 2012) Until 2010, the business came to a halt due to court restrictions. However, business picked up again in 2011 when the ban was lifted. Even so, the level of uncertainty with regards to the regulations for shipbreaking still persists in the country and the import tax of 5% for breaking has also caused the loss of competitiveness for the Bangladeshi breakers. (ICRA 2012) Therefore, they are likely to lower their rates like the Indians. Pakistan

The ship demolition industry in Pakistan has grown steadily in the past few years with the advantage of the cheap labour cost, poor safety and environment standards, surge in demand for steel and iron, similar to India and Bangladesh. With these advantages, Pakistan remains very competitive, and is able to offer firm rates for larger tankers. China

China‟s shipbreaking industry is growing and developing. However, the Chinese shipbreaking business was lagging behind as the breakers in the Indian subcontinent were able to offer higher rates to the owners. Another factor is that the Chinese workers are not willing to work under the same extreme conditions and wages as the Blangladeshis. (Minter 2011) With that, the Chinese breakers tend to lose some ship auctions to lower-cost countries. But recently, due to the increased surplus of vessels and the depreciation of rupee, the gap between the rates of Indian and Chinese breakers has narrowed.

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Conclusion

Owners and cash buyers have invested in high amount of new buildings at high rates previously when the freight market was striving and liquidity flow was high and they are hoping that freight rates will rise after some time. But Duran from Fearnleyssaid ,“With the huge orderbook and fleet growth, freight rates will stay low,” (Bloomberg 2012) And when the demand for vessels collapse , owners may realize that by selling the vessels off for scrap makes more financial sense. As long as this keeps going on, people will continue scrapping and owners will resort to selling vessels for demolition at whatever price they can get when they are drove to a corner. The falling demolition rates may be due to breakers taking advantage of the situation of excessive supply of vessels and also other factors such as regulatory restrictions, labours, currency depreciation and low revenues.

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References
Anbarasan, E. 2012, Bangladesh’s ship breaking industry picks up pace again,BBC news, Dhaka, http://www.bbc.co.uk/news/business-19107373, accessed 1 May 2013. Bloomberg , 2012 , Ship-Scrapping Prices Plunge in Buyer’s Market: Freight, Bloomberg ,http://www.bloomberg.com/news/2012-07-11/ship-scrapping-prices-plunge-in-buyer-smarket-freight.html, accessed 1 May 2013.

Buxton, I.L. 1991, The market for ship demolition, Maritime Policy & Management: The flagship journal of international shipping and port research, http://www.tandfonline.com/doi/pdf/10.1080/03088839100000034, accessed 1 May 2013.

Econintersect, 2011, India: Crisis Looms with Collapse of Rupee, Econintersect,http://econintersect.com/b2evolution/blog1.php/2011/12/06/india-crisis-loomswith-collapse-of-rupee, accessed 1 May 2013.

ICRA, 2012, Ship Breaking Industry: Key Trends and Credit Implications, ICRA Limited,http://icra.in/Files/ticker/Ship%20Breaking%20Industry%20Note_25Sept2012.pdf, accessed 1 May 2013.

ISL. 2012, Shipping Statistics and Market Review, Vol. 56, No 1/2, ISL institution of shipping economics and Logistics, Germany.

Kasra, P. 2011, Essays on the econometric modeling and forecasting of shipping market variables ,https://theses.ncl.ac.uk/dspace/bitstream/10443/1471/1/Pourkermani%2012.pdf, accessed1 May 2013.

Maritime connector 2012, Oversupply of cargo ships provides ocean of worthful scrap, http://maritime-connector.com/maritime-economy/oversupply-of-cargo-ships-provides-oceanof-worthful-scrap/, accessed 1 May 2013.

Minter, A. 2011, The Shipbreakers of China, The Atlantic, http://www.theatlantic.com/international/archive/2011/03/the-shipbreakers-of-china/71976/, accessed 1 May 2013. __________________________________________________________________________________________

Nguyen, H.O. 2013, ‘Shipbuilding and scrapping, Lecture Notes, Maritime Economics, Australia Maritime College, Launceston, Tasmania

Platou 2013, The Platou Report 2013,http://www.platou.com, accessed 1 May 2013 Reyes, B. 2013, ‘Scrapping activity slows to a crawl‟, Lloyd’s List, 12 Feb. p. 5. Stopford, M. 2009, Maritime Economics, 3rdedn, Routledge, New York. Volk, B. 1994, „The Shipbuilding Cycle – A Phenomenon

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