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Lessons not learnt from shipping's golden decade

Lessons not learnt from shipping's golden decade

Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behaviour akin to that of Cinderella at the ball. They know that overstaying the festivities -- that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future -- will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There's a problem, though: They are dancing in a room in which the clocks have no hands.
    o     Warren Buffett, writing in the 2000 Berkshire Hathaway annual report

Bangkok: The media has coined this fast disappearing decade as the Noughties, an appropriate term for shipowners who for much of the past ten years added record numbers of zeros to their daily charter earnings. Yet, as the sands of time tick down towards the pre-teens of the 21st century, when we look at the highs and lows of the Noughties, it's clear shipowners have not learnt much new in the art of restraint. Warren Buffett's quote above from nine years ago holds true to shipping today.

China driver

Back in January 2001, China joined the World Trade Organisation. Since then the world's most populous nation has been the single largest driver of shipping markets. For instance, in 2000 the number of teu shipped worldwide just crossed the 60m teu mark for the first time. By the end of 2008, that figure had grown by more than 150% to 152m teu. Likewise, in 2000 China imported 70m tonnes of iron ore; this year that figure is likely to crack 600m tonnes. No other decade on record has seen such a record growth in seaborne trade. China once again is central to this growth. Back at the dawn of the millennium, the Middle Kingdom ranked as the world's seventh largest economy. Now it lies just behind Japan and the US in the rankings. Its anticipated 8.5% GDP growth this year sits in stark contrast to most of the Western world.

The boom

It was back in the last quarter of 2003 that rates went into overdrive. A combination of pent up demand from China and congestion at loading ports saw dry bulk rates enter a five-year period of record earnings, topping out in the first half of 2008, with capesizes cresting $300,000 a day.
The container trades were also entering a period of unparalleled earnings with liners reporting quarter after quarter after quarter of record net profits. Acquisitions rolled in, none bigger than Maersk's buy out of P&O Nedlloyd. Ships supersized to cope with demand. In 2000, there were no ships above 6,600 teu. The delivery of the Samsung-built 8,063 teu OOCL Shenzhen in 2003 ushered in the era of the super post-panamax containership, with hundreds of giant ships ordered up to 14,000 teu in size, forcing Panama to kick off an ambitious expansion plan of its canal to accommodate this new giant phase of containerisation.
Confident that container prospects were expected to grow at least at high single digit growth rates for time immemorial the battle for container port concessions became wildly inflated. Back in 2000, the war between terminal operators was essentially a two-way tussle between PSA of Singapore and HPH of Hong Kong with some smaller players, P&O Ports, CSX, etc. Then Dubai entered the game in the form of DP World and prices rocketed, concessions going for as much as 40 times earnings.
Gas consumption, led by Asia, saw the LNG tanker sector flourish and mature. It took 34 years for the in-service fleet of LNG carriers to reach 100 vessels and a further eight years for it to break through the 200-vessel barrier. By January this year, the 300-ship mark had been reached just over two-and-a-half years after crossing the 200 mark. Like containers, LNG supersized. Back in 2000, no gas carrier was larger than 150,000 cu m, and spherical Moss-type containment systems were still dominant. Now, thanks to the wizardry of Korean ship designers and gumption of Qatari gas producers, membrane ships of 250,000 cu m have been produced.
Across the spectrum of ship types, whatever the cargo, record orders were placed and owners sought larger and larger vessel sizes.

The bust

Traditionally, a shipbuilder has a backlog of around 18 months of orders. By the time of the collapse of Lehman Brothers in September 2008, the large yards had backlogs in excess of 40 months. Owners ordered newbuilds like never before, confident that China's economic miracle and the West's continued intravenous consumption of cheap products would continue unabated. Shipyards in China moved to list before they had even built their own drydock, let alone their first ship. At the height of the madness there were triple figure greenfield Chinese yards under construction, and owners queuing up to place wildly expensive orders. A VLCC that in 2000 might have cost $55m was going for $150m weeks ahead of the autumn 2008 Wall Street implosion.
When it came, the global financial crisis hit shipping with an unprecedented double whammy. Rates fell - the Baltic Dry dropping from 12,000 points to 660 in the space of five months - while bankers suddenly had no credit to cover all the newbuilds, the capital shortage reported as high as half a billion dollars.
Looking back over the past 15 months, it is remarkable that so few shipping firms have actually gone to the wall. The end of the downturn, however, is not in sight. While bulk looks fair, tankers and gas are questionable going into 2010, with containers and car carriers are looking hard hit through to 2013.

The issues

Think back 10 years and the green lobby was often viewed as a bunch of crackpots. Now the environmental clamour surrounding shipping is very much a mainstream obsession. The environment will be the largest issue facing shipping in the coming decade. The industry was not a part of the Kyoto Protocol, and the sham that was Copenhagen has allowed the sector more breathing space to come up with a unified viewpoint to counter emissions.
Again, go back 10 years and contemplate the threat of piracy. Yes, there had been high profile incidents - the PetroRanger in the late 1990s, for instance - but a bunch of rag tag, rope climbing, dagger wielding southeast Asians were not an international crisis. The rise of piracy off the Gulf of Aden has brought together a previously unthinkable coalition of international naval forces to try and tackle the scourge. The simple fact is this: piracy will remain a threat so long as Somalia remains a failed state.
The rise of RPG toting pirates in the past couple of years has been yet another deterrent for those mulling a career at sea. The shipping industry, despite the horrendous downturn, faces a critical HR shortage, especially for officers, and more action needs to be taken to foster the next generation of seafarers.
As a final issue of the decade, we at Seatrade Asia Online cannot help but note the rising Asian voice in world shipping matters, a phenomenon that, frankly, is about time given that the region contains the largest shipowners, the greatest cargo base, 90% of shipbuilding capacity, 65% of all seafarers and latterly a significant tranche of ship finance. Asia, led by China, will surely dominate the coming decade in world shipping. The stage is set. [29/12/09]