Even though the global sea shipping industry is currently experiencing a severe downturn, and the short-term outlook is highly uncertain since we don’t know what’s going to happen with China’s economy in the next two years, the industry has been rapidly modernizing since the beginning of the 21st Century and this will enable shipping by sea to remain cheap and accommodate future increases in global trade. Since ports and canals will process even larger volumes of goods and commodities in the future, national economies will be more at risk to port and canal disruptions, stoppages, or terrorist attacks. Chinese companies already dominate the ship building industry; in the future they could become leaders of everything else: containers and bulk shipping and port operations.
RECENT SIGNALS OF CHANGE
- The shipping industry is in a major, major slump because of the slowdown in the global economy.
- In 2015, Chinese imports from the European Union dropped almost 14 percent. Chinese exports to the EU were down 3 percent. In the first quarter of 2016, Chinese imports from the EU were down 7 percent from a year earlier; Chinese exports for the same period were down 7 percent.
- Orders for new ships have fallen dramatically.
- According to UK marine data provider, Vessels Value, from 2011 to 2015 an average of 1,450 ships annually were ordered. In the first seven months of 2016, owners ordered 292 vessels.
- The container business is suffering from having too much capacity in the economic slowdown, and experiencing less demand for containers because of new shipping and distribution technologies and practices.
- Two thirds of global shipping trade is carried in containers, a technology invented in the 1950s. But digital technology is enabling manufacturers and shipping companies to become much more efficient in the movement of goods throughout the supply chain, and in 2015 global GDP grew faster than global container trade for the first time, except in the 2008 financial crisis. The industry leader in shipping, Maersk Line, just recently in 2015 installed sensors on its containers to track the location and contents of all its containers.
- Large retailers in developed economies are pushing to reduce the number of goods in the supply chain as more consumers shop online. Retailers are reducing the merchandise in stores and, instead, are storing more goods in warehouses where they can fulfill online orders or quickly restock stores.
- The latest generation of container ships, the Triple E introduced in 2013, can carry 18,000 TEU (twenty Foot Equivalent Unit), more than four times the maximum capacity of the 4,000 TEU Panamax-standard ships (the old size limit of the Panama Canal) introduced around 1985. When oil prices were high before 2015, shipping companies built bigger and bigger ships. Maersk built 20 Triple-E class vessels before oil prices dropped. The size of the Triple-E vessels exceeds the new Panama Canal lock dimensions. The new Panamax standard vessel, introduced in 2014, is 12,500 TEU and designed to fit exactly the Panama Canal’s new locks.
- Efforts have just started to develop unmanned cargo ships. British engine maker Rolls-Royce Holdings is leading the Advanced Autonomous Waterborne Applications initiative. But the earliest estimates are to have remotely controlled unmanned vessels by 2030, and autonomous ones by 2035.
- Since 2000, ports and canal authorities have invested billions of dollars to upgrade equipment, expand capacity, and deepen harbors to handle the growing flow of manufactured goods and bulk commodities around the world and bigger ships.
- The major Panama Canal expansion opened in June 2016. The nine-year, $5.4 billion expansion more than doubles the canal’s capacity and includes a third lane to accommodate ships large enough to carry 14,000 TEU. The expansion is expected to shift about 10 percent of the Asia to US container traffic from West Coast ports to East Coast ports by 2020. The Canal also hopes to recover the 10 percent to 15 percent of annual revenue lost to the Suez Canal from 2013-2015. A key market of the future for the canal could be LNG carrier traffic.
- The American Association of Port Authorities estimates $150 billion will be invested by 2020 to enlarge US ports to handle the bigger ships.
- Unfortunately, a lot of these increased capabilities are coming on board just as the demand for cargo trade has dropped.
- In July 2016, imports fell at the two busiest port complexes in the United States, in Southern California and New York. The month of July is when shipping volumes typically start their holiday-season ramp up.
- Also in July, the city council of Oakland, California approved blocking coal exports through a new terminal. In the past five years, seven coal export terminals have been proposed on the West Coast of North America. None has opened.
- China companies are investing in foreign ports, and maybe a new canal, to enable more trade with China and control a key piece of the global trade value chain.
- Piraeus, Greece is one of Europe’s biggest ports. In 2009, China’s Cosco leased part of Piraeus’ container terminal. Since a key part of Greece’s financial bailout is for the Greek government to sell state assets to pay down debt and bring in foreign investment, Greece completed the sale in the summer of 2016 of a majority stake in the entire port to Cosco.
- In 2014, the China Merchant’s Group and Australian fund-manager Hastings Funds Management purchased Australia’s Port of Newcastle, the world’s largest coal-export terminal for Australian $1.75 billion.
- In 2014 the Nicaraguan government and Hong Kong-based HKND Group announced plans to build a second canal linking the Atlantic and the Pacific Ocean 278km (173 miles) from Punta Gorda on the Caribbean through Lake Nicaragua to the mouth of the river Brito on the Pacific. The estimated cost is $40bn (£23bn). Construction has not started yet, but supposedly soon.
- Multinationals are positioning themselves for future global growth, much of which will be spurred by China. A Wall Street Journal article on 10/15/16 noted that General Electric and other multinationals are following China’s state-owned companies in the developing world who are building roads, ports, and other infrastructure as part of President’s Xi Jinping’s initiative, known as “One Belt, One Road.”
- Because Africa lacks good roads and railroads or a manufacturing base, perhaps 90 percent of Africa’s trade goes by sea. Ports are also the point where trade can be regulated and taxed. Forty percent of Kenya’s government revenue comes from custom duties and taxes. But the inefficiencies of Africa’s ports remain a major obstacle to Africa’s long-term economic prospects. The ports are generally too small; they are poorly run and operated; the levels of corruption involving port officials are high; and the roads and rail infrastructure leading away from the ports require serious upgrading.
- The development of the Russian Arctic route, the Northern Sea Route (NSR), for transit shipping has stalled because of the economy and cheap fuel prices. 2012 was the biggest year with shipments of 1.35 million tons. In mid-September 2016, the year’s total has reached 0.20 million tons. In 2015 less than 0.040 million tons was sent via this route.
- LNG carriers from Russia could begin to use this route soon. In January 2016, Korea’s Daewoo Shipbuilding and Marine Engineering (DSME) launched a liquefied natural gas (LNG) carrier classed for breaking through over 2 meters of ice. The carrier will serve the Yamal LNG project in the Russian Arctic and is planning to use the NSR as needed. Another 14 ice-breaking LNG vessels are on order with Daewoo for the project.
- In this major shipping slump, companies are merging, selling assets, implementing cost-cutting measures, scrapping ships, going bankrupt—anything and everything to survive.
- A.P. Moller-Maersk operates two major businesses: the world’s largest shipping company, Maersk Line, and an oil and gas company, Maersk Oil. The family that owns the Maersk Group is looking to split up the conglomerate. In June, the Maersk Group’s CEO was fired and replaced by the head of the container business.
- The world’s seventh largest shipping line, Hanjin, declared bankruptcy on August 31, 2016. It is starting to sell its best assets.
- French CMA CGM, the world’s third largest shipping line, just acquired Singapore’s Neptune Orient Line (NOL) for $2.4 billion in cash, and is now looking to sell the port assets of NOL for around $1 billion.
- In 2015 China’s two biggest state-owned shipping companies, China Ocean Shipping (Group) Co. (or Cosco Group), and China Shipping Company combined their fleets and port operations to create China Cosco Holdings, the world’s fourth largest container operator.
- China Cosco Shipping Co., the world’s largest bulk carrier, said in June 2016 it would recycle (scrap) 53 vessels by the end of 2017, or 8 percent of its existing fleet. Will that be enough?
- Large shipping companies are forming alliances to share space on their vessels. In January 2015, Maersk and Mediterranean Shipping Company (MSC) started the alliance 2M. The world’s seventh largest shipping line, Hanjin, which just declared bankruptcy on August 31, 2016—had been part of six-member group, The Alliance, formed in May 2016 to help compete against 2M.
- Chinese yards build approximately half of the world’s new ships. They are currently suffering badly. In 2016, the yards have received 127 orders worth about $3 billion, compared with 621 orders worth $27 billion in 2015 and 992 orders worth $34 billion in 2014. About 75 percent of China’s 1,800 yards it had in 2009 have closed. The consolidation is being orchestrated by Beijing to be not so dependent on manufacturing and heavy industries and to remove high-cost, inefficient shipbuilding yards from the market. Beijing is also no longer subsidizing the sector.
- In October 2016, a Wall Street Journal article indicated Cosco and China Shipping Group were also planning to combine 11 shipbuilding yards in China to create China’s third biggest shipbuilding group.
- High-cost Japanese shipbuilders are struggling a lot. “The order book for Japanese yards is down around 80 percent year on year,” said New York-based Karatzas Marine Advisers in October 2016. Labor costs at Japanese shipyards are on average about two to three times as high as the South Korean and Chinese.
- China banks greatly expanded their loan portfolios in the shipping industry before the current shipping business crisis. Many of those loans are likely non-performing at a time when other industries (and loan portfolios) are hurting.
- Things could be turning around in commodities. As of the summer of 2016, it appears energy and materials commodity prices are slowly recovering. The commodity fuel (energy) index of indexmundi.com is up approximately 45% since the beginning of 2016, although it’s still 23% down from the highs of a year earlier. Noticeably, private equity firms are beginning again to invest in oil opportunities. The metals price index of indexmundi.com is up 10% for the year, but still down 15% from a year ago.
PLAUSIBLE OUTCOMES IN TEN YEARS
Short Term: Next Two Years
The world faces two, very different possible short-term outcomes in global trade and shipping: Either the world economy will experience a major recession and cross-border trade and ocean shipping will fall significantly for several years, or the world will embark on long economic expansion supported by increases in cross-border trade and a competitive ocean shipping system. Much depends on what happens with China’s economy. If China’s economy doesn’t’ come off the rails, then shipping will likely start recovering in 2017. Commodity prices are already up and those markets could soon improve one shipping market.
Assuming the recession scenario doesn’t occur, then we could see in the short term:
- The shipping industry will likely slowly begin recovering in 2017, pulled along by a rebound in commodities flows around the world and higher prices after shipping capacity is removed.
- China developments:
- Beijing will continue to encourage consolidation of the various shipping sectors—shipbuilding yards, container shipping lines, bulk commodity shipping lines, etc. More state-owned companies will merge. But will enough higher-cost capacity be eliminated to enable Chinese companies to be the low-cost leaders in the markets?
- Chinese banks will suffer from non-performing loans in shipbuilding. This will contribute to the growing problems in China’s financial industry. How vulnerable is the overall Chinese economy to a financial crisis?
- Chinese companies could be aggressive in taking advantage of current bargain prices and acquiring foreign assets.
- International shipping companies:
- Multinational shipping companies will scrap many higher-cost, smaller-tonnage vessels, removing container and bulk-carrier capacity from the system.
- Consolidation of shipping companies based in Europe will continue because of ongoing financial losses and the need to prepare for rejuvenated, low-cost Chinese competitors for when the market turns.
- Japanese and Korean shipbuilders will lose even more market share when new orders start flowing in again, unless heavy subsidies are pushed their way by their respective governments. That’s unlikely.
Long Term: Years 3 to 10
The long-term outlook for global trade and shipping industries is very positive unless geopolitical forces drastically curb cross-border exchanges. But short of a severe worsening of the political situation, we could see the following in a revived world:
- Global shipping:
- Shipping rates, canal tolls, and port costs will remain low for many years. Ocean shipping will remain a very competitive option.
- The Chinese will remain the largest player in the movement of goods around the world.
- The prices and efficiencies of the global shipping will depend on the competitiveness of the shipping industry and the financial stability of the Chinese companies.
- Use of the Arctic NSR will slowly increase but will not be a major factor in global shipping except for LNG carriers.
- Piracy activities could fall off.
- But maybe non-state terrorist organizations could target vulnerable large vessels.
- Shipping companies:
- In the long-term the costs of transporting large quantities of manufactured goods and bulk commodities will continue to decline with the use of larger ships, more digital data and analytics to improve efficiencies, and more competitive route and canal options.
- Interesting automation advances will continue to be adopted because of the major opportunities for eliminating human safety issues and saving a lot of money.
- Chinese owners, many of them state-owned, may begin to dominate.
- Ports, shipyards, and onshore transportation infrastructure:
- Chinese shipbuilders will recover and dominate future shipbuilding.
- For many developing economies, the investment and operation of new ports will define their economic opportunities.
- There’s a good chance investments in African ports will significantly increase. Less but still important will be the investments in Latin America ports.
- However, corruption levels and bad management will still define most African ports.
- Chinese firms will be active in the financing of foreign port and transport infrastructure to enable trade growth with Chinese firms.
- Maybe the Chinese will buy the Panama Canal, if the plan for a second canal through Nicaragua falls through.
Long-term implications for national economies:
- Since ports and canals will process even larger volumes of goods and commodities in the future, national economies will be more at risk to terrorist attacks, disruptions, or stoppages in ports and canals.
- For the last 70 years, the US Navy and Coast Guard have maintained order on the high seas. That will likely be less so in the future. The Russia Navy will control the Arctic NSR. China will likely deploy its Navy more globally, particularly in the Southern Hemisphere.
- India could try to expand its own Navy to match China’s, but this won’t happen in the next ten years.
- A boom in truck and rail infrastructure building will occur as regional governments complete the land-transport infrastructure to match the new and refurbished port capacities.
- The United States may eventually examine the costs and benefits to the US economy from the Jones Act, which requires goods transported between US ports to be shipped on vessels built in US yards.