As 2016, three trends will describe maritime industry in 2017: 1-an increased volatility of demand 2- a sustained but uneven global recovery 3- a restructuring of the maritime supply. This text presents an analysis of these trends.
1- An increased volatility of demand
1.1 New external factors
Variability of the risk makes demand for transport less predictable. In 2016, several factors triggered this instability, including fluctuations of exchange rates, slowdown of Chinese economy, lower oil prices and difficulties of the European economy.
In 2017, recovering of American and European economies is well engaged. Despite a slight slowdown of the GDP of the United States in the last quarter of 2016, one can anticipate a still dominant position of the U.S. dollar will continue in 2017. The impact of a strong U.S. dollar boost U.S. imports.
In return, other external event to the industry are related to international political situation. The intention of Donald Trump to review several agreements of free-trade (NAFTA and the transpacific Partnership), the vote on the Brexit inducing the exit of Great Britain of the European Union are some examples. The rise of protectionism could have the effect of undermining the global economic recovery.
In the sector of maritime transport, two important events occurred in 2016, the bankruptcy of Hanjin Shipping and the opening of the new Panama Canal.
Some believe that Hanjin Shipping’s bankrupcy it is precursor to a major crisis (Gerry Wang, CEO de Seaspan) in the industry. Hanjin’s situation is not unique and other maritime companies are also in difficulty. Because, recessions are the result of a chain process, if other bankruptcies were to happen, the effects could be devastating on the financial institutions, the clients or suppliers and shippers. It could even slowdown entire world economic activity.
In the case of the new Panama Canal, news is better. The inauguration of the canal had the effect to reconfigurate world trade. However, the impact of Panama is especially to redefine maritime routes, not to increase the overall demand.
For its part, the administration of Panama (Panama Canal Authority) will have to cope with a global context struggling with profitability of an infrastructure which proved to be very costly.
1.2 A cyclical industry in a long process of restructuring
For how long the industry can maintain negative margins and historically low freight rates? The marine transport industry is cyclical, a premise which allows us to anticipate better days, but when?
These cycles are composed of three steps. First, expectations of an expanding demand lead to decisions to invest in the construction of new vessels. In a second time, slowdown of demand causes an oversupply, leaving businesses in debt and having to deal with lower tariffs. Third, the recovery is linked to some specific conditions and magnitude of imbalance between supply and demand. These conditions of adjustment allow us to determine when the industry will be profitable. The future growth of the demand, the interest rates, the freight rate, the renewal rates ships fleet, as well as competition and industrial concentration are among those conditions.
Only companies whose financial health is strong enough to hold deficits or margins extremely tight for a long period will survive. A consolidation of the industry then occurs.
1.3 Sharing risk with shippers
Sharing risk between owners of the ships and shippers remains one of the key variable for recovery. Sharing risk allows to better control supply.
Currently, carrier support commercial risk. Lower freight rates are beneficial to shippers making them more competitive with lower costs of transport. But, in this situation, shippers are not inclined to assume the risk of financial lost if they have to deal with an industry in financial difficulty. They would rather resort to independent markets (Markets spots) and leave the transportation industry to restructure itself.
When growth expectations are good enough, the risk can be transferred to shippers. The latter will agree to assume a share of risk because restrictions on the supply side of transportation services could lead difficulties to distribute their goods and cause significant losses. In order to protect themselves against this type of risk, shippers will seek to better control supply by obtaining guarantees and signing long-term contracts. They could even decide to become themselves the owners of vessels.
For this reason, bankruptcies are an extreme situation and are not necessarily to the benefit of shippers, nor, in fact, of anybody. Hanqin’s case is quite a good exemple in this regard. The announcement of the bankruptcy of the company, seventh largest container carrier in the world, has had the effect of retain, for several months, in the vicinity of ports or in the terminals, hundreds of thousand cargoes, the equivalent of 540 000 TEU (Twenty-foot equivalent). This situation has created enormous indirect costs, not only to shippers but also to the whole supply chain players and even to consumers.
Hanjin has been one of the biggest bankruptcy cases in the industry of container. It is still to fear that other bankruptcies will occur. In the event of such a situation, a chain process could quickly escalate. This means that, despite the mergers and alliances, despite some of the interventions from the Governments, the shippers also have an interest to be involved in a solution of exit from crisis to redefine a sharing of the risk which would be the guarantor of a better stability of the industry.
2- A sustained but uneven global recovery
2.1 India’s growth now higher than China’s
Historical rates of growth in the demand for transport are now a thing of the past. The shipping industry will have to adapt to a much more modest situation, notably in connection with that of the world GDP. Global GDP increased 2.5% in 2015, (forecast of 2.3% in 2016) at the same rate as for 2014. The recovery period should therefore be long.
Note however that the growth of developing countries has decelerated from 4.4% in 2014 to 3.9% in 2015. However, it still counted for 70% of the world’s growth (International Monetary Fund, 2016).
Our last post, January 2016, stated that Chinese economy was in mutation toward a endogenous model feed the domestic demand. Although the Chinese growth has weakened over the past few years, it still shows a lot of strength (7.2 per cent in 2014 and 6.9% in 2015), mainly driven by domestic services while manufacturing sector remains in excess capacity.
Percentage Growth in some groups of countries
India shows some similarities to the Chinese economy and is now growing faster than China, both in terms of the size of the market and of the type of development. It posted, in 2015, GDP growth of 7.2 per cent, supported in particular by significant investments in its infrastructure. Its imports have increased 10% in 2015, fuelled largely also by imports of crude oil. The West Indies is the third largest consumer of oil after the United States.
Despite high rate of growth of GDP in some countries, the ratio of growth of international trade to the GDP of countries tends to dwindle. Since a few years, the trade in goods is growing in a modest way and often below the rate of growth of GDP. This ratio was estimated at 0.62 in 2015, while it stood at 0.94 in 2014.
2.2 Dry bulk and container freight rate at the lowest
All segments of the market have not behaved the same way. Oil remains the main transported good. In 2016, the low price of oil, largely stimulated by the diversity of production encouraged importers to increase stocks, a positive impact. The oil still represents one third of the energy consumption meanly from countries of the OECD, in particular the United States, the European Union but also China and India.
But the year 2017 will be the testing ground of OPEC policy aimed to limit the production. The impact was to increase price barrel in the short term and stimulate resumption of oil extraction, including U.S. shale. It will therefore be necessary to follow the evolution of the price of barrel of oil and its impact on the demand for transport. This price will remain sustained by China and India. However, in return, production will remain powered by the diversity of the different sources of production.
In the other sectors, freight rates are historically low. Analysts estimate that recovery in the bulk sector should occur gradually and slowly from 2017, only if demand from Asian countries is recovering and if the size fleet stabilizes at its current level.
The following graph presents the evolution of the “Baltic Dry Index “, a price index of international shipping for amenities and raw materials. 
BALTIC Exchange Index, 2014-2016
The index was at its lowest at the beginning of the year 2016. This decline can be explained by a decrease in Chinese demand for iron and coal and a overcapacity of tonnage. Consequently, the incomes of the carriers have also dropped to some 7 123 $ per day, when they accounted for more than $15 000 by day in 2013. The fall of the Baltic Index should be related to the restructuring of the supply of transport for 2017 and the following years. It seems that the demand could grow at a more moderate rate over the next few years.
2.3 Impact on the port activities
The diminution of the demand for maritime transport has had an impact on port activities. Since 2015, the whole of port industry, including the sector of containers, has declined. The 20 largest ports growth’s rates went down 85% from in 2014 to 2015, that is to say from 6.3% to 9%. Note however that this decline of activity is uneven in the world.
The most immediate effect of this decline could be to jeopardize some investment projects in 2017. The article on the economic situation 2016 was revealing massive investments to increase infrastructure capacity, despite a deceleration of world growth in transport. Many of those projects have to be achieved on a period of several years and it is too late to question their realisation. On the other hand, they have been justified by the phenomenon of gigantism which involve investments to increase depth of water and scaling of certain types of equipment. This is particularly the case for the ports on the U.S. east coast. One of the foreseeable impacts of this phenomenon is the concentration of port activities in a more limited number of ports. In such a case, recovery will be effective for a few port sites only and not for all sites.
3-RESTRUCTURING THE MARITIME SUPPLY
3.1 Alliances and acquisitions for the concentration of the market
The dismantling of ships allows to reach a better balance between supply and demand.
Given the magnitude of the imbalance, some market segments such as the dry bulk and the container have been more active in the demolition of vessels. The fleet is gradually replaced by ships of larger size. But this strategy has its limits and is not enough to reduce overcapacity.
To ensure the profitability, the industry has a tendency to addicted the level of concentration already very high. A restructuring of supply is currently underway and different strategies are adopted, including alliances strategies, mergers and acquisitions.
Alliances aim the sharing of “slots”, under contractual agreements called “Vessel Sharing Agreements” (VSA). They allow to shipowners partners to load on the vessels of each other. In 2016, it is estimated that four major alliances were formed by sixteen shipowners active on the whole of the East-West routes. It seems that they will not be more than three in 2017.
In addition to alliances, the period 2014 to 2016 has been ground for several takeovers and mergers from 2014 to 2016, in particular in the sector of the container which is a sector that is already highly concentrated. European companies stand at first: Maersk, the Italo-Suisse MSC and French CMA CGM, with respective market shares of 14.8%, 13.1% and 8.9%, or 37% of the total. These companies are followed by Evergreen, Hapag-Lloyd and Cosco. The sum of the market shares of these six biggest companies amounts to more than 50%.
With the acquisition of Neptune NOL, the French shipowner CMA CGM can now count on a fleet of 540 vessels, which in fact make it the third largest carrier of containers in the world. In addition, the consolidation of the two major Chinese operators COSCO (n°6 in the world with 166 ships and China Shipping (n°7 in the world with 126) has produced the fourth largest carrier.
In the dry bulk segment, the demolition of bulk carriers is not sufficient given the growth of fleet in recent years. The industry tries to cancel or postpone the orders for new vessels in order to offset the imbalance. A third of commands has been postponed and 5% have been canceled. On the supply side, shipowners were reluctant to send in demolition their ship because of the decline in the price of steel recycled. In the first half of 2015, the annual average of demolition was to 3,3m dwt (against 1.3M dwt in the first half of 2014).
3.2 Trends toward the vertical integration
Given the volatility of the demand, shipowners dampen risk by investing in the other segments of the supply chain and by offering “door-to-door” services type”. This consolidation of logistic services allows to better meet the needs of shippers. It also gives guaranties on the capacity, handling and prices.
The other impact of this integration is to ensure the fluidity of the goods at the time of their passage in the ports. They thus avoid the congestion in ports and facilitate customs clearance.
New Maritime World
 Panama Canal Authority Http://www.acp.gob.pa/eng/
 Analysis of the economic situation: the transport and marine services – 2 DGITM – Mission of the fleet of commerce
 Review of Maritime Transport 2016, http://unctad.org/en/PublicationsLibrary/rmt2016_en.pdf
Mor Glaz: “Maritime transport has never been sinking, moreover this is impossible Http://7seizh.info/2017/01/11/mor-glaz-le-transport-maritime-na-jamais-fait-naufrage-dailleurs-cela-est-impossible/
 Analysis of the marine environment, 2nd half 2015, http://www.developpement-durable.gouv.fr/IMG/pdf/Analyse_de_la_conjoncture_economique_Transport_et_services_maritimes_2e_semestre_2015.pdf
 The antenna, http://www.lantenne.com/Consortiums-alliances-et-conferences_a14362.html