THREE MARITIME TRENDS FOR 2016

INTRODUCTION

At the beginning of 2016, the world economy is unsettled.  Stock markets are volatile and investors are worried.

Since recession of 2008, the maritime industry has had to restructure. A period of uncertainty and instability triggered by the rise of the U.S. dollar, slowing Chinese economy, collapse of oil prices, slowdown of the European economy and political uncertainties has ensued.

This analysis illustrates that the trends of the shipping industry are positive and encouraging. They predict that growth will remain higher than that of the world economy and will still continue and business opportunities will continue to present themselves. Three major trends are described: one,  the volatility of demand, another related to the the world economy, and a third,  maritime supply and public investments.

TREND 1: High volatility of demand

This first trend is due to globalisation which has increased the variability of risk. Such a ‘butterfly effect’, a simple modification of the conditions of the market in a specific area of the globe – for example in Asia – can have an impact on the supply and demand in different locations – for example in the United-States. This situation leads to less predictable demand for transport.

The fact remains that the maritime industry is, more than any other type of industry, sensitive to all forms of external disturbances, and particularly to international situations. These external variables over which the industry has no control, affect the ability of the industry to plan and structure itself to develop in the long term. Thus, changes in rates of Exchange and interest rates, changes in Government legislation, stock market declines can, in a single year, have important repercussions on the request and on the volume of the substances carried. Other external and unpredictable factors in the industry are equally important and are not necessarily economic in nature: climate, policy (civil wars), human disasters, etc.

2015 was no exception to these difficulties. One can see that the trends are veiled by a set of factors that affect the overall performance of the industry in the short term: successive periods of growth and decline in different sectors and an increased volatility , due to unpredictable elements, external to the industry, have little to do with long-term trends.

This situation implies  tighter management of maritime enterprises (maritime lines, ship owners, ports and shippers) in order to adapt strategies to protect against risk and price fluctuation. Among these strategies, longer-term planning, adaptating of various techniques to counter the risk: signature of long term contracts including clauses on risk, adequate insurance coverage, bank guarantees, refinancing and alliances strategies that allow a readjustment based on  random factors.

TREND 2 – A sustained but uneven global recovery

This second trend is related to the strong correlation between global economy growth, countries external trade balance, maritime transport and its evolution. The most dynamic countries are those with fastest growth for transportation demand. The following analysis gives positive results in this regard.

According to the World Trade Organization (WTO), over the past 30 years, world trade in goods and commercial services increased approximately 7% per year on average. In 2011, there was a record level of 18 000 billion US$ of goods and of 4 000 billion US$ of services. For several decades, world trade has increased on average almost twice faster than GNP. Between 1980 and 2011, the share of world exports in developing economies rose from 34% to 47% and their share in world imports from  29% to 42%. Asia, including China, plays a growing role in world trade.

The shipping industry has benefited from this strong growth. As shown in the table below, its growth tends to follow the economy and confirms the strong correlation.

Comparison of growth of world GDP, INTERNATIONAL MARITIME TRADE AND COMMERCE (1) – annual growth rates

201020112012201320142015
World GNP2.82.22, 42.52.5
World GNP

(developing countries)

6.04.74, 84, 54.1
Export of trade13.95.52.02.62, 3
Importation of trade13.85.42.02, 32, 3
Maritime trade7.04.44.73.63, 2
(1) review of Maritime Transport, 2015, 2014, the United Nations trade and Development Conference.

 

There has been a deceleration. As with the global economy, world trade has increased just 2.3% in 2014, while maritime trade increased by 3.2%. According to the United Nations Conference on Trade and Development, the growth of emerging countries has remained relatively robust, 4.5% in 2014, almost double that of  global economy.

Since 2008, Western economies, particularly those in Europe have been slow to resume their growth rate, the recovery of the the U.S now at least seems more encouraging.

The US recovery could change the situation

2015 confirmed the US recovery. Due to the strength of the U.S. dollar, a key component that defines the dynamics of exchange between countries and continents, it will have a significant impact on trade flows mapping and maritime transport.

The U.S. dollar could maintain its strengh. The reason being that changes in long-term rates are based on the of relative productivity between countries.  Therefore, it reflects the relative demand for the currencies of these countries. There would therefor be a return to a more normal situation towards a capacity of production corresponding more to the level of development of the American economy. This will affect the flow of trade in goods and services.

For shipping companies, transactions in US dollars, will have a significant impact. This could imply higher costs of contracts in local currency, especially in a context or the maritime transportation. Another impact is structural, as a high U.S. dollar could alter the mapping of trade. Imported products from United States will thus become more expensive for other countries.  Exported goods to United States will be less expensive  The flow of world trade would therefore tend to change, and reverse itself.

The changing Chinese economy

Second largest economy in the world after the United States. The Chinese economy has seen slow  growth rate slow over the past years. This growth is currently around 6%. It is still far superior to the progression of the world economy as a whole.

How can this downturn affect the global recovery of the transport of goods. ? China has been the engine of the maritime economy for several years. According to the Chinese Government, it has now the largest capacity of shipping in he world : 20 major ports, each with an average capacity of transit of goods of 100 million tonnes per year. It is also the largest manufacturer of boats in the world. These ships are being exported to 169 countries and regions.

There is, however, a major slowdown currently is taking place. Chinese stock market at the beginning of year 2016 trumbled, leaving investors nervous.  Much speculation was made on impact of this siuation. Several companies, supported by the State regime, are not seeing profits. Cosco (China Ocean Shipping Company) which has, over the past years, seen a phenomenal expansion – a major force of the Chinese maritime industry – has,  in fact,  never been profitable.

China is currently facing a problem of overinvestment, so much so that many investors are withdrawing their money.  An estimated 150 billion $ are being retracted from China every month, the equivalent of 20% of the GDP in one year. The slowdown in the Chinese economy has an impact on exporting countries to China:   United States, Germany,  France and Canada (natural resources).

This slowdown in Chinese growth is perhaps not connected to the weakening economy as such, but rather by the natural mutation of an economy moving towards an endogenous model powered mainly by domestic demand. The strong demand for labour generated by direct foreign investment in China has had a considerable impact on wages (average increase of 8 per cent annually for the past 15 years), which subsequently contributed to increased purchasing power and the development of an internal markets. In such a case, the growth parameters are slower to develop: long term investments, education, productivity, innovation, and also infrastructure, etc.

With the increase in the purchasing power of the Chinese, the consequences of this change on the nature of the goods and services traded with China could be substantial (as in  the post-war Japan). Chinese have become sophisticated consumers. This could lead to opportunities for Western companies business. But the phase of adjustment to increase the purchasing power and enrichment could still take some time.

Europe between the tree and the bark?

Countries in Europe have not yet recovered from the recession of 2008. Britain and the Germany will continue to be important growth engines in the European area. But the southern countries are confronted with a large public debt which could compromise chances of recovery. On the other hand, the economic downturn of China, an importer of European products, could jeopardize  this recovery.

Europe’s advantage is its geographic positioning and its integration with the rest of the world. Europe is located halfway between America and Asia for many routes.  This highlights the importance of  high-capacity infrastructures, including ports such as Antwerp, Marseilles. In the short term, the slowdown in the demand for transport from China could be offset by U.S.

In the long term free trade agreements bilateral or multilateral will contribute to greater success. Europe has, in the past,  assumed a leadership role on these issues. Several European economies are among the members of the G8. According to the WTO, these agreements have been the main factors of growth in transport for several decades.

TREND 3 – A restructuring of supply and ongoing infrastructure investments

The third trend is the supply of maritime transport will adjust to the movement of trade flows. These structural adjustments could question infrastructure planning undertaken by Governments and port authorities.

Since 2008, the industry struggles to increase its profitability and  is going through a situation of oversupply.  Consequently, freight rates have fallen, resulting in financial hardship.

Significant challenges were met, including investments in larger vessels,  mergers and alliances,  These investments were planned from the perspective of an uncertain upturn of the world economy.

Economies of scale but a greater concentration of supply

However, the deceleration of demand worldwide will continue to maintain existing overcapacity in the industry. In 2014, fleet of vessels increased by 3.5%. This is the lowest growth in the past 10 years. The estimated number of ships would currently amount to approximately 89 464 ships, a tonnage of 1.78 billion  deadweight tons. However, this is still higher than the growth of world GDP and world trade which was 2.5% (see table above).

The tendency for larger vessels, the mergers and alliances will increase and will change the structure of the market, resulting in a higher market concentration, bigger contracts and a higher level of concentration of property. While the ability of maritime transport by country has tripled from 2004 to 2015, the average number of business services departing or entering the ports decreased by 29%.

Another trend is related to the balance between operating costs and fixed costs (cost of capital of  larger and more energy efficient vessels). The decrease in operating costs resulting from the increase in the size of ships is offset by the amortization of costs related to their replacement. These amortization charges are higher due to the acceleration of the cycle of renewal for fleet of ships.

The new dynamics of trade, sparked by the recovery of the American economy and the slowdown in China could have a significant impact on the balance of the cargo and freight rates.

Each port has its hinterland

Information about the volume of cargo handled through the world, shows that there is a large geographic disproportion in the size of port sites.  Asia and in particular China accounted for, in 2013, 9 of the 10 largest port sites. The two largest, Ningbo and Shanghai exceeded 700 million tons in traffic. In America, only two ports had a template more 200 million tonnes (MT): Soutj-Louisiana and Houston, with 242 MT and 216 MT. These were followed by Vancouver and New York with respectively 135 MT with 120 MT.

What explains this phenomenon?

The first explanation may be the population density surrounding the port site and the size of the hinterland. (Los Angeles, New York, Shanghai, Singapore).  Congestion of certain ports or overflow for example, may explain, to a certain degree,  shift of market shares, but the  geographic location as well as the size of hinterland are the reasons that best explain the distribution of the port sites market shares in the long term.

Other factors may also explain changes in market shares. They are linked to interventions of Governments and can affect the underlying competitive aspects: — investment costs related to the adaptation of the ports, connectivity (link with a port of transshipment or not), the budgetary constraints of Governments to help the development infrastructure.

Infrastructure investments

Over the next few years, massive investments linked to the increase of the capacity of the infrastructure will continue, and this despite a deceleration of global growth in transport. Because of the size of public projects,  they will be undertaken over a period of several years.

Governments therefore are also motivated by the desire to capture a share of growth in transportation demand. Thus, between 2011 and 2030, all ports in the world could globally invest 830 G$ US in infrastructures, this in order to meet the requirements related to the increase in the volume of trade, the size of the boats, competitiveness and in port efficiency.

Only in the United States, the American Association of Port Authorities (AAPA) provides that American ports and their private partners will invest approximately 46 G $ between 2012 and 2017 in port infrastructure. Also, the adoption of WRRDA (Water Resources Reform and Development act) paves the way for the modernization of American ports by reforming the process of decision and financial implementation of the projects. This project gives permission to develop some 34 infrastructures of importance in the United States.

The Suez and Panama canals will influence the new routes

Globally some infrastructure projects will have an  impact on the choice of the routes around the world and on markets shares between the ports. These investments will therefore be decisive in the direction of trade between these regions.

For example, the Suez canal, a strategic point which provides access to the European markets traveling from Asia, will double its traffic due to its enlargement. It is expected that the average number of ships per day will increase from 49 ships at 97. Transit and waiting time will be significantly reduced. More goods could leave Asia, through Europe and subsequently move to America and ports on the side and American.

Also, this Egyptian project is part of a plan aimed at stimulating economic growth in the country. This includes the construction of an industrial zone in the adjacent area, the construction of 5 new seaports and a logistics pole. The cost of the project is estimated at  8.4 billion $US and should more than double annual revenues for the port, from  5 billion $US to  13 billion US$ in 2023.

The Panama canal enlargement is a competitive project to the Suez canal project. It is an important project for transport in the Asia-Pacific axis. Larger ships will be able ro reach ports of Southern and Eastern costs of the United States and the East Coast American via Panama. The positioning of the Suez canal, however, seems more strategic than Panama since it allows Asian shipping lines to stopover in Europe and thus to serve both the European and American markets.

Also, massive investments will be done in transhipment ports. These types of ports, allow unloading super cargo ships on connector vessels. Although these types of ports are more developed in Asia and Europe, some are already present in the Caribbean. Their geographic positioning remains crucial. These ports offer a more cost-effective alternatve than direct connectivity and allow distribution of goods in areas where super freighters cannot access. Their development also follows the trend.

The new Silk roads

Finally, in the longer term, China aims to promote the development of two major roads  with the aim of bringing the goods to the West by overland or maritime routes.

The overland route is a railway which starts in  Xi’an, capital of Shaanxi province, located in the centre of China. It will traverse the Kazakhstan, Central Asia, North of Iran, the Iraq, the Syria, Turkey to join  countries in Europe, China’s first commercial partner.

The Seaway would start in the centre and southwest ports and would serve the Viet Nam, the Indonesia, Sri Lanka and Bangladesh. The next step would be the Kenya. It would later borrow the Suez canal to join European countries in Greece and later Italy.

Some 40 billion $US in investment are planned for the construction of infrastructure, bridges, roads and railway routes. China is looking to establish its economic power in those countries crossed by this road, and paving a new and  faster way than the sea for its trade. China seems to maintain a preference for the development of the Asia-Europe-America axis instead of the Asia-U.S.

 

Louis Bellemare
Economist
January, 2016

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