08 July 2016 World
Time To Scrap The Fleets?
Radical measure may be needed to restore balance and harmony to shipping

(Picture: Time to scrap the lot?)
As an observer of the shipping industry over the past twenty years, I was struck by the phenomenal growth of the shipbuilding and Chinese markets prior to the 2008 crash.

It seemed every day there were so many new and very large vessels coming out of Japan, China and South Korea that we may as well not bother reporting it any more, so everyday, every minute almost, it had become, that the launch of a ship was as newsworthy as a single Nissan rolling out of Sunderland every couple of minutes. Impressive, but a bit samey if you were to assign a whole article to each one.

Indeed, reporting Chinese vessels was a bit silly at one time. So numerous are they, they are given numbers, not names.

Which is a pity indeed. A look at many of these ships, set amidst the glories of the mountains of Japan and Korea especially, are a thing to behold, many of the designs reminiscent of that bold and majestic flair of 1950s British shipbuilding. Even tankships, seen in rows newly delivered, were things of almost loving beauty. Japanese bulkers, although simply sturdy big things, seen sweeping in their joyful colours on trials, with the typical highland scenery behind, tugged at the heart of this Clyde man like our own ships did when I was a boy.

This is only a decade ago really, and the world is filled with these vessels, of ever size and class, all pumped out brilliantly and in gold rush style, - the world thought growth of 12 to 15 percent was here to stay.

But there were voices back then urging caution, drowned out by the din of ships surging into waters and the clang of steel spewing out the ironworks. It was a golden era for the humble. Of all things to dominate the world, it wasn't the European cruise ship, but the pan Asian supply chain, the bulkers and tankers.

Coal ships from Australia to China, ships that transport steel to the shipyards, and so it went on.

And in the midst of this growing populations with ever growing and changing appetites. A wealthier Asian region, goods flowing to and fro, what was not to like?

Simply the fact it all happened rather fast.

And the rather annoying habit ships have of not going out of date like a Nissan from Sunderland.

Ships usually last fifteen to twenty years, and there has been no real slowdown except in the past couple of years. Finance has been easy, shipbuilders have reduced their prices, and all out war between them now, threatens us all with the prospect of 'dumping' to keep alive and the cash flows going.

Every voice in the bulk shipping industry has called for a calm down. Stop ordering new ships has been hollerred from every office looking at the figures. But the shipowners have not stopped and the result is, we are now a world awash with ships and in the midst of a slowdown meaning prices of everything are going down in suicidal fashion.

That is no idle phrase. Just as you can price yourself out of the market by charging too much, you can kill your company by making it too cheap to keep going. Where can we look for the basic indication things are about to topple over completely?

If there is one thing we all need, its food. And with billions of us to feed, we need ships to supply it. So where's the problem? It's not as if the world has stopped growing or people have decided food isn't fashionable. Quite the opposite, in fact, trade should be booming in that department, but for the shipowner, it isn't.

Grain has been the world's most fundamental food source since biblical times. And it still is. It is the source of all good and can be the source of all wars. Today, with more than seven billion of us, and a world now so interconnected the grain can be bought and sold like never before, surely we should all be in trading paradise?

The weak link here is shipping.

Rates for transporting grain have plummeted. The Baltic Dry Index, that bellweather of all trade, is at levels so low, it makes you wonder how the hell anyone has kept going in shipping at all.

With less demand for heavy stuff, ships now chase the staples that are always going to grow - food. But there are so many ships now, the grain producers are the buyers - and the market has reduced the shipowner to beggar status. That may be good because it makes grain cheaper, but it will kill off the shipowners.

Bulk shippers are now frantically trying to pay off debts, gain custom, and struggle with large capital investments they can no longer service. Yet at the same time, the world is hungry and demands feeding, so that the shipowner has no way of ignoring this whilst the battle for trade intensifies. How can you turn your back on the only trade you can rely on? Of course you can't.

But this is leading to further problems for shipowners as many are now finding themselves operating at running losses all the time. In their panic they also try and buy new ships that will give them the edge. Only today Hyundai announced a new vessel to tempt them to try investment in cheaper more efficient means of transport to give them that edge above the competition. What could be more tempting? If one could only find a way of proving one can operate at profit with this new investment then financiers will be more open to long term arrangements to pay down debts?

That could be a way out of the downward spiral of course, but it does not address at all the main problem we have, in fact it adds to it.

There are, simply, too many ships afloat already.

We would have to scrap two ships for every new one built it seems, to rebalance the relationship between shipowners and basic dry bulk producers.

Let us look at what the experts in the field say, and note how clearly and strongly it is said:

“Scrapping ships and no new builds is the fastest road to recovery for the dry bulk market”

This was the heading of a press release from BIMCO last month. "This is the message from BIMCO President, Philippe Louis-Dreyfus, ahead of Posidonia 2016 as BIMCO releases new market analysis – “The Road to Recovery” – on what the dry bulk sector must do to return to profitability."

"BIMCO has developed a new analysis model designed to highlight the actions needed for struggling shipping markets to recover – and to be able to track the progress of the recovery. Using this model, BIMCO has developed a “zero supply side growth” scenario for recovery of the dry bulk market. This scenario requires shipowners to neutralise the delivery of new ships every year by scrapping an equal amount of capacity from the existing fleet."

Commenting on the new analysis Mr Louis-Dreyfus described the dry bulk market as being in a “terrible” condition. He said:

“We cannot expect to be helped by growth in demand, the recovery of the market is wholly and exclusively in the hands of us, the shipowners.”

“The medicine is not going to be easy to take, zero supply growth has been achieved only three times in recent history, during the 1980s and 1990s. The task ahead of us is huge and must be sustained year after year.”

“We need to demolish an enormous number of ships and refrain from building new ships.”

And that my friends, is that. Until the shipping world addresses the problem it created, between shipbuilders, financiers and shipowners, we are unlikely to see any future at all for shipping. It is that stark. The only other way out is to keep going as we are until the strongest survive and in a world already moving towards control of interests in too few hands, that is a scenario that will do nobody any good.

We need a world of healthy competition and world where the little guy can grow his business. We need more companies, not less, otherwise we are all going to end up beholden to one or two major shipping giants. And from this reporting position, how boring a world that would be.

So how can this be done? Perhaps we need governments to support a ship recycling programme, just as the UK introduced a car scrappage scheme to boost new technological advances in design and build of motor cars.

To the environmentalist this must look an horrific waste but we are globally in need of real incentives here on both sides of the coin. We need profitable shipowners, so they can invest in risky new ships that are more environmentally friendly and cut down or even eradicate emissions. We need a healthier trading environment so all have opportunities to enter the world as passionate producers and innovators. And we need new technologies to return profits to boost further research into improving how we transport the goods and foods to a growing population.

If the bulk market were to crash completely, confidence would evaporate. As would improvements in efficiencies and environmental advances. The shipbuilding market could crash with it. It's already in dire straits in once dominant regions. No bad thing you might say, and that's the way the cookie crumbles. But sudden shocks lead to unrest and division. And the world needs less of that.

It helps us all to help each other. World trade will never stop, it will grow always, but we need healthy companies and individuals to help make that growth sustainable, economically and environmentally too. Less boom, less bust should be our motto from now on. And perhaps a scrappage scheme linked to incentives to progress in a more stately and ecologically sound way may be our way forward.