"May you live in interesting times" is alleged to be an ancient Chinese curse. If anyone is living in "interesting times" right now, it's the shipping industry. As a global business with highly fungible assets, shipping is very much influenced by the balance of supply and demand in both global and particular shipping markets. However, managing supply requires foresight of at least two years (the typical lag between a new vessel order and delivery), while demand is subject to economic growth and global sourcing patterns that have become increasingly volatile of late. A review of some of the developments in the three major industry sectors shows how changes in the forces affecting supply and demand are shaping the significant—and yes, interesting—challenges facing those in the industry.
Container (liner) shipping
Simply stated, times are not good in the container shipping industry. In fact, they have rarely been good for any extended period of time. For many years, the container shipping industry has depended on strong demand growth bailing out carriers that have placed aggressive orders for new capacity. That may not have been a great worry when the industry was growing at double-digit rates in the 1980s and 1990s, and periods of overcapacity were relatively brief. However, as Figure 1 makes clear, this has not been the case in recent years.
![[Figure 1] Change in containership supply & demand](/media-library/20130904choppy-seas-ex1.jpg?id=53612105)
![[Figure 2] Change in dry bulk vessel supply & demand](/media-library/20130904choppy-seas-ex2.jpg?id=53612106)
![[Figure 3] Change in liquid bulk (tanker) vessel supply & demand](/media-library/20130904choppy-seas-ex3.jpg?id=53612107)
Driven by the goal of maximizing scale economies, containership operators have been adding larger and larger vessels to their fleets—up to 18,000 TEU (20-foot equivalent units) at the upper end of the range. However, some fundamental changes that appear to be occurring on the demand side suggest that the "boom times" of recent decades may be a thing of the past. An April 2013 report on "nearsourcing," The AlixPartners Manufacturing-Sourcing Outlook, indicates that U.S. manufacturers may increasingly turn to U.S., Mexican, and other Latin American suppliers rather than stick with more distant sources in Asia. Two of the reasons for that shift cited in the report are exchange rates that reflect the increasing strength of Asian economies and automation (for example, three-dimensional printing), both of which will have a significant impact on manufacturing costs and choice of location.
Meanwhile, slow economic growth in Europe and that continent's own version of nearsourcing (shifting production from Asia to Eastern Europe) will continue to affect the Asia-Europe container trade. Over time, this shortening of supply chains on both sides of the world will reduce the need for containerships to move goods across miles of oceans between the developed world and its suppliers.
The outlook for 2013-2014 is a challenging one for container shipping, as excess capacity, particularly in the form of very large container ships, will not be balanced by a recovery in major liner shipping markets. Look for rate recovery to be modest at best in all of the major liner shipping markets over the next 18 months despite the current noncompensatory level of freight rates.
Dry bulk shipping
Demand within the dry bulk shipping segment is driven by the global need for basic commodities like coal, iron ore, and grain. Recent strong growth among Asian economies, particularly China, has been a major contributor to growth in demand for bulk carriers. However, slackening demand within these economies, partially driven by weakness in European and, to a lesser extent, American economic growth has led to a significant level of overcapacity in the dry bulk sector. This has been exacerbated by aggressive ordering of new tonnage by ship owners in response to the boom in demand seen in 2010, as indicated in Figure 2.
Nearsourcing is not likely to have the same effect on the dry bulk shipping markets that it will have on container shipping, so the outlook for this industry sector will depend on how long it will take for demand growth to absorb the infusion of new capacity that came into service in 2011 and 2012. A recovery in the short term (2013-2014) is unlikely, as the recent influx of new orders will not be offset by significant growth in dry bulk commodities shipments. Expect freight rates to remain relatively depressed for the next 12 to 18 months until demand catches up with supply.
Liquid bulk shipping
A similar nearsourcing effect appears to be influencing the supply/demand balance within the global oil and gas markets that are the fundamental drivers of demand for crude and product tankers. With the increase in U.S. domestic energy supplies due to the use of hydraulic fracturing ("fracking") technology and the substitution of alternative energy sources (for example, wind and solar) for fossil fuels in much of the developed world, the number of ton-miles required for transporting crude oil and other petroleum products by tankers is declining. As shown in Figure 3, the supply of tanker capacity has yet to be adjusted to reflect the reduction in ton-miles.
Accordingly, we can expect more rough seas in this sector as global energy supply chains experience substantial change, and changing energy markets have a long-term impact in the form of reduced ton-mile demand. Partial withdrawal of the United States from some crude markets will not have a big impact on rates for the very large tanker sizes that primarily focus on European and Asian markets; however the impact will be substantial in mid-range vessel segments. Nevertheless, increased demand for natural gas and the emergence of the United States as a significant liquid natural gas (LNG) exporter may boost rates in the larger gas carrier sector within the next two to five years.
