Shipping: Evolution Not Revolution
It was a relief to see the consolidation that took place in the shipping markets in 2017, which in turn has led to a healthier market and a stronger outlook for 2018. The energy sector, however, remains complicated with the LNG market rising, tankers falling, coal volumes up, and shale the wild card. All in all, more transaction volumes (demand) plus more controlled tonnage (supply) leads us to conclude that the year ahead of us will be more and more balanced. Yard consolidation has also continued (from 680 yards in 2007 to 300 today), which has meant upward pressure on newbuilding prices.
This year has seen the confirmation of three major changes to the shipping market whose implications, and whether they will be disruptive or evolutive, have yet to be settled:
1) the awareness that shipping is a major contributor to CO2 and sulphur emissions;
2) the fact that all shipping markets, and thus the landed costs of many trades, are based on broker indices; and
3) a recognition of the need for transaction traceability for compliance, sanctions, tax and reliability purposes. Regulations imposed on national companies by international organizations are by defi nition hard to enact and even harder to enforce.
The industry is making small steps, but there is a large differential building between those who embrace the targets and the others who try to circumnavigate or delay them. Geopolitical events complicate planning and decision-making, as oil at $40 a barrel leads to radically different decisions than oil at $75 a barrel. Such decisions range from immediate scrapping for heavy consumers, to conversion to dual-fuel engines, to newbuildings with full LNG-capable engines, or simply ultra-slow speeding. Our markets will be infl uenced by the ultimate proposals of the engine/ ship designers; what fuel qualities the energy companies can provide effi ciently; the political decisions of the major oil producers; and of course the fuel price which emerges from these developments, as all the while the climate conundrum unfolds.
The Singapore Stock Exchange (SGX) bought the Baltic Exchange at the end of 2016 and with it the right to publish all the shipping indices used as benchmarks for pricing, plus the settlement numbers used for derivatives and increasingly also for term physical transactions. The indices were developed by shipbrokers to allow a tanker and dry cargo shipping derivative market to fl ourish. The indices were extended into all sectors in response to a real need for transparency and objectivity. The industry is now faced with a realization that the indices less and less refl ect shipbrokers’ objective opinion of the state of the market, but rather more and more what the clients are showing to the market.
Who owns the indices? The cargo owners who transact (in which case the compliance offi cers will have a serious issue to resolve; transacting using an index which you infl uence), the shipbrokers who supply objective appraisals of how they see their markets (but they are seeing a smaller and smaller share), or the Singapore Exchange (in which case with what authority, as any major news provider could compile them, albeit with less objectivity and sentiment as the users who rely on them would quickly learn to feed the provider and thus infl uence the indices). Direct fi xing using indices is now the majority of dry bulk transactions.
On the major ore routes, which represent over 50% of the dry cargo market, we estimate less than 10% is fi xed through brokers or disclosed. The CIF (Cost, Insurance and Freight) net back prices of commodities are even more dependent on the indices. Price disclosure that used to be done by establishing bids and offers on the market is no longer necessary as the indices serve as price references. End users can now price their freight (and the landed cost of their commodity) on their own ships without going to the market.
Could this be the reason why a majority of the dry cargo orderbook in 2017 constituted orders by, or for, end users and traders. Traditional owners are having a harder and harder time justifying investing against returns based on purely indices. Is this a natural inevitable evolution or are we headed to an uneven playing fi eld where the giants are able to control the total commodity chain? We better figure it out before there is a revolution, but the evolution is already well advanced. Whether it is the Panama Papers, national tax laws, Brexit, terrorist funding, sanction enforcement, the future need for traceability and accountability is growing. Various maritime initiatives are underway with Silicon Valley targeting the huge transaction volumes in all aspects of the maritime sector.
The complexity of cross border trades and payments, coupled with the even more complex interaction between the participants, screams for transparency, speed and simplification. Blockchain and cryptocurrencies are heralded as potential solutions but with the complex web of essential maritime links, the chain will look more like a cobweb than an anchor chain. Our industry has major challenges ahead but we are confident that it will continue to grow in order to transport safely, efficiently and cheaply, with participants finding solutions to overcome climate, transparency and transaction hurdles. Maybe not in one go, but slow and steady like a ship tracing its own wake. Evolving not disrupting.
Source: BRS Annual Review, Tim Ford, President