The shipping industry has experienced two years of very strong growth, thanks to a range of factors that are now beginning to unravel. Continued strong demand from China should mean that the outlook continues to be favourable in 2006, but there are plenty of downside risks.
Martin Stopford, Director of Clarksons, gave his outlook for the shipping industry at the Maritime Cyprus Conference which took place on Monday to Wednesday last week.
Factors that will dampen growth
There have been four key reasons for what Stopford described as two years that had been “uniquely good” in shipping.
First, is the tight market balance. While the 1970s were characterised by over-supply of ships, the 1980s by a credit crunch and the 1990s by mopping up supply, “by 2000 we were beginning to see a market where for the first time there were no spare ships if you had a sudden surge in demand,” said Stopford.
However, that sudden surge came when China entered the market for world trade with its accession to the World Trade Organisation in late 2001.
The outlook for China is still “encouraging”, said Stopford, but it will not be able to maintain the strong growth rates of recent years.
Supply beginning to outstrip demand
Stopford also noted a “less encouraging” development on the supply side, with the supply of ships beginning to outstrip demand next year.
The fleet is expected to rise by 22% from 2003 to 2006 and within the past two months, the tanker fleet exceeded the size of the tanker fleet in 1976–during the last over-supply downturn–for the first time.
While he forecasts tanker requirements at 12 mln dwt, the supply is expected to reach 25-30 mln.
Scrapping is unlikely to reduce supply that much, since scrapping rates have been so high.
Shipbuilding capacity has also exceeded 1976 levels for the first time.
Orderbooks have doubled in the past year, and “we are beginning to run a little ahead of our trend requirements,” he said.
Prices of newbuildings (new ships) have also doubled, a situation that he described as “unstable”.
A fall in newbuilding prices would also affect freight rates, which have been enjoying a boom, since there is historically a very high correlation between the two.
Recession in tanker markets
Stopford said that the tanker market has a “chronic history of unpredictability”, being vulnerable to external shocks such as the Asia crisis, the dot com crash, and the SARS outbreak.
Stopford predicted a “a little bit of a recession” in the tanker market because of over-supply.
Dry bulk slower
Dry bulk, which has risen 300% in two years, will see steadier growth, as China is now producing enough of its own steel not to have to import so much.
“They are no longer short of steel in China,” he said.
Energy a “wild card”
Stopford also said that energy prices are “a bit of a wild card”. Noting that gas prices have quadrupled, he said “whenever it [the energy market] does crumble, it is going to have an impact on shipping.”
On the other hand, demand for oil is expected to continue rising, equivalent to 12 million tonnes a year of ships.
High capacity utilisation in refineries will also be good for product tankers (those shipping refined petroleum products).
However, given the over-supply situation, he said demand would have to be “spectacular” to deal with the supply issue.
Top of the business cycle
While fundamentals in the global economy point to “reasonable” growth next year, Stopford noted that there is plenty of talk about downside risks, such as big external imbalances in the US.
(The Economist Intelligence Unit in its September World Outlook underlines the risk of a collapse in the dollar for these reasons.)
Peak in the fourth quarter
In conclusion, Stopford said that because the market is tightly balanced, one should expect surprises either on the upside or downside.
Overall, he expects a good fourth quarter but that the pressure would start building from 2006.
However, the slowdown should not be a rapid one.
“I don’t see a spectacular fall because this is supply-driven”, he said, adding that it would be more like “Chinese water torture”.
Fiona Mullen
