All is definitely not shipshape in the maritime sector, according to Dr Henrietta van Niekerk, director and head of dry bulk analysis for London based Clarksons, the world’s leading integrated shipping services group.
As keynote speaker at the first annual Durban Maritime Summit, she quickly poured cold water on one of government’s key growth initiatives for the maritime industry. Operation Phakisa, which aims to boost South Africa’s ocean economy, fingers ship building as one of the biggest potential growth areas. The only problem is why build ships at a time when the global fleet is way too large and big operators in the shipping industry are looking to “lay up” ships (basically park ships for a year or two) due to weak market conditions?
Van Niekerk walked delegates through global shipping trends, pointing to how world economic growth had driven oil and dry bulk demand, earning massive profits during the booming “super cycle” between 2003 and 2010.
As China pushed global trade ever upwards, ship owners decided it was a case of full steam ahead and ordered more and bigger ships. What they didn’t foresee was the sudden contraction of the Chinese economy that saw the bottom fall out of world commodity markets.
As Van Niekerk showed, the world tanker and bulker fleet doubled over the past 15 years. At the end of 1979, the world fleet comprised 7 365 ships. By the end of 199, 8 589 ships had been added. By the end of 2015, it had grown by another 8 163 ships, bringing the total to 16 752.
But everything is driven by supply and demand. With little demand for shipping, there was now a glut of ships – one that was to grow still further. Because there are up to three year lead times, ships that were ordered three years ago are being delivered now.
Van Niekerk said that, during the super cycle, earnings spiked, reaching around $4 000 per day during the good years. But this normalised and then slumped to an average of $1 335 post 2010. The dry bulk market has dropped by 51 percent year on year and ship owners are sailing into deeper and deeper waters.
The obvious solution, according to van Niekerk is that the global fleet needs to contract if there’s to be any meaningful recovery. But that’s not anything near as simple as it sounds.
As a short term solution, ships are “slow steaming” to reduce short term capacity. By reducing speeds by two knots, shipping supply is reduced by 11%. Any increase in speed will unlock further capacity onto the market, delaying any longer term sustained recovery.
A slightly more drastic solution has been to “lay-up” ships under extreme weak market conditions in order to save fixed costs and insurance. Although it costs around $2 000 a day to leave a ship at a berth, this is far better than sailing. Costs per day are around $5 000 but earnings just $1 500.
Van Niekerk says that South Africa could exploit this, earning money from any spare berths that could be made available to lay up underutilised ships.
Similarly opportunities could come from an even more drastic solution – scrapping or demolishing ships. Today, ships as young as 50 years old are being demolished with around 500 ships likely to meet their end this year alone.
This can be done at berth or in old dry docks, offering opportunities to gain not only from dismantling large vessels but also from recycling the materials.
Even though world shipping is in choppy waters right now, van Niekerk was quick to point out that South Africa nevertheless found itself in a “favourable strategic location”. Freight market cycles created opportunities – but, due to their relatively short time span, these had to be identified and implemented timeously.
However, just as it takes time to turn a big ship, South Africa’s extremely conservative maritime industry has up until now been rather slow to both identify opportunities and respond.
Van Niekerk observed that, post the 1950’s South Africa became important on the Southern Shipping Route. To this day, large numbers of dry bulk ships sail around the Cape – but less than half arrive in South African ports.
On February 16, she said that large numbers of ships were passing by. Of the 40 container ships making their way around the Cape, just 20 called at South African ports. Of the 163 dry bulkers in South African waters, just 70 were calling at local ports and only 28 of the 55 tankers passing by intended visiting nearby harbours.
What the local shipping industry needed to realise was that enticing these into local ports could offer growth opportunities, she said.