Global shipping: Drifting into recession?

Is world shipping heading for recession? It is too early to predict anything firmly at this moment but the indications appear ominous. And traditionally, as everyone knows, shipping has been the leading indicator.
On August 15, Bloomberg reported that Baltic Dry Index (BDI), the benchmark for shipping freight, fell for 23 consecutive sessions through August 12, the worst decline since the third quarter of 2005.
Early this month, Goldman Sachs advised investors to sell bulk carrier stocks ahead of any major correction as it forecast that the BDI would fall 40 per cent in 2009 and a further 47 per cent year-on in 2010, citing an oversupply of capacity in coming years.
The fear may not be totally unfounded. Recently, the share prices of leading South Korean shipbuilders tumbled amid a spate of newbuilding cancellations and reports of some yards attempting to renegotiate price and delivery dates for new buildings.
Also, the echo of Russian bombers pounding Georgia and the steady decline in the crude price fuelled speculation of a further fall, driven by fears of slowing global demand and firming up of the US dollar.
The nervous sentiment was further aggravated when it was revealed that China, now the world’s second largest consumer of oil, imported record low crude in July.
China continues to have disproportionate influence also on the dry bulk market (it imported 230.2 million tonnes of iron ore in first half which annualised to 460.4 mt or 20 per cent higher than record setting year of 2007) but its manufacturing sector contracted in July from June, the first drop in almost three years.
The container rates are off the edge of a cliff against the backdrop of plunging consumer confidence so much so that even gold is down more than 20 per cent since it reached the record high in March. In tanker markets, unprofitable rentals are spurring owners to slow down speed.Bad, not so bad…
What all this could mean for shipping is stark. But there is no consensus among the experts over what happens next as one can find plenty of rosy forecasts.
There are shipbuilders who point out that order cancellations take place even in a good market. The present focus is on cancellations because the world’s financial market is passing through a bear period and the current developments, therefore, are not indicative of a wider problem but only of a specific issue for certain yards.
In fact, reports suggest that some of the Korean shipbuilders, after a panic over their nosediving share prices, succeeded in reselling their slots at a better price.
According to some experts, the gloomy prognosis of Goldman Sachs is overdone, more so because even a couple of weeks after the prediction the market really did not plunge as predicted. The market is softening but there is still money to be made, it is pointed out.
There are as many Capesize vessels on order as already exist in the fleet. The shipyards will deliver 786 bulk carriers of various capacities next year, representing 15 per cent of the existing fleet.
True, Neptune Orient Line reported a 19 per cent decline in second quarter results but the east-west containerised trade continues to grow, though the rate of growth has shrunk to 5 per cent as compared to exceptional figures in recent years.
But, then, as some experts point out, not too long ago, an increase of 5 per cent was considered a cause for satisfaction, not disappointment. Also, even after decline, it is further pointed out, the bulk shipping freight remains more than three times higher than the 20-year average of 2015 on BDI.Tanker market scene
According to some analysts, the tanker market too is set to break its lacklustre reputation and regain its pristine glory. Faster than expected oil demand growth has helped wholesale firming of tanker rates, with many tonnage types, both dirty and clean, now near highs for the year.
The rates were low in the past largely on the assumption that the order-book was too large despite the looming crunch to be caused by the 2010 IMO deadline for phasing out of old single-hull vessels.
But it now appears that the fleet growth may outstrip demand growth only marginally, securing for owners a much stronger negotiating position. According to some experts, the tanker market has better prospects.
But then it will be rash to claim that everything is hunky-dory. Quoting North of England P&I Club’s management report, the Lloyd’s List recently reported, “it seems that the phones in the freight, demurrage and defence department have been ringing non-stop with serious concerns over newbuild contracts, the rising price of steel and yards’ abilities to meet their obligations….
“All this of course has been said before but here it is in black and white that we have a real problem on our hands that is not expected to go away. Indeed the P&I clubs seem to think the position may well be worse in the coming years — leading to some potentially very expensive disputes and owners being declined cover”.
Clearly, these are unpredictable times.