ihs markit - maritime trade - making headway

MARITIME & TRADE

Making Headway: Passage planning for the next decade in the global maritime industry

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Making headway: Passage planning for the next decade in the global maritime industry

The pace of change in the maritime sector has increased as the economic downturn goes on. Partly this reflects external factors such as commodity pricing, and partly it is a consequence of internal factors like the advance of digital technology. Keeping up with change has evolved from managing a decline in freight rates to survival at a time of less-than-breakeven rates. This IHS Maritime and Trade series seeks to identify the trends that can be discerned beneath the noise to aid future planning for those in the ship owning, operating, and managing community.

In Q2 2016 we picked out five evolving trends: the restructure of China’s economy, the world of low-cost oil; mergers, acquisitions, and consolidation, the drive towards digitalisation, and shipping’s shift from quay-to-quay transportation to a critical link between manufacturer and consumer. The change taking place within China’s economy is now widely accepted, although there are signs that the government is rowing back from reform in favour of stimulus measures. And there are good reasons to believe the era of 50-dollar oil will be with us into the medium term.

For this reason, these two trends are on the back-burner. This paper looks at:

(a) Consolidation in Asian shipbuilding, especially in South Korea;(b) Seafaring and seafarer training in an era of digital revolution; (c) Heightened trade barriers interrupting the supply chain;(d) Popular resistance to globalisation and its consequence for shipping;(e) Scepticism about data-driven decisions and those who make them.

1. The rise and fall of South Korean shipbuilding Asian shipbuilding is in crisis. This should worry all of us because Asian yards build more than 90% of the world’s ships. Japan became top nation in the 1970s, South Korean took the crown in the 1980s and 1990s, and the years since 2000 have seen China’s rise to prominence in the number of shipyards and across many sectors of the industry. So successful have these nations become that they now drive the construction industries in Vietnam and the Philippines.

But size is no guarantee of robustness. Japanese yards reflect the national demographic: an ageing workforce and a shortage of young apprentices mean that within five years Japanese builders will need to refocus. The problem for China is not its workforce but debt. The pursuit of market share without attention to the need for profitability has left yards deeply indebted at a time when newbuilding orders have dried up.

Of even greater concern is South Korea, from where the news is bleak. In September last year, the government, business leaders, and unions drafted a tripartite agreement on labour market reform as part of President Park’s prioritising economic growth over what was already a pretty flimsy social security net. Within a few months, both of Korea’s largest umbrella unions had withdrawn from the agreement, leaving the way open to strikes and disruptive protests over salaries, corporate debt restructuring, redundancies, and employee rights.

Partial strike action at Samsung Heavy Industries, Hyundai Heavy Industries, and Daewoo Shipbuilding & Marine Engineering has already taken place, and is likely to become a regular feature of the industrial process the longer the dearth of newbuilding orders goes on. It is feared that protest action both in Seoul and in shipbuilding communities including Ulsan will involve thousands of workers and could cause some violence.

In June, President Park called for a “bold restructuring” of shipbuilding by downsizing the overgrown workforce and a tighter control over costs. If this doesn’t happen, she said, the future of Korean shipbuilding – and the national economy – will be threatened. What’s the background to this, and how significant is it to shipping in 2016?

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Making headway: Passage planning for the next decade in the global maritime industryMaking headway: Passage planning for the next decade in the global maritime industry

In the 1960s and 1970s, a series of five-year plans was set up to build a self-sufficient and increasingly modern industrial structure; among the sectors prioritised were steel, machinery, and chemicals. The Third Development Plan (1972-76) achieved rapid progress in building an export-oriented structure focusing on iron and steel, transport machinery, household electronics, petrochemicals, and shipbuilding. Critical industries were built up in the south of the country – which had the benefit of being far from the border with North Korea but also of providing work for deprived rural areas.

Shipbuilding was identified as a strategic industry in the Fourth Development Plan (1977-81) because it was technology-intensive and skilled labour-intensive. The government’s generous financial assistance programme ensured that Korean shipbuilding focused on high-quality products at a competitive price at a time when more advanced economies were cutting their investment in heavy industry.

By the time of the Sixth and Seventh Development Plans of the late 1980s and early 1990s, the focus had shifted to micro-electronics, new materials, fine chemicals, bioengineering, optics, and aerospace. South Korea had moved beyond heavy industry and shipbuilding, leaving the world’s largest yards increasingly separated from the country’s economic theory.

Since the 1990s, South Korean shipyards have shifted up the scale to container ships, chemical and product tankers, offshore vessels and floating production storage and offloading vessels. But sophisticated ships carry higher risk. Revenue at fourth-largest builder STX Offshore & Shipbuilding hit the buffers when offshore exploration and production collapsed after the oil price plunge in late 2014. The business is now owned by Korea Development Bank, NH Bank, Export-Import Bank of Korea, Woori Bank, Shinhan Bank, and Korea Exchange Bank. Auditors believe STX O&S is unlikely to post an operating profit

before 2021. Because the liquidation value of the business is less than its value as a going concern, there are plans to keep it going. However, rising costs mean that many of the 53 ships on the orderbook no longer make commercial sense: STX O&S is in talks with the ships’ owners to terminate the contracts.

Third largest-builder Daewoo is currently embroiled in a financial scandal that has undermined the credibility of the company. It is possible that this business could collapse, or be revived on a much smaller scale. Meanwhile, self-rescue proposals for the shipbuilding divisions of Samsung and Hyundai are being assessed.

This is an industry in a dark place, and shipping is seriously worried. Speaking at a Capital Link panel discussion in Athens in June, Eletson Holdings vice-chairman Vassilis Kertsikoff observed: “What’s happening right now with the yard situation in South Korea is a tremendous event that will impact us in the long term. Tens of thousands of people are losing their jobs there, capacity is being rationalised, the banks are in charge and I think that will impact the pricing decisions of the yards for many years to come.”

Euronav CEO Paddy Rodgers agreed. The supply of shipping will be determined, he said, “by exactly how clever the Korean government will be over what they do next. They have an opportunity to guarantee a valuable part of the support of Korean GDP by making sure they have a lean, effective shipbuilding industry, with probably only two major yards.”

The evolving trend here is clear: decisions taken this year about the future of South Korean shipbuilding will feed through to state support for yards, newbuilding pricing, and the supply of tonnage in future.

Ordering activity

Source: IHS

0200400600800

100012001400160018002000

2016201520142013201220112010

China South KoreaJapan

No

. of

ship

s 1,412

511 520

1,066

395 382

1,773

617 578

1,408

642

356

918692

342148 105 40

988

394251

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2. Seafaring in an era of digital revolutionThought leaders tell us ships are getting more “intelligent”, by which they mean many functions of vessel navigation, operation, condition management, and decision support will be done digitally. We should expect to read much more about automation, robotics, vessel health monitoring, and energy optimisation. Some of this new technology will feature on ships over the next five years, even if the fully autonomous ship may still be a little way over the horizon for all but vessels running between fixed points in sheltered waters.

There are two questions that come to my mind: what will be the roles and responsibilities of seafarers in the brave new world of digital technology? And how can we revise the training we provide to seafarers when the new technology is not yet in place?

These issues are already being debated at international forums. At a simulation user conference in Singapore earlier this year, Frank Coles, head of marine equipment firm Transas commented that: “Traditional shipboard and shore-side structures appear to be an anachronism when viewed against the reality of operations.” The master and his navigating team are under increasing pressure; while the load can be reduced with technology, Coles added, “automation, alarm management, and electronic forms are not the answer alone.”

Many seafarer interests have warned about the dangers of uncontrolled connectivity. Cheaper and faster communications, together with the explosion of social media, have changed life on board. Some shipping companies have reacted by trying to control access. It has proved hard enough to recruit the next generation of seafarers to sea even without the killer consideration that there’ll be no Instagram or WhatsApp connection. “Connectivity is a right; it opens doors to the future and we should embrace it,” said Coles. “However, it does lead to more data, more access to the ship, and more of everything.”

The evolving trend I see here is a clash of ideologies between those with a more traditional view of the ship master and the bridge and engine teams, and those who are planning for the complete removal of trained seafarers from the bridge.

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3. A world of rising trade barriersIn all the shock of the UK’s referendum on whether to remain in or leave the European Union (abbreviated to ‘Brexit’), the implication for trade and shipping between the UK and the EU’s other 27 states is not fully understood. Negotiations on terms have yet to begin, partly because the UK has few negotiators immersed in British trade policy. This matters to the shipping industry because almost half of British trade moves to or from the European Union, and much of this goes by sea.

This is not the only trade negotiation underway at the moment. There’s an alphabet soup of trade discussions on the table including CETA (an EU-Canada trade agreement), TTIP (Transatlantic trade and investment partnership), TiSA (a Trade in Services agreement under discussion between 23 members of the World Trade Organization), and the EU-Japan Free Trade Agreement. These talks are not going well. According to a study conducted by the European Commission’s trade department, more than 200 protectionist measures have been adopted in the 31 countries being monitored, although hardly any of the protectionist measures hindering trade had been resolved.

It’s a worrying trend for shipping, says Patrick Verhoeven, head of the European Community Shipowners Association. He believes that any barriers to international trade have a direct negative impact on the shipping sector, and he has asked the Commission to develop a strong EU external agenda as part of the maritime transport package in 2017.

Regional trade negotiations and talks to build a globally connected trading network are good for shipping, but they not good for everyone. There are reasons for all the protectionist measures, reasons that lie in governments’ need to limit the level of competition, which helps less efficient manufacturers to survive. Any determined effort to “resolve” protectionist measures might achieve the opposite of what was intended.

This was one of the messages sent from the UK’s Leave voters, many of whom have suffered from closure of factories and the resulting long-term unemployment because free trade has opened the door to both more efficient and financially-subsidised competitors from the other side of the globe.

Shipping recognises it plays a significant role in providing cheap transport for goods and services. Brexit was not about shipping, although shipping’s ability to link manufacturers and consumers across the world was at the heart of the ‘Leave’ agenda. Brussels is urged to understand that policy objectives emerging from the EU’s maritime transport strategy could drive the adoption of more, rather than fewer, protectionist measures.

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4. The stirrings of de-globalisationLinked to the trend of protectionist measures and higher trade barriers is the issue of increasing political interference.

In the sector on market structure of their book Maritime Economics, A macroeconomic approach, British academic Professor Elias Karakitsos and the former head of shipping at Royal Bank of Scotland Lambros Varnavides write: “Shipping is one of the last large perfectly competitive markets where the laws of supply and demand control the market and prices.” However, there appears to be plenty of evidence to show that national interest plays a significant role in distorting the perfectly competitive market.

Earlier in the year, Euronav chief executive Paddy Rodgers told delegates to a Capital Link event: “People often falsely describe shipping markets as being perfect markets… Most of the time I’ve worked in shipping, we’ve had OPEC, a cartel, on the customer side, determining production of oil, and on the shipping side, we’ve had governments choosing to subsidise uneconomic businesses.”

Rodgers believes the flow of capital into business is what causes cyclicality. Easy access to capital and a shipyard willing and able to fund the working capital of building the ships through government subsidies are the ingredients of what he calls “a completely distorted market”.

In the early decades of containerisation, senior directors of state-supported liner companies in Europe, Asia, and both North and South America argued that their countries needed dedicated container operators otherwise they would be cut off from world trade. As debt mounted, governments encouraged operators with a growing global presence to make regular port calls; this meant finance ministers could end the funding of inefficient and costly ships and services. The lines showed that if the cargo is there to be lifted, the operators will come.

In the 1990s, European governments stopped the practice of underpinning inefficient and uncompetitive shipyards, which led shipowners to switch their allegiance to the east. Even today charterers acting on behalf of many governments tend to favour domestic shipping companies: for example China requires that ships carrying crude oil to Chinese ports should fly that country’s flag.

However, the trend to encourage the transfer of employment from developed to emerging states – which has been so beneficial for shipping for more than 30 years – is coming up against popular resistance. Globalisation is likely to turn into de-globalisation as governments seek ways to find favour with voters. Some have forecast that such trade decisions will distort the free flow of trade yet again. With the benefit of hindsight, Brexit appears to be a sign of resistance to the inexorable globalisation of trade.

It is expected that European elections later in 2016 and in 2017 will be influenced by the need to tackle the issues of underemployment and unemployment caused by globalisation. So far there has been little solid evidence to suggest a shift in outsourcing of manufacturing from distant, and cheaper, locations to a site in a country adjacent to the consumer (Near-shoring) or to a site within the same country as the consumer (On-shoring).

Political interference in the manufacturing and distribution sectors will have a direct and profound influence on shipping, especially container shipping but also roll-on/roll-off, breakbulk, and even shortsea shipping.



5. Scepticism over data-driven decisionsIt has become trendy to question the work of analysts and forecasters. Who needs big data if everything it tells you about the medium-term market outlook proves to be wrong, and everything it suggests about the long-term is overtaken by events before the year is out?

The Q2 2016 Evolving trends white paper touched on the need for a collaboration between analytics and expertise to generate decisions that go beyond what either data or expertise on their own might contribute. It was suggested that a new position, a maritime analytics leader, could be appointed at board level. S/he would bring critical insight gained from both data analytics and maritime expertise that is often missing from boardroom decisions.

Decisions based on uninformed guesswork prove very expensive if they go wrong: the blight of overcapacity in shipping is often blamed on shipowners ignoring or misunderstanding the consequences of placing vessel orders. The trend of rejecting expert guidance in decision-making – in business as in government – is at odds with the improving quality of the data now available through the digital revolution noted above. There are questions to be asked about the accessibility of big data, with the latest solution appearing to lie in ‘small data’, a limited and targeted collection of key metrics that reflect the wider data set. However, it is unhelpful to argue that the industry has had enough of data scientists saying they know what’s best for the business.

It is tempting to say that forecasts falling short of the mark are worthless; often such forecasts are created by extrapolating a trend line when it’s not possible to factor in all the variables that affect the market. A better way forward might be to identify two or three likely scenarios based on perception of the price of oil or China’s economic growth; these scenarios can be tested over time as more data becomes available.

The role of analytics, forecasting, and scenario building will become more significant in future as data is increasingly used to support decisions. However, rather than relying on solely on numerical expectations, forecasts and scenarios should be given heightened credibility with the oversight of industry experts from the maritime commercial and technical sectors. The new skills of maritime analytics leaders could be the difference between business decisions that give an advantage over competitors and decision that weaken a company’s financial basis.

ConclusionEvolving trends are by their very nature shifting in shape and substance. Decisions about the future of South Korean shipbuilding will impact on newbuilding pricing for the next five years; while the rate at which digitalisation is introduced into vessel operations is likely to change seafarer training over the same period. But governments’ need to keep voters onside might lead to an imposition of trade barriers and similar protectionist measures that could bring manufacturing closer to the consumer. Shipping, as a servant of trade, must remain flexible enough to accommodate both external and internal changes, while remaining profitable enough to invest in the future.

Author: Richard Clayton, Chief Correspondent, IHS Markit

For more information IHS.com/maritime_trade

Copyright © 2016 IHS Markit. All Rights Reserved

About IHS MarkitIHS Markit (Nasdaq: INFO) is a world leader in critical information, analytics and solutions for the major industries and markets that drive economies worldwide. The company delivers next-generation information, analytics and solutions to customers in business, finance and government, improving their operational efficiency and providing deep insights that lead to well-informed, confident decisions. IHS Markit has more than 50,000 key business and government customers, including 85 percent of the Fortune Global 500 and the world’s leading financial institutions. Headquartered in London, IHS Markit is committed to sustainable, profitable growth.

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