Ship owners say overcapacity not to end soon

The dramatic expansion in shipyard capacity is making it difficult for the overcapacity across the shipping industry to be absorbed any time soon, ship owners and industry veterans said.

Speaking at the Sea Asia conference in Singapore on Tuesday, they also cited the low interest rates and the increasing number of nation state players coming on board as among the factors exacerbating the challenge for the volatile industry.

"Two years ago, I was actually getting quite optimistic over Fukushima about LNG (liquid natural gas) trade and the demand for LNG ships. And within six months, 70 LNG ships were ordered, or nine months, whatever, without commitment," said Andreas Sohmen- Pao, Group Chief Executive Officer of BW Maritime.

The ships are starting to be delivered now, he said.

Similarly, some 185 medium range tankers have been ordered over the past 18 months following signs of hope that emerged after several miserable years for a segment of the industry, added Sohmen-Pao, grandson of late shipping legend Yue-Kong Pao.

Shipyard overcapacity

The shipping industry, be it tankers, dry bulk or container shipping, has been dogged by overcapacity over the past several years amid the global financial crisis and the economic downturn. The shipping rates have been low, with the Baltic Dry Index, for instance, moving within the range of 661 to 1,165 over the past 12 months, compared with 10,649 in May 2008 and 4,187 in May 2010.

Per Wistoft, Chief Executive Officer of Brightoil Shipping Singapore Pte. Ltd, said that the industry consensus is that the market is moving at the bottom, but the difficult part is to predict when it starts going up again.

"Predicting the bottom is a little bit like playing golf. Regardless of how bad you are playing, it can always get worse," said Wistoft, who has been in the industry for over 30 years.

"It's going up. But it's going up by how much, and when," said Douglas Tong Hsu, chairman and chief executive officer of Far Eastern Group, a business conglomerate based in China's Taiwan.

Wistoft said the current cyclical downturn is different for the shipping industry in that it is really worrying that the shipyard capacity has probably almost tripled over the past decade.

"That's of course very dangerous, because that's the capacity will not go away," he told the audience at the conference which was held in conjunction with the Singapore Maritime Week.

"Once you have built the infrastructure around the shipyard, you will have to keep it. It's a big problem, of course, because once you have demand rising, they will start building ships again and the capacity is there," he said.

Sohmen-Pao also said he did not expect a recovery to be seen within the next one or two years.

"Any growth we see on the demand side, is so quickly saturated by the just overwhelming supply," he said.

Wistoft also said that the current fleet is now comparatively young, which means that there will be less tonnage retired in the coming years.

Demand side

On the demand side, the industry players said that intra-Asia trade is growing and that they are also starting to feel the impact of a major change in the United States energy demand and supply.

The United States, thanks to the breakthroughs in shale gas technologies, is expected to move fast towards energy self sufficiency by 2035, according to predictions by industry analysts.

In 2000 shale gas provided only 1 percent of the U.S. natural gas production, but by 2010 it was over 20 percent. The U.S. daily consumption of oil has dropped by almost 2 million barrels a day in the past five years, and its oil production has gone up.

But Hsu said the picture was not all that bleak. The world economy is still growing and the demand from Asia is growing fast.

His company is already looking at investing in the United States, he said, citing that it could be cheapest source of energy in the future.

Wistoft said that the fall in the U.S. demand for energy exports may not be bad for tanker shipping, either.

The U.S. mainly imports its oil from Venezuela, Africa and the Middle East. The oil supply will not go away as these countries depend on oil exports, and it will probably be diverted to the east, he said. This could even mean longer routes of transportation for the energy trade, potentially benefiting the larger tankers in the long run.

Easy money

Kenneth Koo, group chairman and chief executive officer of Tai Chong Cheang Steamship Co. (H.K.) Ltd, said easy money pouring into the shipping industry, a factor not there in previous downturns, is adding to the challenging for independent ship owners.

Funds such as private equity are coming into the industry with an investment horizon shorter than the traditional school of independent ship owners, including many family business owners.

Such investors tend to trust their ships to the ship managers, driving down the barriers of entry, he said.

The national or state players, seen not only in countries like China but also many other countries in the past and now, also have advantages over the independent ship owners, they said.

Hsu said the low interest rate is both a blessing and a cursing, leading to easy decisions to buy more ships.

"Why not buy a new ship?" he quoted them as saying.

The shipping assets and capacity do not go away even if a company goes broke nowadays.

Such factors could mean a transformational change in the nature of players in the shipping industry, and the independent ship owners will have to adapt to the challenges, they said.

Sohmen-Pao said that the ship owners get returns from sailing the ship, but only makes money when they sell the ship.

"It's a little bit like real estate. If you buy a property and rent it out for 3 percent or 4 percent, you are not making a lot of money. But then you hope that you'll sell it," he said.

The industry players cited the herding instinct as part of the challenges in predicting what will happen.

"If you are buying a ship today, you have a better chance of making money than if it was five years ago. But you don't know. You are guessing at the exit in three or five years. Nobody knows. You make the calculations and you hope that not everybody else does the same thing," Sohmen-Pao said.

"The shipping industry is always cyclical. We shouldn't lose that perspective," he said. "Eventually this cycle will come back, I think there is a risk that we are in a long downturn."