Navigating turbulent waters

AS the curtains drew on 2016, players in the marine industry were looking back at a turbulent year whose dark clouds look set to persist in the year ahead.

It is hard to mince words in describing the morbid performance of the local and global marine industry in 2016, which has continued the tangent of the dismal form recorded in previous years.

The shipping sector, which includes shipbuilding/ship repairing, port operations and various maritime support services, was characterised by severe overcapacity, low freight rates and tight financing.

This grim scenario was set against the backdrop of slow global economic growth and lethargic growth in key shipping trades such as container and bulk, and the offshore support vessels (OSV) sector.

Shipping companies big and small performed badly as demand destruction swept the industry on the back of global economic uncertainties, low seaborne trade growth and severe cutbacks in offshore oil and gas exploration and production activities.

Few shipping companies could boast decent performance in 2016 and in recent years many suffered from losses, some so overwhelming that the owners had to pack it in altogether.

Many halted fleet expansion and cancelled orders of new ships and some even defaulted on new building contracts.

This has had an adverse effect on shipowners, shipyards, ship designers, marine engineering service providers, classification societies, marine logistics companies and even financial institutions with exposure in the industry.

There are few macroeconomic indicators and signs within the industry suggesting a convincing and sustained rebound in 2017.

The industry has come under tremendous pressure since the global recession began in 2008 as global economic growth and trade slumped and offshore activities in the oil and gas industry curtailed.

The world economy has shown only tentative signs of recovering, as underlined by the paltry 2.4% growth forecast by the World Bank.

A major contributor to this is the slower pace of growth in emerging economies which are the principle sources of manufactured goods and consumption of commodities.

Adding to the uncertainty is the direction of prices of key commodities especially oil. Until oil prices firm up to sustained levels of around US$80 per barrel, the grim mood in the oil industry looks set to continue and will weigh heavily on the demand for offshore support vessels and offshore structures such as rigs, topsides, jackets and accommodation platforms.

This will in turn adversely affect the business of shipyards and fabrication yards and supporting players.

The credit crunch amid uncertainties in the financial markets and pessimistic outlook on the global economy is also expected to persist in 2017.

This will have a lingering effect on capex-hungry industries such as shipping, shipbuilding and offshore oil and gas.

Already, there are signs of distress arising from the tightening of funds and investors’ reluctance to be involved in the marine industries. Among the high-profile casualties are Korea’s Hanjin Shipping (the world’s seventh largest in terms of fleet capacity) and Swiber Holdings (Singapore-based offshore and marine group), whose financial woes and debt default sent shockwaves through the industry.

At a time when there is demand destruction for ships (cargo carrying and support vessels) arising from slow growth in global seaborne trade and offshore projects, new tonnage continues to flood the market.

These combine to drive down demand for ships and offshore structures such as rigs and topsides, subsequently affecting shipyards and a host of ancillary support players.

Woe betide shipping companies in the container sector which have taken delivery of or ordered large ships at huge financial cost and strict financing terms.

They will find it difficult to fill up those ships voyage in, voyage out and generate return on their investment in good time.

As the economic, geo-political and financial outlook remain unclear, the international shipping markets will continue to feel the squeeze from the belt tightening by banks and the wait-and-see stand of investors.

Financing for new buildings and purchase of second-hand ships and offshore structures will remain sparse as more banks drop the marine industry off its radar.

Faced with clients who struggle to repay their loans, the banks may have to renegotiate the loans to ensure the shipping companies do not default.

Growth in international trade – 95% of which is carried by ships – looks set to remain subdued while the supply of new ships continues.

This combination of tight credit, overcapacity in the shipping markets, subdued freight rates, low vessel valuations and poor industry outlook in the near term will continue to exert downward pressure.

If the woes of domestic shipyards like TH Heavy, which was hit with wind-up petitions, and in South Korea that are facing mountainous debts arising from cancelled orders and thinning orderbooks are any indication, shipyards will continue to face a torrid time in 2017.

The predicament of Hanjin Shipping Co. which sought bankruptcy protection in 2016 and the losses suffered by the country’s major shipyards such as Hyundai Heavy Industries and Hyundai Mipo Dockyard underscored the hard-hitting times in the global shipping and shipbuilding industries.

To reduce losses and position themselves on stronger financial footing, companies in the marine industries should focus on disposing non-essential assets and dispensing with activities which are not core to their businesses.

Shipyards with good cashflow, healthy orderbooks, solid contracts, good relationships with financial institutions, attractive investment prospects and stakeholders with deep pockets can generate enough cash to meet debt obligations and opex and capex requirements.

Shipping companies which can match demand and capacity and provide value-adding services at reasonable freight rates will be able to survive the turbulence and also flourish.

Enterprises providing ancillary support services such as naval design, classification, marine surveying, equipment manufacturing, engineering consultancy and manpower services also need to adjust to the challenging landscape by focusing on value-adding services at competitive rates while maintaining high levels of efficiency, productivity and customer service.

But there is some silver lining amid the overall gloomy outlook.

One example is the dry bulk shipping sector which transports cargo such as coal, iron ore, cement and grains.

Statistics point towards an improving Chinese real estate sector despite the deliberate slowing down of China’s economy, and rising volumes of coal imports into emerging economies especially in Asia in 2017.

These factors propelled the growth of the dry bulk shipping sector in 2016 and could well save the day again for the industry in the coming year.

Despite the tepid global economic growth, global industrial production is set to grow, stirring demand for steel and coal, while demand for grains looks set to grow at a reasonably healthy rate, which will be positive for dry bulk shipowners.

However, it would take an optimist to wager a bet on the industry being restored to its former full-swing growth mode.

On the overall industry front, players will have to face growing competition from the domestic as well as regional markets.

The governments in the region have introduced various measures and incentives to keep shipping companies and shipyards afloat and maintain national shipping tonnage.

Some have tightened the Cabotage Policy which accords protection to local shipping companies to carry cargo and undertake marine service works in domestic waters.

As the typhoon of demand destruction continues to rage in the marine industry, it would be fair to expect that it would claim victims along its path.

Some shipping companies and shipyards may have to restructure their organisations and debt, consolidate or even call it quits.

The patches of opportunities lurking within the crisis can only be unearthed and reaped by those who dare to innovate and take risks to venture beyond their comfort zone and traditional markets, and work hard at enhancing productivity, efficiency and customer service while being cost competitive.



Honorary Secretary
Association of Marine Industries of Malaysia

As published in The Star, 26 January 2017 –