Shipping Industry To Face 'Famine'

Friday, October 22, 1999
The shipping industry faces lean times or worse over the next few years, industry experts said at a round table discussion. "I don't see any fat times ahead. I see lean times and perhaps famine," said Alexandros Kedros, a director of Greek company Halkidon Shipping. "It will not be easy... the ability to create assets (ships) will continue to undermine ability to earn a good return on operating those assets," said Peter Stokes head of research at investment bank Lazard Capital Markets. Stokes said most of the shipping industry was not large enough to attract public financial backing and was unable to make adequate returns on capital in the bulk and container sectors. Only Costas Grammenos, professor of shipping, trade and finance at City University in London, thought the industry was undergoing structural changes, which could help it overcome its cyclical nature. Regulation and consolidation would intensify over the next 10 years. The cyclical nature of the shipping industry would not prevent it tapping financial markets, he said. However, Kedros said the capacity of the world's shipbuilders to build more vessels than was required was a great danger. It was now possible to build ships in six to nine months compared with about two years two decades ago and the costs of building were as low as they had ever been, he said. China's entry to the shipbuilding market would further exacerbate overcapacity and produce a glut of ships. "It takes very few ships to turn a boom market into bust, and once built, the vessels are with us for at least 20 years," Kedros said. Grammenos said industry consolidation would create larger companies which shipping banks would be prepared to finance. Although most listed shipping companies had underperformed their local markets in the long run, those that had stable cashflows could prosper. But the climate in which Greek shipping companies had made fortunes after the second World War was gone, Stokes said. Most chartering in the bulk markets was now on a spot basis, with very few lucrative longterm charters available. "The shipping industry is largely irrelevant to the big financial institutions...if the shipping industry wants to access the capital markets it has to address the issue of size," Stokes said. But he warned that several factors mitigated against success in the public markets. The industry was capital intensive, high risk and fragmented with low barriers to entry and poor ability to control market share. "Even in relatively favorable market conditions, shipping has made poor returns, and in poor times they have been dreadful," Stokes said. Kedros said increasing regulation and changing employment conditions were making it more difficult for shipowners to operate. But pooling assets often led to inefficiency and still did not create enough market share to adequately control prices. However, he said he saw a role for niche players able to react quickly to changing events. Stokes agreed that specialists could perform well where they were able to major in a trade which had high barriers to entry. "The industry needs to get smarter. Shipping does not need to mean owning vessels in future," Stokes said. Large logistics companies such as Vopak, the group being created by the merger of Pakhoed and Van Ommeren, could be leading transport providers by being major suppliers of bulk storage capacity but not operating vessels. "The shipping package they can sell to major oil companies will be using other companies' assets for which they will pay a fee." - (Paul Berrill, Reuters)

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