Oversupply Cause Failure in Shipping Market

The oversupply of tonnage in the shipping industry and unsustainably low freight rates is still a major challenge ten years after the massive downturn of 2008.

Simon Bennett, Deputy Secretary General of the International Chamber of Shipping (ICS) cautioned that shipping companies needed to show restraint when ordering new ships, to prevent stifling recovery.

"Yet the dark clouds of protectionism and slowing growth in key economies mean that the avoidance of overordering is now more important than ever,” Bennett said.

He acknowledged that individual operators would legitimately make their own individual business decisions regarding new tonnage.

“Opinion is still divided on whether the rapid globalisation that has been experienced in the last thirty years may have run its course, and whether the slower rate of trade growth seen since the 2008 crisis represents some kind of permanent structural change,” he said. “Certainly in 2019, the outlook for the global economy and thus demand for maritime transport appears to be worsening.

“Ship ordering (in deadweight tonnage) fell 14% in 2018, about 17% below the average since the 2008 downturn.  This suggests that many shipowners may indeed be resisting the temptation to over order and in early 2019, the worldwide shipping order book appeared to be stable at around 10% of the fleet,” he said. “However, the reluctance of governments in Asia, where the vast majority of ships are built, to address overcapacity in the shipbuilding sector remains a serious issue.”

Mr Bennett explained: “As well as the temptation to over order, decisions about when to recycle older ships are also fundamental to the equation. The good news is that a number of important regulatory uncertainties which have complicated decisions about when best to dispose of older ships are finally being resolved.

“In particular this includes the implementation dates of the IMO Ballast Water Management Convention.  And while the precise cost of compliance with the IMO sulphur regulations is still unknown, the situation should become clearer after January 2020 now that IMO has confirmed that the implementation date of the global sulphur cap is irrevocable.”

ICS is also encouraged by the decision in 2018 by the Organization for Economic Co-operation and Development (OECD) to resume negotiations on an agreement to remove market distorting measures from shipbuilding that contribute to overcapacity.  However it remains to be seen whether China (which is not an OECD member) will take an active part.      

“Notwithstanding the risks of uncertainty in the immediate years ahead, in the long term there is always cause to remain optimistic,” said Mr Bennett. “The UN has revised its projections for population growth upwards to an incredible 8.6 billion in 2030 from 7.7 billion in 2018.  Combined with seemingly unstoppable demand for higher living standards in emerging economies, this indicates that long term demand for international shipping should continue to increase significantly.”