No Intervention Needed to Tackle Oversupply
A panel of shipping industry experts, including leading economist Martin Stopford, has concluded that there is no need for either market based or regulatory intervention to break a period of sustained low freight rates, erosion of asset value and oversupply.
The panel, speaking at a debate co-hosted by law firm Norton Rose Fullbright and PR consultancy BLUE, disputed conclusions made by industry leaders at Danish Maritime Days (DMD) 2016 that the market may never recover.
However, Martin Stopford, President of Clarksons, stated that if the oversupply issues were not resolved, then the downturn could extend for many years, citing that if market recovery did not commence before 2021, the industry would have been in the longest downward cycle dating back to the 19th Century.
The DMD group surmised that two general approaches could be taken to achieve a rapid reduction of the present cargo fleet capacity: a free market approach, where the book value of assets were realigned to reflect their real market value, and a more interventionist approach.
But, while admitting that there remained substantial oversupply in the market, the panel largely agreed that intervention in either incentivizing the acceleration of scrapping, or in controlling newbuild numbers, was both impractical to implement and unnecessary.
Janina Lam, Head of dry bulk research at Howe Robinson, suggested that even if market intervention was feasible at the newbuild stage, shipbuilding was not an industry that reacted to market trends beyond commodity prices, commenting: “Yards might be creating a false demand for newbuilds as they do not price according to the markets. For them it’s more about the tonnes of steel. Although the markets in tankers, bulkers, containers do not correlate with each other we see the newbuild prices correlating. And this is because the yards to do not care so much about the markets themselves, but more about their forward cover. This is where I see the problem that has led to a pro-cyclical ordering."
In terms of incentivizing scrapping, recycling expert and consultant and non-executive director for cash buyer GMS, Dr Nikos Mikelis commented: “The market will sort itself out. I don’t see the need for governments to subsidize scrapping. I cannot see recycling intervention working. Ballast will get some ships, but it’s a moving feast [in terms of when].”