Unlocking Over-Supply to Re-Calibrate the Market
As the shipping industry reluctantly veers into its second decade of economic woes, there appears to be little sight of an satisfactory conclusion to the perennial issue of over-supply in the market, which in turn has precipitated bankruptcies, sustained indebtedness that have created vessels that are effectively stranded assets.
At Danish Maritime Days 2016, one of the core conclusions was to classify over-supply as a terminal market failure as opposed to the previously received wisdom that it was simply a product of cyclical shipping economics. This is, at first glance, a bold and even radical conclusion, but considering the seemingly unsolvable nature of over-supply in the market, perhaps unsurprising – and moreover once assumed, precipitates more radical thinking.
However, accepting this crippling market issue as something that will not simply disappear with time under current market dynamics poses a significant dilemma. Replacing a broken market with a functioning one that proactively and positively solves the issue of oversupply.
Fundamentally, the industry needs to work together to develop a market where scrapping older or obsolete vessels is desirable, the supply of new vessels meets, rather than exceeding, projected requirements, and that recycling is enacted safely and with due care to the environment to ensure the whole vessel lifecycle is managed sustainably.
A key pillar of this rebalancing is ensuring strong and sustainable ship recycling market. How the ship recycling market is legislated and functioning directly affects how, when and where owners choose to sell end-of-life vessels to cash buyers as much as the value and profitability of the vessel alone. Any solutions laid out must therefore also take into consideration balancing the dynamics of recycling alongside either a free-market or legislative approach to solving over-supply.
One solution suggested aims to use another of the shipping industry’s critical market issues against over-supply. The shipping industry has a significant amount of negative equity, widely suggested to be $90 billion, with large chunks of the bulk and container market fleets substantially over-valued. Recalibrating the fleet’s market value to reflect current market conditions and not the original cost of debt on the vessel would accelerate the decision to scrap some vessels, reducing over-supply.
Yet, a radical and market reshaping solution like this requires close analysis, discussion and buy-in from all sectors to ensure it is fit for purpose and manageable in the long term.
On June 6, 2017, BLUE will partner leading maritime law firm Norton Rose Fulbright (NRF) hope to initiate a debate which will set the wheels in motion for developing a strategy to right this corrosive issue, touching on everything from the gap between book and market value for vessels, scrapping subsidies and the potential clouds on the horizon for the Hong Kong Convention.
The free panel discussion and webinar ‘Unlocking the issue of over-supply and accelerating sustainable scrapping’ will see key industry names such includes Dr Martin Stopford of Clarkson Research Services, Michael Jürgen Werner of Norton Rose Fulbright, Gust Biesbroeck, Head of Transportation at ABN AMRO N.V., Dr Nikos Mikelis, independent consultant and non-executive director GMS, and Rick Power, WSM Asia Green Recycling and IHM Services, explore how we can solve the biggest challenge facing the industry today.
Starting by looking at whether over-supply can ever be righted by growing demand, the debate will circle in on the key issues surrounding existing vessel supply, newbuild orders, the challenges facing shipyards and the incoming legislative and capacity challenges for the ship breaking industry. Finding the key dynamics between these diverse sectors, their impact on the struggling market, and how they can be rebalanced together to reshape the industry to a profitable, forward looking industry ready to meet the challenges of the future.
Alisdair Pettigrew is MD of BLUE Communications.
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