The big question for ship owners considering a newbuilding order today is, what shall we build? This is not as easy to answer as you may think.
Discussions over newbuilding specifications are inevitably tied together with wider environmental and regulatory discussions. There is also a political dimension to estimating future demand for ship types. What will shipping demand look like in future? What kind of ship shall we build to meet that demand? How shall we fuel the vessel? Where will we source the fuel?
For a few years now, answering these questions has been hard. So hard in fact that the previously neat relationship between the volume of global trade and shipyard output has broken down. The breakdown began with the global financial crisis in 2008. At that time, shipyards had nearly three years’ worth of orders on their books. Many of those orders delivered into a depressed market and were instantly worth no more than half of what they had cost new. Indeed, the sharp fall in prices encouraged another wave of newbuilding orders as owners gambled incorrectly on a return to pre-bust conditions.
There was therefore a delayed reaction to the global financial crisis, with the output of new ships dipping deeply only in 2013, five years after the crash. A brief recovery in shipyard output petered out in 2015 and output has been falling ever since.
In the current decade, shipyards have faced a perfect storm.
Newbuilding demand has been held back by shipping-specific economics, specifically the chronic overcapacity still endured by most sectors of the shipping markets. Demand has also been held back by a lack of newbuilding finance, which is related to overcapacity as those traditional lenders not still restructuring their balance sheets have been shying away from shipping exposure, with the Poseidon Principles offering a convenient shield against credit applications. Greek ship finance analysts Petrofin reported in August 2020 that traditional bank lending grew in 2019 – but the disruption caused by Coronavirus may stall that lending recovery, in particular for banks and lessors exposed to passenger transport such as cruise and aviation.
The Coronavirus pandemic has served to bring into sharp relief the arrest and even reversal of globalisation which drove trade demand for the decade to 2012. The current US administration is doing its best to tie public health, trade and even arms control treaties together in an attempt to gain leverage over its Chinese competition. Reshoring, nearshoring and the replacement of just in time supply chains with more resilient just in case supply chains will all alter trade routes in the future, but exactly how remains unknown and probably unknowable.
In addition, latent newbuilding demand remains unsatisfied as ship owners and naval architects wrestle with known and yet-to-be-created environmental regulations for ships. There is no single known solution to the challenge of cutting shipping’s CO2 emissions within the lifetime of a ship ordered this year. Nobody knows which horse to back so even capitalism’s nerveless gamblers, ship owners, are staying out of the turf accountancies until the runners and riders can be more clearly analysed.
If we have passed peak globalisation and face a future of reshoring of manufacturing and shorter supply chains, along with just-in-case replacing just-in-time logistics, then long-haul ocean shipping demand may fall, while short-sea shipping demand growth may rise. This might primarily affect the container shipping market as the boxships move the world’s manufactured and semi-finished goods. The global fleet will need to be adjusted to meet future demand. The rapid growth in capacity for container ships and bulk carriers may well have reached its limits, as tanker sizes did in the 1970s.
If it were just a case of building more smaller ships for regional trade, life would be good for independent ship owners. After all, smaller ships are cheaper to build and on a dollar per deadweight basis can be just as profitable as bigger ships, as owners of Handysize oil tankers and bulk carriers will attest. But the regulatory risks and hurdles are currently too great for most independent owners. They are unlikely to lead the way in designing and building new ships – they lack the risk capital. Simply put, for most ship owners there is no good economic reason to order a ship today. Fleet renewal can be achieved by buying more modern second-hand vessels when they come available for sale.
When shipbuilding volumes recover, as in previous cycles, State Owned Enterprises (SOEs) and large multinationals will lead the way in ordering new ships for new trade patterns. But this time, the addition of smart technologies, connected fleets, automation and optimisation may make ships so expensive and complex that, like the aviation industry, the shipbuilding industry collapses upwards into a small group of fully integrated research, design and manufacturing behemoths. These few shipyards will build standardised, modular designs. There may be space for mass customisation (what colour do you want it to be?) But, to ship-spotters’ disappointment, the ever-converging designs will keep on coalescing.
And if a single non-hydrocarbon fuel emerges as a reliable and universal solution to the CO2 challenge, these big shipbuilding combines will be in an unassailable position to replace the by-then obsolete fossil fuel global cargo fleet. From a ship builder’s perspective, it doesn’t really matter if the fuel of the future is ammonia, hydrogen, methanol, batteries, cold fusion, wind or fairy dust. So long as they can manage the engineering, they will hit paydirt as shipping passes its Dreadnought moment when all the oil-burners become obsolete overnight.
I’m not saying this is a bad thing or a good thing. There’s no moral angle to this from a shipbuilding perspective, only the prospect of survival until the next wave of orders comes along. But the direction of travel seems to be towards larger corporates designing, building, financing and even leasing or operating a narrower range of ship types in larger fleets.
Life is likely to get harder for independent ship owners operating small fleets independently. They will have less data to share, which will reduce their insights and therefore their competitiveness. They will have smaller maintenance budgets, which will make spare parts more expensive as they won’t be buying in bulk. The per-ship cost of employing safety officers, security officers, IT professionals and the like will be higher for smaller fleets. Chartering brokers will prefer to wine and dine the operators of bigger fleets, making it harder for smaller owners to get proper coverage from the broking community. And larger companies with larger balance sheets and bigger piles of cash may be able to sit out market downturns for longer than smaller owners can stay solvent. They have in the past, why should that change?
In other words, the coming change in how the industry fuels its ships, alongside the Industry 4.0 developments like interconnection, SMART shipping and the like, will reduce further the prospects for the traditional, family owned, gut-feel, tramp shipping operation. If shipping is to go fully green, it’s going to be goodbye casino, hello computer as supply chains are automated and vertically integrated to optimise and fully account for the environmental costs of moving commodities and manufactured goods by sea.