At the Crossroads

Malcolm Latarche
Malcolm Latarche

03 August 2016


Exhibitions, and SMM in particular because of its sheer size and extent, always inspire with the quality and quantity of engineering expertise and innovation on display. All the more so because most of it comes about through very extensive and expensive research and development that sometimes seems to be in complete contrast to the hurried and ill-conceived regulation that the equipment or services are aimed at satisfying. Take the ballast water convention for example. It is now more than a dozen years since the convention was adopted but as well intentioned as it was, it has been bedevilled by inconsistencies between the type-approval process, the testing standards and the impossibility of making amendments to the rules before they have been allowed to enter into force. And, despite being allowed for by the convention rules, there has been little or no progress on establishing the regional exemption agreements that would permit ships operating within restricted areas to avoid the unnecessary expense of installing a system. The delay has had a detrimental effect on the finances of system makers and ship operators alike for now it seems that the ballast water convention may very well overlap with the introduction of a reduced global cap on sulphur levels in fuels. Both the ballast and MARPOL regulations are long running issues that are now coming to a head but there are more to follow including things such as e-navigation and CO2 monitoring and reductions, possibly through an emission trading scheme or other market based measures still to be decided. Shipping may not like these things but it learns to live with them just as it does everything else the world throws at it. And on that front, 2016 has been one hell of a year. Low oil prices and reduced bunker costs seem like a heaven sent gift, and to some ship operators they have been just that. If low oil prices have proved disastrous for the offshore oil and gas sectors, for everyone else struggling just to break even, lower bunker prices have allowed heads to be kept above water; although for how long yet remains to be seen. A shrinking world economy is exacerbating a self-inflicted overcapacity in many sectors of the world fleet and in the opinion of many it is not going to get any better. There can be a reduction in the world fleet if the industry opts to stop ordering new ships and bites the bullet and sends ships to the breakers that might ordinarily have expected to be operating for many more years. As for the economy, Brexit is the latest scapegoat for gathering storm clouds but the reality is that it will likely have far less effect on the world economy and shipping than other factors some of which are already at play. For some years now the world of commerce has become addicted to China seeing it with its voracious appetite for raw materials and its torrent of exports as the perpetual motion driver of economic activity. But as most people recognise, for one country to have a continual massive trade surplus is not a sustainable situation. China’s growth has rippled out to other Asian countries to the detriment of both Europe and the US and world trade has become distorted as a result. Until some sort of balance can be restored, shipping will be in a difficult place. There is a noticeable movement seeking an economic rebalancing around the world and it is a phenomenon that seems to be gathering pace. Globalisation has many different facets and nobody would argue that cultural exchange, travel and tourism are bad things but economic globalisation is a different matter. The idea of economic globalisation is that each country makes and sells what it is best at doing and relinquishes activity that does not fit into that ideal. In reality what happens is that capital is allowed to move around the world but labour does not. A corporation produces where costs are lowest and sells where returns are highest. Jobs are exported to low-cost nations and while there should be compensations in the way of retraining and new industries or services – this never seems to happen. Instead stockholders and business owners profit and labour loses. For a period this can work and shipping has certainly benefitted in that time. But now the chickens are coming home to roost. People in the US and Europe are demanding more action from their governments. In the US there is a very real chance that the next President will be Donald Trump and he has pledged to reverse the trend of decades and repatriate industry and jobs. Certainly the west needs to rebuild its manufacturing sectors and give back some economic muscle to the man in the street. It is an essential for shipping which needs trade to survive, because if the world populations have no resources to acquire consumer goods, then the shipment of them will disappear and with it the need for raw materials to make them. Some say that reversing economic globalisation is impossible, that it has gone too far to be reversed. But that is just to duck the issue, and as was proved with the unravelling of the USSR and the Warsaw Pact and before that the Empires of European nations and Europe itself that what man has put together can always be undone. Throughout such turbulent times, shipping has always found a way to come through. It is a supremely resilient industry that adapts and changes to suit the times. Sometimes that has meant the industry has to shrink to survive and it would seem that this is where we are at the moment. The boom time of the 2000s attracted investors that really were not needed and has seen shipping transformed from an industry where experienced hands guided the overall strategy to one where opportunist investment and corporate greed have ruled the roost. Demanding constant growth rather than being satisfied with stable and sustainable profitable activity is at the root of the current overcapacity. But enough of the doom and gloom as there are encouraging signs as well if they are looked hard enough for. The world population is rising and that alone will fuel demand for shipment of basic goods and raw materials along with manufactured items. Then there is oil and gas, the fact that oil prices have not been able to get back to anywhere near their peak of two years ago even with Asian economies at full stretch, would seem to indicate that the fear of peak oil is diminishing and fuel prices will find a new and lower equilibrium. For shipowners in general, the combination of more efficient ships and lower fuel prices should be a double benefit. Shake out some of the excess tonnage and the red ink will begin to disappear from company accounts. There can also be some genuine economy of scale savings to be had. Not the unachievable one promised by massive box ships that run at less than 60% capacity and which force ports and terminals to make unnecessary investments in equipment to handle them, but the potential to use just slightly larger vessels through the Panama and Suez Canals. The Canals were game changers when they first opened and their enlargement, though not on the same scale, means new ship types are now able to ply the world’s oceans. There may be other new routes to come although these are less certain, the Nicaragua Canal and the Northern Sea Route. Some say that the first will never see the light of day and although much enthusiasm was evident for the second just a few years back, things seem to have gone a little quiet on that front now. How Russia is viewed in the world at the present may have something to do with it but so might the fact that despite supposedly record temperatures coming year after year, the Arctic ice has stubbornly refused to disappear as some had predicted it would. Now that the 2014/15 El Nino has faded and La Nina conditions begin to kick in, it will be the time to start looking for the future direction of ice cover. Drowned out by the climate change industry, there have been numerous voices predicting a return to the conditions of the 1970s or even another little ice age coming within the next 30 years. Of course the future of the climate is, like the future of shipping, never certain and we can but plan to the best of our abilities for whatever comes along and hope we get it right. I’m sure that at SMM this year there will be plenty of offerings on show that will get it right and hopefully not too many that have made the wrong choice. Winners or losers, those that are there are showing their faith in the future of the shipping industry and while they continue to do that there must be some cause for optimism for the future – whatever it may bring.