Does the ratification of the Ballast Water Management Convention spell gloom or boom for the dry bulk market? Will Fray from Maritime Strategies International investigates.

After more than 10 years in regulatory limbo, the IMO Ballast Water Management Convention will finally enter into force on September 8, 2017. Despite being beset with technical challenges and owners’ opposition, its implementation might provide the basis for a dry market recovery.

Following entry into force, all affected ships will be required to install a ballast water treatment system by the first renewal of their International Oil Pollution Prevention Certificate (IOPP), which is due at least every five years, during the vessel’s special survey. This effectively means that by 2022 all ships in the fleet must have a ballast water treatment system (BWT) installed.

Ballast water treatment plants and their installation involve a significant amount of CAPEX, with the level varying depending on the type and size, usually based on flow rate of the system and the technology selected, with cost ranging from $0.5 to $2m for a bulker. This is obviously a source of concern for the industry and individual owners alike.

Some vessels requiring a special survey in 2017 will be obliged to fit a BWT system, extending to all vessels with a special survey in 2018 and 2019. With the cost of a capesize third special survey in excess of $1m plus the additional outlay for retrofitting a BWT at around $1.5m, a 15-year-old vessel that is only earning $7,100 a day and worth $8.2m (based on MSI’s Q3 2016 forecast) the alternative of scrapping next year at $6.7m will look appealing to many.

The chart above highlights exactly how many vessels in the dry bulk fleet will hit special surveys of three or more over the course of 2017 to 2019 based on age profile extrapolation. Of course some of these vessels will be scrapped before they reach these special survey dates but as an indicative position there is just over 100m dwt of dry bulk carriers currently on the water where the owner will soon have to make the call to invest or scrap.

In light of both the prolonged depressed state of the market and the imminent entry into force of the convention, we expect almost 100m dwt of bulkers to be removed over the course of the next four years to 2019. We expect deletions to be frontloaded, because owners will be almost immediately impacted by the parlous state of the market and have one eye on the entry into force timeline.

By the end of 2016 MSI expects 40.1m dwt of bulkers to have been removed from the dry bulk fleet, with scrapping falling to 26.6m dwt in 2017. Scrapping over the course of 2015 to 2017 will exceed all other historical triannual totals not only in dry bulk but also across any individual shipping sector.

This combination of low deliveries and high scrapping will be the driving force that will help pull the sector off the floor and provide a foundation for a recovery that will gain momentum at the start of the next decade.

South Korea’s Ministry of Oceans and Fisheries (MOF) is acting to safeguard the welfare of Hanjin Shipping’s seafarers as the bottleneck involving the company’s ships stretches into a fourth week.

Fifty-nine of the 97 container ships operated by Hanjin Shipping are crewed in-house. The company employs 1,238 seafarers, 518 of which are South Koreans and the rest foreigners.

Of the 38 ships that are waiting in the open seas, 22 have discharged their onboard cargoes. Nine others have been loaded and are waiting in overseas ports, while seven vessels are still waiting in open seas outside Busan, Incheon, and Gwangyang, pending berthing.

The ministry’s checks show that of the ships crewed by Hanjin Shipping, six have enough daily necessities for 10 days; 13 have enough for 20 days; 19 have enough for 30 days; and 21 are amply supplied for more than 30 days.

With regard to the ships that have enough supplies for 10 days, Hanjin Shipping is planning to replenish their stocks after 24 other vessels have been restocked. Going forward, the plan is to ensure that the affected ships have sufficient daily necessities for at least 15 days.

In order to provide support to the stranded seafarers, Hanjin Shipping is working with the Korea Shipowners’ Association, and the liner operator’s labour union is working with the Federation of Korea Seafarers’ Union, in collaboration with the Ministry of Foreign Affairs, and various South Korean consulates have set up points of contact.

The MOF will pay special attention to vessels that have been waiting for more than 15 days, especially the 19 ships that are waiting in or off South Korean ports. Inspectors from Busan Regional Office of Oceans and Fisheries will check on the crew in those vessels to ensure they have sufficient necessities and relieve psychological stress and anxieties.

The MOF claimed that the seafarers have been paid their salaries and this is a necessary expense approved by the court.

As for seafarers whose employment contracts have expired and who wish to disembark from the ships, such arrangements will be made immediately.

Each ship has an onboard medical inspector, but in an emergency seafarers will be helicoptered to designated hospitals with all expenses to be borne by Korea P&I Club.

Seafarer welfare charity Mission to Seafarers, concerned about the lack of essential supplies for Hanjin Shipping’s crew, has called on the company to allow its volunteers to assist 2,500 seafarers on all of the liner operator’s vessels.

Thai dry bulk shipowner-cum-operator Precious Shipping plans to sell its Supramaxes and replace them with bigger Ultramax ships, Managing Director Khalid M. Hashim said Wednesday on the sidelines of the Marine Money Asia conference in Singapore. “In the next 2-5 years whenever the shipping cycle goes up and returns are good, we will sell the Supramaxes and replace them with more Ultramaxes,” Hashim said. The company currently controls around nine Supramaxes. This assumes significance because the company has canceled orders for new Ultramaxes due to inordinate delays in construction and delivery by a Chinese shipyard.

Precious also planned to sell for scrap one or two more Handymaxes in the next few months, Hashim said. Explaining the rationale behind plans to rejig its fleet, Hashim said: “Ultramaxes can carry around 15-20% more volume than Supramaxes while they are also fuel efficient, consuming up to 20% less bunker oil.” Precious has Supramaxes in the 53,000-57,000 dwt range while Ultramaxes are of up to 64,000 dwt. With infrastructure upgrade as ports across the world get bigger and deeper, Ultramaxes were the ships of the future, Hashim said.

There are already six Ultramaxes in the Precious Shipping fleet including two that were delivered earlier this year and two last year, he said. One each is lined up for delivery next month, in January next year and in early 2018, he added. After selling off the Supramaxes — all of which were built between 2010 and 2013 — the company plans to buy more Ultramaxes from the second-hand market, Hashim said, adding that there were no plans to venture into the Capesize market.

A five year-old dry bulk carrier was almost 50% cheaper than a new ship, he said. According to industry estimates, five-year-old Handysize ships are quoted at around $11 million, compared with close to $20 million for a newbuild. In the last 12 months, Precious has also canceled close to a dozen new building contracts for Ultramaxes with China’s Sainty Marine Corp. because the shipyard did not deliver the vessels within the contracted time frame and in compliance with the technical specifications, Hashim said.

Last month, Precious Shipping also sold two of its 1997-built handysize ships. “We are getting rid of our smaller and older ships,” Hashim said. The company now has only two pre-2000 built handysize ships in its fleet. Apart from Ultramaxes, Precious will also retain its relatively bigger handysize ships mostly in the 34,000-38,000 dwt range, he said. Disposing off the older ships has ensured that the average age of the company’s fleet has come down to 7.5 years from 21 years in 2008, he said. Having a younger fleet makes it easier for owners to lease their ships on long-term time charter because charterers prefer to hire younger ships for a longer duration. Hashim said currently close to 20% of the company’s fleet was hired out on long-term time charters running into several years. As it weeds out older ships and buys younger ones, it is aiming to increase the share of long-term time charter in its fleet to more than 70%, he said. Its fleet is used to move grains, coal and minerals among other commodities.

He said the time was not opportune for dry bulk operators to venture into LNG bunkering. “Dry bulk shipping industry is struggling for survival and LNG bunkering can be considered 1.5-2 years later when there is an improvement in freight rates,” he said. Until then the freight rates were likely to remain volatile, he said. There have been some increase in rates recently, driven primarily by gains in the Capesize segment, he added. Freight rates may rise in the medium term if China’s proposal for a Maritime Silk Road to boost shipping traffic between South China Sea, South Pacific Ocean and Indian Ocean was implemented, he said.

Representatives at Japanese shipping major Kawasaki Kisen Kaisha (K Line) have rubbished reports from China that the line will shortly follow Hanjin Shipping into administration. A report carried by Shanghai Metals suggested K Line will file for bankruptcy protection within the next two weeks.

Kiyoshi Tokonami, general manager of K Line’s IR & PR Group, dismissed the report today. Speaking from K Line’s HQ, Tokonami told Splash rumours of them filing bankruptcy are “untrue, completely groundless”.

Adding further fuel to the bankruptcy speculation, Splash has received an image purportedly to be an emergency notice from a Chinese shipper that states K Line will follow Hanjin into court receivership either next week or within two weeks. In May, ratings agency Moody’s downgraded K Line from Ba2 to Ba3. As of the end of its last financial year, March 31 2016, its gearing ratio stood at 1.48:1. K Line, also in the red in the first quarter, warned at the end of July its full year loss will be worse than originally forecast. K Line is now bracing for a full year loss of Y45.5bn, some Y10.5bn worse than originally predicted in April, the start of the Japanese financial year.

Japanese shipping has been rocked by big bankruptcies in recent years – Sanko Steamship and Daiichi Chuo being the two most high profile. A K Line receivership, however, would be on a whole different scale given its scale and diverse business activities.

Earlier this month Splash reported that a Japanese fund run out of Singapore called Effissimo was gearing up to take over K Line. Effissimo has been steadily building its stake in Japan’s third largest line to the point whereby it is now the largest shareholder with a 37% holding as of early August, up from 6.2% a year earlier.

Effissimo Capital Management, established in Singapore by ex-colleagues of activist investor Yoshiaki Murakami, has become the top shareholder in the line as well as in other well known Japanese brands such as office equipment maker Ricoh. Its strategy has been to target Japanese firms it deems undervalued.

However, K Line’s Tokonami today dismissed the takeover talk. “We are having dialogue, explaining our business plans as is usual with any shareholder,” Tokonami said, adding: “Effisimo says their stake is purely for investment purposes.”

K Line shares are trading today at JPY263, up by 2.7%.

The Hanjin bankruptcy came as no surprise as its attempts to restructure and reduce its commitments to the very large number of chartered-in ships, FAILED. The complexity of the effects of the bankruptcy on its creditors, customers and other shipowners is immense and highlights the weakness of owners chartering ships to companies that don’t own or control the cargoes. Intermediary companies have caused huge problems in the past mainly, in the dry-bulk sector, but have been worsened by the Alliance structures that the container operators have formed and endlessly reformed. Hanjin is the tip of the iceberg for shipping in the container and dry-bulk sectors as they service both ends of the manufacturing chain that is part of the Global Economy which is deeply troubled.

The financial state of the Shipping Industry continues to decline in most sectors as the Global Economy itself is declining. The problems the Industry faces have been created by the shipping companies, both public and private, grossly over-ordering new ships in the false belief that the Global Economy would continue to grow at the rates seen in the last decade. The reality is the opposite and most of the new ships were delivered into a stagnant economy that has continued to decline.

Shipping continues to carry more than 90% of physical World Trade but as this has declined so have the freight rates of the ships that carry the Trade. There is a chronic over-supply of ships in many sectors and the average age is historically low. Most companies, whose ships do not have period charters with cargo owners, are now faced with freight income from the spot markets that barely cover ship operating expenses. Debt service is not being covered and cash reserves for future maintenance and dry docking are also not being funded. Neither are the new requirements including Ballast Water and Cleaner Fuel systems.

Charterers and cargo owners need to respond to these issues and at least pay freight rates enabling shipowners to operate safe ships maintained properly with experienced crew. It is patently ridiculous for cargo owners to charter ships from the spot markets that are creating insolvency and bankruptcy amongst shipowners. It is also absurd that shipowners should accept the low rates that don’t cover the costs of operating the ships when they know from past experience that cargo owners can afford to pay more. Ship managers should not be forced to lower standards or reduce quality or safety and investors are ill-advised to push for cost reductions in these essential areas.

The present over-supply of ships will continue throughout this decade and into the next one until ship recycling removes the surpluses and shipyards resist the temptation to over-build again. With the demise of most shipping banks, facing huge losses from their careless lending in the recent past, new debt will be very difficult to find. Also the new investors, comprised mostly of Private Equity, Hedge Funds and Venture Capital Funds, now face inevitable losses which cannot be avoided. Wall Street Investment banks continue to prop up struggling shipping companies with expensive debt that takes priority security and further undermines the existing equity and debt, but enables the company to pay the legal and bank fees.

There will be further collapses in the container sector as some companies that falsely believe “bigger is better”, have incurred huge debts and are losing money. The rush to build super-sized container ships is a disaster, as there are not enough cargoes available to fill them and they have even fewer back-haul cargoes. The previously large ships have been cascaded down into the feeder trades, for which they are too large, and numerous smaller ships await the scrapyard.

The depth of the Global Economic slowdown is clearly evident in Asia. From China to Korea, Vietnam into the Philippines and even into Japan the slowdown in the economies of the USA and Europe and the ongoing wars in the Middle East, have reduced the demand for manufactured goods and with it the demand for ships on both sides of the manufacturing chain. Many of the new investors that have come into shipping in recent years had no understanding of the workings of the shipping industry but were simply focused on the false belief that ship values would rise, and they would make large profits quickly. Most of the publicly traded companies they invested in are now barely solvent and have no hope of generating profits from either their operations or the sale of ships. Faced with the inevitability that many of the shipping markets will not improve the struggling companies should sell all their ships and close down their operations.

In an indication of the sorry state of the dry bulk shipping business, even though it is chronically oversupplied, rising demand for iron ore and coal from China could be bad news for the struggling sector. China’s iron ore imports are up 9% in the first eight months of the year and coal imports have grown 12% compared to the same period of 2015, and steel exports have risen 6% year on year. This has raised hopes that the industry is recovering, but there are still too many ships chasing too little cargo.

However, Precious Shipping managing director Khalid Hashim said equilibrium in the dry bulk market depended on the supply side shrinking its numbers. “The orderbook is going to flatten out in 2018 and 2019, but shipowners are like unsupervised children who are already on a candy high being shown more candy from the shipyards and will not be able to resist the temptation,” he warned. “As soon as the market shows additional signs of stabilisation, not only will scrapping be consigned to the dustbin of history, but new orders will be placed galore at the dying/bankrupt shipyards, giving them another lease on their wretched lives.”

In the first quarter, Hashim said about 14 million dwt of dry bulk ships were scrapped. That dropped to 9 million dwt in the second quarter with the third quarter scrapping volume looking to be half that of the second quarter. He said that if shipping pundits are correct in predicting the BDI will remain strong for the rest of this year, that could be a problem. “The shipowners will make sure that the upturn is extremely short-lived by stopping the scrapping of their older ships and ordering new ones from the shipyards, who could only bless their good fortune that there are so many stupid shipowners out there,” he said.

Pacific Basin CEO Mats Berglund said strong grain shipments and a rebound in Chinese coal imports have contributed to stronger rates since the lows in the first quarter, but he pointed out that the rates remain at historically low levels. This dragged the carrier down to a first half loss of USD49.5 million. “There is a high inverse correlation between freight rates and scrapping volumes. Over the last few months, the scrapping rate has slowed down given the higher freight rates that we have seen and also, we have seen less scrapping activities over the last few months because of the monsoon climate in the region,” Berglund said. “We would like to see more scrapping in the industry and owners should take the opportunity to trade up to younger better second-hand ships or re-sales as this can help provide a better supply demand balance.” Berglund urged shipowners to be patient and said Pacific Basin was continuing to manage for a weak market in the medium term.

The two shipping executives also highlighted the IMO’s Ballast Water Management convention that will be enforced from 8 September 2017. Both Hashim and Berglund expect this will have a significant impact on dry bulk capacity. A coalition of maritime groups is trying to convince the IMO to put back deadlines under the convention so owners can install second-generation cleaning systems. The World Shipping Council (WSC) is proposing a filing that it claims will prevent shipowners investing billions on treatment systems that may fail the treaty’s requirements for killing or rendering harmless invasive species. Berglund said the recently ratified IMO rules requiring the installation of the ballast water treatment systems in ships would contribute to higher scrapping levels.

Hashim said, “With the Ballast Water Management convention coming into force on the 8 September 2017, all existing ships will have to retrofit a ballast water system by their next drydock after 8 September 2017. “Any ship that is older than 15 years of age would then become a scrapping candidate when it’s next drydock became due after the effective date, as the cost benefit to retrofit an extremely expensive – and as yet largely untried – system would be too great a risk to run. It will make the ‘to scrap’ decision much easier.”

Axia Capital analyst Robert Perri noted in a sector outlook, “The market remains volatile and we will see pockets of strength, like the one we are currently in, and people will begin to get excited; however, the recovery is not there yet.”

Clearly the maritime shipping business will begin to pull out of its depression if the world economy begins a strong recovery. And the key growth area is Asia without a doubt. However, the Obama administration has undertaken a series of new policies of dubious merit, often called the Pivot to Asia. Unfortunately most will have a negative impact on the economic development of the region. Two situations which have a military element are important to examine: the Korean peninsula and the South China Sea.

North Korea

The fact that the Korean War has not officially ended and is still under an armistice speaks volumes about the aims of the US over the last 60 years. It has been in the interest of both the US and China for the Korean peninsula to be divided. China does not want a pro-Western country right on its border and the US does not want to lose its client state which can be used as a base for intelligence gathering and political influence in the region. This was especially true during the Cold War. A united Korea would be more neutral and even a South Korea not on a war footing would not be as anxious to support US activities. In addition, US presidents have used North Korea as a punching bag to display their anti-communist bona fides with US voters.

A key aspect of US, North Korea relations is the development by the Democratic People’s Republic of Korea (DPRK) of a nuclear explosive device. US policies have, in fact, pushed the DPRK to establish a program to develop nuclear weapons. One must examine the various reasons that nations develop these weapons. First is to exert hegemony. The Truman administration appears to have had this policy in mind when it built additional nuclear weapons after the wartime detonations on Japan in 1945. Some analysts even believe the actual motivation of the US wartime use was strictly hegemony with respect to the Soviet Union. The second is to deter an adversary from attacking. This was the reason the Soviet Union developed its nuclear weapons. It was concerned with the US monopoly on nuclear weapons. The third is to demand respect from other nations. This was the reason France began its nuclear weapons program. In 1954 the President of France’s Council of Ministers, Pierre Mendès France, attended a meeting in Washington DC. On the return trip he reportedly told an aide, “It’s exactly like a meeting of gangsters. Everyone is putting his gun on the table, if you have no gun you are nobody. So we must have a nuclear program.” That December he ordered France’s nuclear weapons project. A fourth reason to have nuclear weapons is to counter conventional forces. During the Cold War the United States, through NATO, planned to use low-yield battlefield nuclear weapons to slow or halt any invasion of western Europe by the superior ground forces of the Soviet Union.

North Korea has two of these reasons for developing nuclear weapons. First, to achieve respect on the international stage as France did beginning in 1960 with its first detonation. Second, the DPRK can counter the threatening conventional forces of South Korea and the United States. Tactical low-yield nuclear weapons would allow the North Korean government to divert part of its large defense budget to improve the standard of living of its population by eliminating the need for a huge standing army.

The error in US policy over the decades since the armistice was signed is that presidents have used North Korea as a punching bag to puff up their reputation as a tough commander-in-chief with the American public. Action such as the recent flight of a nuclear capable B-1 bombers over South Korea is primarily for US domestic reasons. Unfortunately similar actions over the years have fed into North Korea’s insecurities with the result that the DPRK leaders have countered with their nuclear weapons program and their development of medium and long-range ballistic missiles. The genie cannot be put back in the bottle. The next US president will have to be content with the DPRK as a nuclear weapons state. Much more effective non-proliferation policies should have been pursued over the last 60 years.

South China Sea

The dispute between China and several other Asian nations concerning sovereignty over areas of the South China Sea has worsened with the Obama administration’s pivot to Asia. Instead of leaving negotiations to the nations involved, the US has stuck its nose into these disputes. The recent decision by the international tribunal in The Hague against China was immediately touted by the US as a rebuke of China, which had not taken part in the case nor recognised the tribunal’s jurisdiction. China and the Philippines had been conducting negotiations concerning this issue; the US should have kept quiet and not taken the position that China should obey the tribunal and cease its occupation of the area. The region is not in the Pacific Ocean. The United States only muddies the water by trying to exert hegemony there. Shipping would be affected very negatively by any military clashes in this area. In fact, considering the wide area involved it is clear that even minor incidents could cause problems for maritime shipping. Flights of B-52 aircraft over disputed islands by the US do not help the situation. The existence of US naval and other military bases in countries, such as the Philippines and Japan, is counterproductive to a peaceful environment for sea trade. There are even rumours the US would like to have a base in Vietnam. Also, joint military exercises in the area should cease.

Conclusions

From the standpoint of international trade and shipping in particular, the US is not contributing to the Asian economic growth with investment in infrastructure as China is with the One Belt, One Road initiative and the Asia Infrastructure Investment Bank (AIIB). In fact the policy was to discourage allies from joining the AIIB. The overall US policy has been negative for Asian economic growth.

If the US continues an adversary position with respect to China, as it has with North Korea for over 60 years, economic development in Asia will be greatly hindered. The idea that a certain style of democracy is some fundamental principle that needs to be exported around the globe will simply cause disharmony and economic problems. In fact too often US policy is no more than neocolonialism. It must be remembered that although the US often states its principles as democracy and human rights, those ideals go by the wayside if the US economic interests are at stake. One bright recent development is that during the presidential primary election race, several candidates demonstrated support by American voters for far less adventurism as an element of US foreign policy.

The overall sluggish shipping market of today can look forward to the One Belt One Road (OBOR) initiative as a long term catalyst for growth, industry players from the financial sector have shared.

The economic development strategy and framework, proposed by China under president Xi Jinping, has gotten countries in the region gearing up to take advantage of the widening trades from China, both inland and at sea, with a particular push to infrastructural developments.

David Mann, chief economist Asia at Standard Chartered Bank, said the OBOR initiative has reinforced and expanded the existing trades between China and Asean in particular, be it on the ‘belt’ side leading to Europe or on the maritime lane.

“China has been finding destinations to invest in, and the OBOR initiative is expected to gain even more traction… give it another year or two,” Mann told delegates at the Marine Money conference held in Singapore on Tuesday.

Over at Hong Kong and Singapore, the two key maritime cities have established their respective OBOR offices to facilitate the expansion of Chinese trade.

“We have (OBOR) office in Singapore under the ministry of trade and industry, looking at how we can bring Chinese investment into Southeast Asia,” said Chay Yiowmin, partner, corporate finance, BDO Advisory.

“Singapore is considered a financial centre of this region, and a lot of money from China are parked here for investment to build up infrastructure in neighbouring countries, for example, Indonesia,” Chay said. He added that funds are also channeled into developing second-tier Asian ports for them to cater to increasing shipments of commodities to energy-starved China.

Hong Kong also has an OBOR office to give suggestions and recommendations on strategic and trade growth to the Hong Kong chief executive, according to Benjamin Wong, head of transport and industrial, InvestHK.

“We are very upbeat on the OBOR initiative. On the finance side, the monetary authority has established the infrastructure financing office as a platform for stakeholders,” Wong said, adding that Hong Kong’s strengths in finance, logistics and trade would play a key role in promoting the OBOR initiative.

In the much longer term say over the next 10-20 years, according to Standard Chartered’s Mann, the OBOR may see linkages to South Asia, primarily to India, to aid infrastructural developments in that region and to promote the establishment of new industries.

We know we are operating in one of the more volatile industries in the world and have been through severe down cycles before, but his time it is different. Slowly, but surely the realization that the commodity boom and the unprecedented Chinese hunger for raw materials was likely a “once in a lifetime” bubble, is sinking in.

Effectively all data relating to the dry bulk market, whether on the supply – or demand side, underlines the fact that we are now moving into a very different environment than what we grew accustomed to post-2000. It is therefore likely that the market will see less volatility on both freight rates and asset values for the foreseeable future. Keeping these fundamentals in mind, it is important to consider what the most sustainable dry bulk business model might be in this “new normal.”

Looking forward, underlying demand growth will most likely at best be in the order of one to three percent. Demand will not solve the tonnage overhang this time as it did during the China boom, unless to significantly alter existing barriers (or the lack of barriers) to international trade. For the market to return to even modest break-even levels it is the supply side of the equation that needs to be significantly adjusted – and history tells us this will be a drawn-out process.

Recognizing these hard facts, the next step is for the industry is to adjust to a new norm, with more realistic expectations relating to market trends and profit margins. And this realization process is painful for many reasons:
• We all think the other shipowners should scrap their vessels. My vessels are superior!

• The moment there is the smallest uptick in the market, owners choose to hold onto their older vessels rather than recycle.
• It hurts to take and accept a loss. Many companies choose to close their eyes and hold on tight for as long as possible, even if this means a further deterioration of their position.

Unfortunately, the reasons above are driven as much by emotion and hope as the cold reality of the accountant’s ledger. Fewer ships may be the answer, but this will require the manifestation of a sense of mutual solidarity, something this industry has never been known for. Such decisions and actions do not come easily or without cost.

If we are looking for a silver lining, the dry bulk industry has probably seen the worst of this unprecedented downturn, at least for the more robust Handy and Supramax markets. Western Bulk Chartering has a strong history for producing positive margins in all market scenarios, but it is obvious that it is also harder for commercial operators to extract a substantial margin when rates are around opex levels. Harder, but still possible.

We have learned to always be prepared for the unexpected, and so far this year there are at least two elements that may yet provide the market with some long awaited tailwind; Firstly, China may continue to close domestic coal mines and could further strengthen the trend we have seen lately with increased imports of coal. The other element that may play out positively is the fact that IMO now finally managed to get sufficient support for the Ballast Water Treatment regulations that may over time force more recycling of tonnage as an alternative to investing $1-2 million in older vessels.

The question is, therefore, what we can expect the market to do going forward? Our best-case scenario is for modest demand growth and reduced supply of vessels. This will improve the tonnage balance slowly, and contribute to a recovery over the next 18 months. It will be a fragile recovery, and will very much depend on the world economy and continued soberness on behalf of shipowners.

Hopefully I am wrong, but we need to be prepared for markets, from a historical perspective, to stay low for at least the next 18 months – which is also probably what is required to bring scrapping to the level where it will support a more permanent recovery. As the downward trend reverses, we also expect our margins to return more in line with traditional performance levels.

It is hard to answer the question as to which is the most viable business model for survival in the dry bulk business – through asset plays or through a pure operating model? However, irrespective of how the recovery plays out, we believe our operating model is a safer place to weather the storm than to be exposed to the asset markets.

Jens Ismar is CEO of Western Bulk Chartering.
The opinions expressed herein are the author’s and not necessarily those of The Maritime Executive.

THE court-led receivership of Hanjin Shipping may have come as a shock to many in the industry but it was unlikely to lead to a systemic collapse in the container shipping system worldwide, according to Alphaliner executive consultant Tan Hua Joo. Mr Tan was responding to comments made by Seaspan Corporation chief executive Gerry Wang on Bloomberg TV, comparing Hanjin’s situation to the implosion of Lehman Brothers in 2008, which eventually led to the global financial crisis.

He noted that Hanjin only accounted for about 3% of global capacity for container shipping. “Even in the largest market that Hanjin was serving, which is the transpacific market, it had a 7% share of the market. So a 7% disruption of the US inbound supply chain is unfortunate but it is not a catastrophic event.” The event caused a two-week delay in inventory for most cases at 7% of the entire market, Mr Tan added.

Putting things into perspective, he does not expect the Hanjin event to be one that the container shipping system is unable to recover from fairly quickly. Hanjin’s 3% of global capacity should be easily replaced by other container shipping lines, Mr Tan noted, given that idle capacity in the containership market is around 5% — significantly more than what Hanjin is operating. Additionally, with the number of containership newbuildings scheduled for delivery over the next four months (September to December), “it is almost similar to the capacity that Hanjin is withdrawing”. With both these factors in mind, he feels the 3% global capacity taken up by Hanjin can be easily replaced.

Looking at situation so far since Hanjin entered court-led receivership, Mr Tan notes that nearly 70% of Hanjin’s capacity on the transpacific trade has already found replacements. “The speed of the capacity substitution is incredible.”

Although Hanjin’s filing for receivership occurred amidst the so-called traditional peak shipping season, Mr Tan said it was fortunate that the peak season this year had been fairly tepid. As such he expects the entire logistics crisis to be resolved roughly a month and a half from now. “The whole impact of the Hanjin situation is going to blow over. It is not a Lehman event. If we were to look back on this situation several months from now, I think we would see that this thing is going to revert back to normal,” he said. Unfortunately, that would also mean that the increase in freight rates seen over the past few weeks in light of Hanjin’s predicament will be short-lived as the market enters its lull period, with the Chinese bank holidays coming up in early October. Mr Tan expects cargo volumes to slide by then, with the extra capacity offered by Hanjin’s competitors.

Hanjin’s situation has also barely made a dent in the charter market so far, and will not be of much help to shipowners, he said. But he did say that the situation with Hanjin’s vessels could have a major impact on how alliances are set up, especially for The Alliance, which Hanjin would have been part of. “Without the inclusion of Hanjin, the [alliance] at this point looks particularly weak and that, in a sense, is only going to drive the uncertainty as we move towards the new alliance set-up, which will come about in the second quarter of next year,” he said. Hanjin would have contributed about 20% of planned capacity in the alliance.

Hanjin’s situation can be viewed as a one-off event and can be blamed on bad timing, said Mr Tan. “If the situation for Hanjin did not occur today and it was pushed back six months from now, I think the Korean government would have stepped in. There is really no justification for the Koreans to step in to bail out Hyundai [Merchant Marine] a couple of months earlier and then failing to do the same for Hanjin because clearly Hanjin was the stronger of the two Korean carriers and I think they had a much better organisation, they had much better coverage and a fairly strong [information technology] system used by other competitors.” He noted that Hanjin also had more strategically attractive assets, such as worldwide container terminal holdings. Thus it would have made more sense to save Hanjin rather than HMM. In Mr Tan’s view, the main reason Hanjin was not bailed out by the government was political, in light of the recent alleged accounting scandals plaguing shipbuilder Daewoo Shipbuilding and Marine Engineering, previously rescued by the authorities. Thus lawmakers were unwilling to put their support behind Hanjin lest history repeat itself.

Looking at the broader shipping industry downturn, Mr Tan said that more of such shipping bankruptcies would be needed to restore the supply and demand balance. The industry possesses quite a poor track record in terms of self-regulation, Mr Tan said, in spite of persistently below average earnings mainly due to the ‘too big to fail syndrome’. He cited cases such as Zim, CSAV, Hapag-Lloyd and CMA CGM as recent examples. “The fact remains that there have not been sufficient exits in this market at all. If we look at the rest of the bankruptcies and exits that have taken place in the past, they have all been relatively small scale.”