14-09-2017 Andreas Sohmen-Pao shares his five levers of positivity and risk, By Andy Pierce, TradeWinds
Andreas Sohmen-Pao is positive about the future for shipping underpinned by strong demand from China. Sohmen-Pao, chairman of BW Group, however, sees the demand picture as just one of five levers for shipowners to watch.
“There is a lot to be optimistic about in terms of the future of shipping, but we should also be mindful of the risks,” he told the London International Shipping Week conference. “Too often we have gone from euphoria to despair in this industry,” he told a packed room at the Grosvenor House on Park Lane. “There will be small road bumps along the way like Brexit and political noise around the world, but I think the genie is out of the bottle when it comes to progress.”
He pointed out that Chinese GDP had grown from $300bn in 1918 to $11 trillion today, with that expansion taking place 10 times faster than that seen during the European industrial revolution. Even at the lowest growth rate seen in 2015, “China’s economy created a Greece every 16 weeks”, he explained. “That kind of growth gave unbelievable shipping demand and underpinned some of my optimism for the future,” Sohmen-Pao said. However, he added: “Before we get too euphoric, let me inject a small dose of despair.”
He explained demand growth is not very inspiring and too much depends on China. “There is a good chance China will implement more structural reforms after the MPC meeting in October,” Sohmen-Pao said. “It will slow down and although I mentioned there are other countries that can take up the mantle, currently there is no other country that can replace it in terms of shipping demand.”
In addition, supply remains “very elevated” and shipyards have plenty of capacity to bring back on line should prices rise, the shipowner continued. “To put it in simple terms, we have seen maybe a halving of shipyard capacity since the peak but we grew by four times to get there in the first place,” Sohmen-Pao said. “If you do the maths the yard capacity needed for the world fleet to grow in line with demand is probably about half of current capacity, assuming yard utilization of 70%. So putting supply and demand together I think the world will remain oversupplied with ships for some time to come.”
Sohmen-Pao noted that the world became heavily oversupplied with ships in 1975 and it took 25 years to work it off with a shortage finally reached in around 2000. “And [we] had a good decade or so, which coincided with China’s massive increase in demand,” he recalled. “Are we now 10 years into the next 20 to 25 year down-cycle? I’ll let Martin answer that later,” he said, in reference to fellow speaker, Clarksons Research vice-president, Martin Stopford.
After demand growth and capacity, Sohman-Pao’s third lever is technology, which he believes will provide both maritime opportunities and “high-level threats”. “If it’s not too blasphemous to say it, what technology giveth, technology may take away?” he told the audience. “Technology leads to efficiency gains which can increase the supply of ships. Technology is also about developments that can threaten the demand for ships: renewable impacting energy shipping and localized production and manufacturing impacting containers,” he reasoned.
“The fourth lever I think we need to watch is capital,” the shipowner explained. “It’s likely capital will remain relatively abundant and cheap. I know it may not seem that way to some players, but seen on a macro basis there is plenty of capital out there. The fact a few banks have pulled back may not make much difference if you have plenty of alternative funding sources.” He pointed to Oaktree and ICBC, both of which have high profile investments in shipping, having $100bn and $3.5 trillion under management respectively. “They can afford to invest a few billion in shipping and its billions which can actually move the needle,” Sohmen-Pao said. “Even though we are a capital intensive industry, we are not so big that if you pump a few billion in it won’t make a difference.”
Sohmen-Pao concluded: “A final observation, as we all know, geopolitics is a wild card. Shipping is a call option on logistical disruption. I don’t think this is something we should wish for, both because this kind of disruption can have ugly consequences and also because our industry should build a more constructive strategy than just waiting for disturbance.”