Commodities: a decade in the doldrums

Commodity prices in the doldrums for the next decade and further declines in Chinese demand leave no doubt as to the expectations for the dry bulk market through to 2025.

According to consultant and analyst IHS, these two big-picture trends will mould the capital investment, operational efficiencies and long-term business strategies of the maritime industries over the next decade.

IHS expects that depressed commodity prices will continue as the global economy struggles to make any meaningful recovery. Prices for coal, iron ore and crude oil, it says, are all likely to remain depressed for the next few years.

“For most shippers, the five to 10 years of slow growth ahead translates into depressed rates for shipping, particularly dry bulk shipping. Accentuating the price weakness is that most fleets – with the exception of panamax fleet coal and grain cargo vessels – are fairly young, leaving little room to reduce capacity,” IHS said.

It does concede that tanker shipping could remain immune to the trend at least in the short term, but lower oil prices will eventually cut into that as average global oil demand growth predictions of just 0.6% per year through to 2040 take hold.

Dalibor Gogic, principal analyst at IHS Maritime & Trade, says: “The possibility of low commodity prices for a prolonged period of time will mean readjusting current and near future fleet capacities, particularly in the dry bulk sector that experienced large growth of the fleet in last 10 years.

“One bright spot is the demand for energy shipping, which is still expected to remain healthy – at least looking a year ahead – as demand for energy resources from the non-OECD Asia Pacific region is expected to drive demand. However, the growth in demand is not expected to replicate the demand growth noticed in earlier stages of the commodity supercycle and it seems unlikely to continue.”

Chinese excesses

Turning to China, IHS cites excesses in industrial capacity, housing inventory and debt as suppressors of domestic demand in 2016, which is being exacerbated by slow and unstable global economic growth. The analyst expects that China’s GDP will fall to 6.3% in 2016, before a modest rebound in 2017.

“The slowdown in Chinese demand means most businesses will simply readjust to new economic realities. However, the situation for dry bulk shipping is much worse,” says Mr Gogic. “The number of new ships and increased capacity expected to be hitting the waves in the next couple of years is huge.”

He adds that the crucial factor will be the success or otherwise of the implementation of China’s new economic reforms to incentivise domestic demand, which could mop up some of the excess capacity in the dry bulk trade.

But there are some upsides to counter the negativity, one being the effect of lifted sanctions on Iran on shipping. Expected to be lifted early next year, removal of sanctions is expected to add about 500,000 bpd of oil to the market before the end of 2016. While this won’t help tanker operators directly – most of the oil is expected to be shipped in National Iranian Tanker Company’s tonnage – its contribution will likely further depress already weak oil prices, inflating near-term demand for oil, gas and petroleum products.

IHS also highlights shifts in global demographics and population growth rates as potential drivers of growth over the next decade. A growing middle class in the emerging economies of Asia, Africa, and Latin America is expected to drive growth in demand for imports of commodities and finished goods.

“Shipping is a servant of trade, and trade is driven by consumer behaviour,” says Richard Clayton, chief analyst of IHS Maritime & Trade. “So understanding how economies develop, evolve and plan for change brings valuable insight of what the maritime sector will look like over the coming decade. This insight is much more instructive than studying changes in ships and related systems.

“The significance of expanding middle classes comes from an increased demand for efficiency, a greater emphasis on innovation, and a more globalised outlook,” he adds. “Shipping enables these goals to be achieved.”

Data drive

A final positive trend is highlighted in an increased uptake of big data. IHS expects that big data analytics will aid better forecasting, which will deliver greater market and pricing visibility. Improved use of AIS, for example, could lead to better insight of trade route evolution and enhance the industry’s ability to mitigate risks.

“The arrival and acceleration of big data in shipping is starting to signal a sea change in how the industry and its customers plan for the future,” says Andrew Scorer, principal trade analyst at IHS Maritime & Trade.

“As forecasts become more accurate, shippers can run more productively, such as choosing ideal routes, operate efficiently by choosing best-price fuels, or become more competitive. For maritime investors, big data reduces risk exposure and extends visibility into business operations, encouraging further investment.

“Big data won’t end the industry’s cyclical nature or remove all the uncertainty that comes with geopolitical forces, such as oil embargoes. But it will allow players to look with more confidence into future events and act proactively to turn challenges into opportunities.”

The New York Stock Exchange-listed analyst made its predictions in its IHS Global Maritime Trends 2016 whitepaper.