Straight down the middle
While the immediate outlook for the shipping industry is far from rosy, there’s more than a glimmer of hope on the medium term horizon in the form of the burgeoning Asian middle class
The rise of a middle class in Asia could well be the lifeline for lacklustre shipping trades in the medium term, although near term risks remain a concern.
A high level panel of ship operators, a financier and a classification society at the recent Sea Asia event in Singapore agreed that an “unprecedented rise in affluence” is good news for the shipping sector over the next five to 10 years.
Andreas Sohmen-Pao, chairman of BW Group, described himself as “super optimistic” in the medium term, based on an “incredible rise in the middle class”. This coupled with cheaper energy and raw materials, rising standards of education, and developments in technology lends support to the positive medium term outlook. “Our faith rests very much on whether we are getting more affluent or poorer as a world,” he said.
Tom Boardley, marine director at Lloyd’s Register, agreed: “In Europe and the UK the middle class is disappearing. The idea that the middle class is moving to Asia is a new phenomenon and I’d be very interested to see what happens.”
There’s no question that if we see interest rates go up 2%, 3% or 5% there will be consequences – in my view very healthy and necessary consequences where you sort the weak from the strong – Andreas Sohmen-Pao, BW Group
Threats remain
However, threats remain to this medium term positivity. Claus V Hemmingsen, a member of the executive board at AP Moller-Maersk Group and chief executive of Maersk Drilling, pointed to growth that has “got ahead of itself” in some of the emerging economies, citing Brazil as an example. This leads to more volatile growth, he said, especially when some of the underlying economics of these countries are undermined. “That’s a challenge for ship owners,” he said.
The impact of the Panama Canal expansion is another unknown, according to Mr Sohmen-Pao. “The Panama Canal expansion will clearly have an impact on flows, but the only thing I am a bit cautious about is that everyone thinks they are going to go through it. However, there are limitations on how much and which traffic. The big question is how is pricing going to be done as that will really determine which type of ships go through. We’d all love to go through but the reality is that we probably can’t.”
Mr Boardley voiced concerns that a major shipping disaster, one in the public eye involving people and casualties, would shake the medium term positivity, while Precious Shipping managing director Khalid Hashim was worried about the impact of the withdrawal of quantitative easing (QE) and a subsequent rise in interest rates. “The difference between this recession and the one of 1986 is that then LIBOR was at 14%; today it is close to zero. If LIBOR goes from 0% to 14% we are all dead.”
This was a view shared by Mr Sohmen-Pao who questioned how the industry would manage its exit from QE. “The only thing that I’m scared of even more is that in five years time we are still in QE and that there is still money being poured into the economy and ships getting built with no regard for the cost of money,” he added.
Major geopolitical issues over the next five years topped the list of concerns for Mr Hemmingsen: “We have Russian sanctions now, but imagine the effect of other geopolitical developments in the future.” For his part, SS Teo, managing director of Pacific International Lines, cited security as a key worry.
Short termism
Short term risks are also all too real with overcapacity and excess liquidity still being blamed for shipping’s continuing depression.
Said Mr Sohmen-Pao: “There is a lot of slack in the global economy, there’s too many ships and there’s too much production across many different industries as a result of too much liquidity. The things that worry me is how we manage this exit from QE and from too much liquidity, and the polarisation of politics.
“In the end, whether we end up with a pessimistic or optimistic outcome depends a lot on global governance. I think that there is this strange world of far too much money and liquidity, but at the same time not everyone has access to capital. There’s no question that if we see interest rates go up 2%, 3% or 5% there will be consequences – in my view very healthy and necessary consequences where you sort the weak from the strong and you have this cleansing.”
Mr Hashim believes it’s a “question of survival” for the next few years. “If I was a company that wanted to survive and be part of the success story in the medium to long term I would have to be scrapping old tonnage, getting rid of anything that is not my core asset, raise finance, and get efficiency and costs down. With these things you will be one of the success stories of the future,” he said.