Mandarin Shipping sees mass scrapping of shipping and shipbuilding as only way out
 There are times when the obvious course is the best one, when there is no-story-behind-the-story to provide an escape, only the painful hard road to get from where you are to where you want to be.
"There are too many ships - so scrap them," Tim Huxley, managing director of Mandarin Shipping, told a somber audience at a Hong Kong Maritime Industry Week. "They lack employment and there is zero expectation that employment will be found."
Mr Huxley was speaking at an Asia Maritime magazine event at the Foreign Correspondents Club (FCC), recalling his youth in England: "When I was a kid, there were 36 shipyards on the River Tyne, by the time Margaret Thatcher had done with them, there were none.
"What is needed in China is a Margaret Thatcher figure to come in and do to Chinese shipbuilding what she did to British shipbuilding in the early '80s," said the 24-year veteran of Clarkson's, the London shipbrokers.
When Mr Huxley arrived came to Hong Kong in 1989 he recalled a chart in Clarkson's Weekly about how Poland was the world's fourth biggest shipbuilder.
"China was running at number eight. Then there was a decision to be the world's biggest. I was asked to go to Beijing and be on a panel about China's plan. When I said why don't you focus on being the most profitable, the invitation was withdrawn."
Mr Huxley hoped saner head ruled Beijing today and would also get rid of the massive overcapacity in cement production and steel.
"There's tumbleweed blowing through ship yards. There were only 89 worldwide that had an order in the last year. Shipbuilding capacity is the elephant in the room," he said.
Mr Huxley recalled when Hong Kong's Tai Koo and Whampoa yards were "haemorrhaging cash" building ships. "They only started to make money when they built apartments on them. Yes, I know low shipbuilding prices are coming in. I know we're eternal optimists. Maybe you're hoping that the shake-up in Korea might have an impact on capacity. But history will prove you wrong," he said.
Another folly to be dealt with is environmental regulations, the breaking of which has become dangerous. The jury's out on whether we can actually manage to make those environmental considerations, but the consequences of breaching them are now penal," he said.
"But I'm still not going to go out and order an LNG fuelled feeder - because I'll be at a competitive disadvantage for years. So much regulation has over-burdened shipowners and a lot has been badly thought through and not well implemented - things like scrubbers and ballast water treatment management.
"I think Hong Kong took the lead on this with the introduction of the Fair Winds Charter. We were really making an effort, with the voluntary, which now is mandatory, use of low sulphur fuel in Hong Kong.
"That set the tone for the Pearl River Delta, but we there's so many vested interests here. We were talking about the implementation of low sulphur and, I mean, scrubbers. That's going to be complicated, though it might keep shipyards busy retro-fitting scrubbers.
"Burning distillates is going to be expensive. But then you've got the vested interests of the oil companies, because the shipping industry has done them a wonderful favour by being the primary consumer of the crap that's left at the bottom of the, err . . . the refining process," said Mr Huxley.
(To explain, if one takes a barrel of crude, many barrels are needed to supply demand of highly refined aviation fuel, which only skims a tiny fraction off the top. Then comes automotive petrol, which takes up a much larger fraction of each barrel, then diesel which takes up an even larger one, before we get to heavy oil, from which come plastics and marine bunker fuel, which accounts for up to two thirds of each barrel, making it very cheap and plentiful indeed. That's why at the height of various oil crises, there was never any shortage or price increase for plastics.)
"But because of environmental regulations you cannot use crude oil to make tarmac for roads in new infrastructure in the United States making it all the cheaper, he said "So shipping has been a wonderful way to get rid of it. What they'll probably do is drop the price so much we'll continue to use it unless it's regulated in a very strict way," he said,
From shipyards to the ships they build, Mr Huxley painted a gloomy scene with gloomier prospects.
"The destruction and equity invested in ships over the past few years has been devastating. This is particularly true in the panamax sector of between 4,000 to 6,000-TEU ships because this class of ship becoming almost unemployable since the opening of the widened Panama Canal.
"In my 34 years in shipping I've never seen a situation arise where a significant sub-sector of the shipping market has become obsolete so quickly," he said.
Asked if MCC Transport, Maersk's Singapore-based short sea feeder unit, had any use for such vessels, CEO Tim Wickman told the earlier TPM conference in Shenzhen that they were ill-suited for the intra-Asia trade.
Said Mr Huxley: "Even when trades are found where they can be deployed, they will be operating at well below capacity and liner companies are looking to replace them with smaller ships which offer greater efficiency in terms of fuel consumption and port charges.
The theme of the Asia Maritime event was feeder services were coming into their own a big time profit makers, Mr Huxley wouldn't go that far.
"That's a bit optimistic, but certainly the feeder sector has not been as slaughtered like the rest of the market," he said.
"Down the line, we still believe that there is a place for a lean, efficient shipowner with the right assets being a quality tonnage provider to the major container lines."
Mr Huxley noted Of the liner operators, Wan Hai has consistently been the most profitable by focusing on niche trades.
And over the past few years, the feeder sector has provided some of the most notable hits in the liner sector. For example, in December 2014, a seven-year- old 1,700-TEU ship was purchased with delivery in the Mediterranean for $10.2 million, nine months later and after that ship was repositioned to Asia, that ship was sold for $12.4 million showing just how quickly values can move.
"Unfortunately, that ship today is probably worth no more than $8 million, so it can slide the other way. too," he said.
There had been almost zero investment in the feeder market over the past few years from the major lines.
Low oil made fuel efficiency less of a selling point. "But container shipping is more sensitive to bunker prices than other sectors as it's not possible to implement slow steaming where you have schedules to maintain, unlike the bulk sector.
"If there is one thing a liner shipping company cannot face, even in these dire markets, it's unreliability and the risk of having your tonnage provider go out of business or have their ship arrested with your cargo on board," he said.
"There is one thing that we have to hope comes out of the chaos of the Hanjin bankruptcy. It is that shippers start to focus on the reliability of their supply chain partners and are not solely driven by cost," he said.
"The huge losses which have been and will continue to be incurred by people who went for the cheapest option can hopefully be monetised by companies who offer customers a reliable partner.
"The lack of investment in the feeder sector has been crucial to the market enjoying slightly better balanced market conditions during 2016, giving a degree of optimism going forward," he said.
"Intra-Asia trade has been one of the bright spots. There's been a pick-up in demand in the Caribbean, Mediterranean and Baltic which has provided an alternative which has helped keep rates relatively stable.
"Of course, optimism can be undone if there is return to the ship yards. I don't have a crystal ball, but so far things are moving in the right direction," he said.
But first things first. Scrap tonnage surplus to needs now. It may be the hardest course, but it is also the best and shortest way to restoring supply and demand balance to make an unprofitable industry profitable again, he said. That seems to be the painful, but growing consensus. |
