Shipping Industry Faces Overcapacity Amid Economic Downturn
A collapse in global trade combined with new capacity coming on stream has led to huge falls in freight rates and financial hardship for shippers
CHEMICAL SHIPPING operators face difficult trading conditions in 2009, due in no small part to the global economic downturn. Put simply, there are currently not enough chemical cargoes to go around because of weakened global demand. Volumes are down by as much as 75%, which has led to overcapacity in the shipping market.
Owners blame this on the relentless production of new ships in Asia, which are flooding the market. Ship operators have publicly stated that Asian shipyards must adapt to the economic situation in order to avoid a crisis. Delaying production of new ships will be critical to protect the growth of the industry, they say.
In response to the growing fleet of available vessels, shipbuilders in China have declared their intention to lower the ship age limit, which would mean chemical carriers having a maximum life span of 25 years. However, the global shipping fleet is expected to increase by 12% this year, despite declining orders for new ships. The chemical tanker fleet worldwide currently stands at around 4,500.
SUPPLY AND DEMAND CONUNDRUM
A consequence of this overcapacity is the impact on shipping freight rates. According to global chemical market intelligence service ICIS pricing, freight rates have been in steady decline over the past six months, with the European market seeing the largest average fall, at nearly 40%.
The biggest decrease in the region was noted along the northbound route from the Mediterranean to the European continent for 2,000 tonne parcels, with levels falling from $71-75/tonne (€52-55/tonne) at the end of August, to $33-36/tonne in March - a decrease of 53%. This drop was a result of poor production levels in the Mediterranean and shipping overcapacity.
"There used to be one or two ship owners applying for a cargo, but now there are as many as seven or eight offers," a London broker says.
Over the same six-month period, rates on the transatlantic eastbound leg had decreased on average by 35%, a considerably higher percentage than on the westbound route, which decreased by 22%. There were more benzene, toluene, xylene (BTX) cargoes on the Europe-US Gulf route, which kept freight rates from falling, owners say. Asia was the firmest market out of Europe, although rates had decreased an average of 19%.
Activity on the Europe-Asia route may be stimulated by the Suez Canal Authority (SCA) announcement, at the beginning of the year, of an indefinite freeze on transit fees through the Suez Canal. This is in response to the economic downturn and the escalating piracy problems in the Gulf of Aden. SCA chairman Ahmed Fadel predicted that traffic would fall by 7% over the year, as the number of vessels passing through the canal in December was down by nearly 20%, compared with October and November.
The pitfall of lower freight rates, overcapacity and fewer chemical cargoes claimed its first victim at the end of last year, as Sweden's Svithoid Tankers was forced to employ two advisers to help save the company from liquidation. Other large ship owners, such as Malaysia's MISC have announced a cut in newbuild orders as the downturn takes hold.
A period of stability in difficult market conditions is expected from most sources. Demand - or lack of it - is seen as the key issue for the future. There is also the question of whether those producers operating at reduced rates could tighten the market and create some upward movement in rates.
However, one analyst predicts that freight rates would not rise until the end of the economic downturn, which he thinks will be 2010. "[By then], freight rates will most likely recover, as demand and profitability return to the sector," he says.
CHEMICAL SHIPPING operators face difficult trading conditions in 2009, due in no small part to the global economic downturn. Put simply, there are currently not enough chemical cargoes to go around because of weakened global demand. Volumes are down by as much as 75%, which has led to overcapacity in the shipping market.
Owners blame this on the relentless production of new ships in Asia, which are flooding the market. Ship operators have publicly stated that Asian shipyards must adapt to the economic situation in order to avoid a crisis. Delaying production of new ships will be critical to protect the growth of the industry, they say.
In response to the growing fleet of available vessels, shipbuilders in China have declared their intention to lower the ship age limit, which would mean chemical carriers having a maximum life span of 25 years. However, the global shipping fleet is expected to increase by 12% this year, despite declining orders for new ships. The chemical tanker fleet worldwide currently stands at around 4,500.
SUPPLY AND DEMAND CONUNDRUM
A consequence of this overcapacity is the impact on shipping freight rates. According to global chemical market intelligence service ICIS pricing, freight rates have been in steady decline over the past six months, with the European market seeing the largest average fall, at nearly 40%.
The biggest decrease in the region was noted along the northbound route from the Mediterranean to the European continent for 2,000 tonne parcels, with levels falling from $71-75/tonne (€52-55/tonne) at the end of August, to $33-36/tonne in March - a decrease of 53%. This drop was a result of poor production levels in the Mediterranean and shipping overcapacity.
"There used to be one or two ship owners applying for a cargo, but now there are as many as seven or eight offers," a London broker says.
Over the same six-month period, rates on the transatlantic eastbound leg had decreased on average by 35%, a considerably higher percentage than on the westbound route, which decreased by 22%. There were more benzene, toluene, xylene (BTX) cargoes on the Europe-US Gulf route, which kept freight rates from falling, owners say. Asia was the firmest market out of Europe, although rates had decreased an average of 19%.
Activity on the Europe-Asia route may be stimulated by the Suez Canal Authority (SCA) announcement, at the beginning of the year, of an indefinite freeze on transit fees through the Suez Canal. This is in response to the economic downturn and the escalating piracy problems in the Gulf of Aden. SCA chairman Ahmed Fadel predicted that traffic would fall by 7% over the year, as the number of vessels passing through the canal in December was down by nearly 20%, compared with October and November.
The pitfall of lower freight rates, overcapacity and fewer chemical cargoes claimed its first victim at the end of last year, as Sweden's Svithoid Tankers was forced to employ two advisers to help save the company from liquidation. Other large ship owners, such as Malaysia's MISC have announced a cut in newbuild orders as the downturn takes hold.
A period of stability in difficult market conditions is expected from most sources. Demand - or lack of it - is seen as the key issue for the future. There is also the question of whether those producers operating at reduced rates could tighten the market and create some upward movement in rates.
However, one analyst predicts that freight rates would not rise until the end of the economic downturn, which he thinks will be 2010. "[By then], freight rates will most likely recover, as demand and profitability return to the sector," he says.
quoted from: www.ICIS.com
