Shipping mirrors the general economy: in times of expansion, shipping does very well, in a downturn things are ghastly.
This is due to the colossal amount of capital one needs to construct ships. This leverage generates enormous profits once operated at capacity. Conversely, once an overcapacity exists in the marketplace, shipping, due to elevated fixed costs, takes a big hit.
The present atmosphere of the economy is not supportive for shipping. The recovery is a jobless recovery, house prices are still low and without consumers spending the equity in their houses or cash they earned, the US economy will not prosper.
Quantitative Easing, the low-cost cash the federal reserve spills in banking coffers, has done a little good, but its effects are disappointing. Shall we hope that more of the same will finally bring the long-awaited breakthrough ?
Storms in the United States, quakes in Japan have added uncertainty that will create unfavorable conditions for the economy. Extraneous factors are not looking good for shipping. How about industry specific parameters ?
Bunker fuel is any type of fuel oil used aboard ships. Bunker costs currently cost carriers about 46% of spot freight income assuming a 90% utilization. These costs are not going to decrease, rather the political uncertainty in all Arab countries will keep oil prices high. Hence the expenses for the shipping industry are going to go up.
Are freight rates going to increase to buffer the increase in costs ? Freight rates have been looking weak for a couple of years now. What about the longer term outlook ?
Globalization may have run its course. The West has outsourced to China; however the time of further outsourcing might have come to an end. The West does not have much more to outsource. Some local manufacturing (cars, planes, tanks) is necessary to protect market access. Outsourcing causes its own set of challenges (cross-cultural communication, language barriers, time differences) that produce hidden costs making outsourcing less attractive.
Migration of manufacturing from China to South-East/South Asia does not create extra cargo. Rising costs in China may force manufacturing activities to even cheaper locations such as Bangladesh or Vietname. However this move does not create additional demand for shipping, it would rather cause a replacement of existing traffic routes.
Finally, the currently existing overcapacity will not disappear quickly. It takes several years to build a ship, the current generation of new cargo ships were ordered when demand was high. The current overcapacity will not abate by adding more capacity that comes online now.
Conclusion: The shipping industry, as well as the container building industry, is not going to recover to its pre-financial crisis boom times any time soon. On the contrary, some fundamental structural problems need still to be worked through.
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