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30% of orders should be scrapped

30% of orders should be scrapped
There should be a 30 per cent scrapping of existing order book, for the shipping industry to maintain the current status quo and prevent the situation from further deteriorating, a senior industry official has said.

Shipping industry needs to scrap 30% of orders.

There should be a 30 per cent scrapping of existing order book, for the shipping industry to maintain the current status quo and prevent the situation from further deteriorating, a senior industry official has said. To maintain an equilibrium between supply and demand, the industry needs to scrap 30 million dead weight tonnage (dwt) over the next two years, said Andre Urstad, Associate Partner, Marsoft International, provider of consulting services to the maritime industry.

Presenting his analysis during the sixth annual Marine Money Gulf Ship Finance Conference in Dubai, Urstad said that although there is a lot of uncertainty in the numbers, they provide an approximate analysis based on the performance in 2009.

The demand for dry bulk has been growing at 5.3 per cent annually and the demand for dry bulk ships is much higher at present compared to mid-2008.
"On the dry bulk side there is a very healthy increase in trade growth of about 3.4 per cent. In addition there is a significant rise in congestion, adding almost two per cent," he said.

However, in the tankers section, there has not been such a strong demand.

"Yet we have not seen one single quarter of negative demand for tankers. The problem continued on the supply side as there was tremendous fleet growth," he said.

Trade, as far as tankers are concerned, has been low.
"Oil trade has fallen quite significantly. We have seen almost four per cent of negative growth. At the same time, we have seen a substantial increase ? almost 5.5 per cent ? in floating storage," he added.

He said the order book, as far as tankers are concerned, is currently 31 per cent of the fleet, significantly down from what it used to be (46 per cent) in 2008.

While 46 per cent of the order book comprises of VLCC's, there was 20 per cent slippage in 2009.
Similarly for dry bulk, the order book currently is at 59 per cent of the fleet, dropping significantly from 73 per cent in 2008. Almost 50 per cent of them are for carriers above 100,000 dwt.

He said the slippage rate in 2009 was 35 per cent.
Comparing the current economic situation to that during the 1980s, he said, "The shipping cycle does not necessarily start and end with the global recession".
He said the tremendous drop in rates since 2008 is not entirely unique.

"If you look at the 1980s, you also had quite a significant drop in a relatively short time period.
"Another factor that these two downturns had in common is that during both occasions there was an acceleration in the shipping fleet growth," said Urstad.
However, while the 1980s witnessed prompt delivery of most order books, "this time we are witnessing a lot of slippage in the delivery schedule", he added.
According to him, demand wise, the market really crashed and stayed low for a very long time in the 1980s.

"Whereas this time around, we haven't seen significant drop in demand, thanks to the Chinese."

He said China has been the fundamental reason for the growth in the dry bulk sector. "China's market share of the dry bulk and tanker market has changed over time. Compared to just six per cent of the dry bulk demand 10 years ago, China now accounts for one third and is growing. Right now we estimate that China accounts for more than 30 per cent of the sea borne oil import.
"Without China, the dry bulk market would have been terrible. By growing at eight per cent, it has more than offset the negative growth elsewhere in the world," said Urstad.

For the tanker market, he said, China's share was much more slower, growing by 1.4 per cent, while the rest of the world fell by 5.6 per cent.

"Looking at changing oil imports since the beginning of 2005, the demand for oil in the EU and US has been steadily declining since the middle of 2006.
"It fell off a cliff towards the end of 2008, and most recently we have seen it starting to recover. We expect that recovery to continue but the demand will not come back to 2005 levels either this year or next," he said.
According to him, the fundamentals in China provides room for optimism.

"While the industrialised nations have 420 cars per thousand and in the US, the number stands at 850, China just has 20 to 40 per thousand people. We do not expect China to become like the US and not even like the industrialised nations.

"However, the Chinese auto market is now larger than the US and is growing at 15 to 25 per cent.
Coming back to his premise, he said if the demand figures for 2010 are reasonable and if the order book is delivered, with nothing being scrapped, the industry would be looking at 12 per cent of fleet growth.
"While this is clearly unlikely and assuming that slippages are going to continue, it will reduce the supply by 20 per cent, and the supply growth by two per cent," said Urstad.

While the current order book far tankers is 31 per cent of the fleet, almost half of that is VLCC's and 12 per cent of the fleet are super hulls. "Last year we saw 20 per cent of delivery schedule never materialising," said Urstad. The estimate for VLCC orders between 2007 and 2008 is that they have lost 30 per cent of the value.

Moving into 2011, he added, might be a challenge.
"Even with 20 per cent slippage, we are looking at nine per cent fleet growth and with only one per cent demand, we will need to scrap eight per cent.
"Although there is a lot of uncertainty in terms of demand figures, clearly we also see how important slippage figures are for the sector," said Urstad.
About the Dry bulk market, Urstad said there has been a tremendous jump in import volumes into China in the first half of 2009, compared to 40 other importing regions.

"In just six months, China added the entire volume of Japan. Although since then China has struggled to maintain those high volumes, we are talking about more than six per cent of annual growth. The rest of Asia did not suffer much during recession and have more than recovered and will continue to grow on the same lines," said Urstad.

He was, however, skeptical about Western Europe.
"While it fell drastically during recession, it only managed to recover by 30 per cent and we do not expect it is to come back to the pre-crash levels during the next two years due to the economic condition," said Urstad.

Giving an example of the Chinese ore import, which is the biggest commodity and accounts of 26 per cent of global tonne miles, he said: "It has been growing at almost 10 per cent per quarter and 30 per cent every year. However, it is very volatile and the volatility will continue," he added.

Overall, according to him, the demand for dry bulk sector will continue and the industry can witness much higher growth rates.

www.turkishmaritime.com.tr

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