Risk of a 'prolonged' downturn in the shipping market

2013-08-23 09:00

Entering this year, new shipbuilding investment projects have shown signs of recovery. However, some analysts point out that this may lead to supply-demand imbalance, increasing the risk of the shipping market falling into a downturn again.

According to a Jefferies report, new shipbuilding orders this year have already surpassed the total for last year, exceeding it by 27%. Large-scale new shipbuilding projects are impacting the recovery of the shipping market, increasing the possibility of a prolonged downturn similar to those experienced in the 1970s and 1990s.

Jefferies analyst Johnson Leung stated that there have been 69 million DWT of new shipbuilding orders this year. Analyzing trends over the past 40 years shows that an increase in new shipbuilding orders directly slows the recovery speed of shipping market freight rates, slower than the global economic recovery. In 1983, ship owners believed that global GDP growth had fallen to its lowest level in 1982. Based on this judgment, they planned large-scale new shipbuilding projects. While their economic outlook was correct, their freight rate outlook was wrong. Due to the large number of new projects, the shipping market downturn continued for another three years.

In the tanker sector, VLCCs also experienced a nearly 20-year slump between the 1970s and 1990s, during which there were several periods of increased new shipbuilding orders.

Analyst Leung indicated that high oil prices, efficient new ship designs, low ship prices, large-scale shipbuilding facilities, and an atmosphere suggesting the end of a prolonged downturn are similar to the situation in the 1980s.

According to Clarkson Research, following the 2009 global financial crisis, global new shipbuilding orders plummeted from 186 million DWT the previous year to 58 million DWT, but rose sharply again to 155 million DWT in 2010. However, orders declined again in 2011 and 2012, to 84 million DWT and 54 million DWT respectively.

This year, rising expectations for global economic recovery, a rebound in new shipbuilding prices, and a boom in the development of environmentally friendly and efficient ships have directly impacted new orders for traditional vessels, showing a recovery compared to last year. Against this backdrop, it is necessary to be wary of "blind optimism" and maintain vigilance.

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