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The Shipping Industry: Navigating Choppy Waters

The Shipping Industry: Navigating Choppy Waters

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The container shipping, a great recipient and assistant of globalization, continues as the means to exchanging goods around the world.  Recently, the shipping industry experienced a consistent and speedy rise with China as the world’s manufacturing power. Consequently, a number of shipowners, bankers and investors enjoyed prosperity during this period.  However, the current world’s financial and economic crisis has hindered this growth and instead influenced a decline in the amount of containers shipped worldwide, causing great losses.

Pre-crisis situation

During “the good old days” of the shipping industry, the containers sector was going through a period of prosperity where banks were lending great sums of money at low interest rates to ship owners in order to increase their fleet.  Ports were experiencing record transactions and there was great demand of variety of goods all produced by growing economies. The financial landscape seemed very promising.

This increasing demand produced by the growing trade encouraged the industry to supply more vessels with greater capacity.  But far from being a great business strategy, the oversupply of ships and a changing demand for manufactured goods led to a decline in the industry.

Factors that Contributed to the Crisis

Companies in the shipping sector found potentially profitable investing in new ships to compete in a promising economy (its climax took place in the years 2006-2007).  However, shortly after, the demand for goods started to decrease and the shipping sector was left with an excess of new, modern and great vessels: in other words, oversupply. Consequently, there was great shipping capacity for rather reduced orders.

Hard times hit global economy in 2008, resulting in its deterioration, and thus, the shipping market was affected as well.  This situation came along with an accelerated drop in demand for transport and other associated services, decreasing exports, and a decline in world-class ports activity.  Even without the economic contingency (which definitely made things worse), in a matter of years, the oversupply of vessels would have led to the same outcome anyway.

Repercussions of the Crisis

The demand for the shipping industry services has seen a drastic drop and freight rates have fallen as well.  In the past, there was availability of cargo to be transported, that is before the global crisis, but it is no longer the case afterwards.  The decrease of demand and consumption ended up in an oversupply of vessels with greater cargo capacity that cannot be filled.  This situation has its own effects on the shipping industry.

With a massive drop in shipping activity, shipping line operators and owners were losing significant revenues that resulted in the incapacity of paying for their ships expenses, or pay off debts to the banks.  Banks, therefore, were affected as well.  They were forced to issue credits more carefully, or otherwise they would be lead to bankruptcy as it was the case of some banks the working with the maritime industry.

The biggest and strongest shipping companies have tried to endure the crisis by competing with prices to gain market share.  The most unable to do this have been the smaller companies and are greatly affected.  Other effects of the crisis included reduction of job and employees to mitigate the repercussions of the crisis. Downsizing was unavoidable as part of the solution.  Salary reductions were implemented as well.  

Image courtesy of Joe Ross at Flickr.com
Image courtesy of Joe Ross at Flickr.com

Opportunities for Some after the Crisis

Not everything was hopeless for everybody.  Other opportunities arose with the crisis.  There are things that were positive for some in the shipping industry. To mention some of the adaptations the industry had to go through, the situation provided an opportunity for China ports to come close to its alien competitors.  Moreover, since the transport services costs were dropping, companies decided to outsource their productions to developing countries where costs were lower.  These countries were enjoying the benefits of work.

Adaptations to Flow with the Crisis

The shipping industry had to go through major changes to adapt to the new financial situation and find a balance between demand and supply.  A couple of examples of these adaptations are:  

  • Reducing navigation velocity was found to be a way to diminish fuel consumption.  Lower speeds do represent longer trips but this makes necessary the use of more ships to be able to keep the same frequency.  The advantages are saving fuel and using more ships instead of getting rid of them.
  • The shipping industry will not agree to lose business deals altogether.  Many deliveries will not be cancelled but postponed and rescheduled.  The idea is to restructure and renegotiate existing orders.

As we have seen, the worldwide crisis has deeply affected the shipping industry, its transactions, its market.  The decrease of demand and the oversupply of vessels were a very unfortunate combination for the sector. Time, strategy and a right perspective are required to overcome the chronic problems this industry has been facing.  It is true that the shipping industry is not exempt from economic collapse at all, but it is also true that the world still depends on it at some level.  

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