Correction: A previous version of this story referred to Dominik Stehle as COO of Zeamarine.
Market optimism has cooled since early 2019, as business uncertainty and trade wars take a toll on the multipurpose/heavy-lift (MPV/HL) fleet, according to Dominik Stehle, CCO of Zeamarine.
On the other hand, fleet capacity could shrink with the onset of IMO 2020, the Jan. 1 requirement that the global fleet shift from burning fuel containing a maximum sulfur content of 3.5 percent to a maximum of 0.5 percent. Many 15- to 18-year-old ships in the sector were built assuming high bunker consumption and fast steaming, Stehle said on the sidelines of the Breakbulk Americas conference in October, and “these [vessels] will be less competitive as variable costs go up,” pushing more owners toward scrapping.
IMO 2020 will substantially increase operating costs, but higher bunker prices shouldn’t be used to mask freight rate increases or “subsidize 10 years of a bad market,” Falk Puetz, VP and global head of marine chartering at Kuehne + Nagel, said during the event. Change will have to be more fundamental.
Ten years is a long time for a bad market to linger. Is the MPV/HL sector nearing a recovery, or should “hopeful pessimism” — the gloomier twin of “cautious optimism” — shield us from yet more business disappointment?
Where is the MPV/HL market now?
Martin Stopford’s “Maritime Economics” (3rd edition) outlines four distinct stages to shipping market cycles: trough, recovery, peak/plateau, and collapse.
Stage 3 (peak/plateau) can be handily eliminated. According to Stopford, signs of the peak/plateau stage include a fleet operating with high utilization rates and little to no surplus capacity; freight rates at two to three times operating costs, sometimes higher; excited bystanders wanting to invest; banks eager to lend; second-hand ship prices higher than replacement costs; modern ships selling above construction costs; shipyards jammed with new ships and orders; and older ships bought at speed, perhaps even without proper inspection, by people frantic to get into the market. Shades of 2007-2008 to be sure, but we are not seeing these symptoms now.
As peaks wane, supply overtakes demand, rates begin falling, and collapse begins, often accompanied by a weakening business cycle or economic shocks, à la the 2009 global credit crisis. Ships ordered during the previous peak arrive, adding to a growing surplus. Owners delay selling off ships that were just recently so valuable. The present surplus capacity is a remnant of the 2009 collapse. The industry is not suffering from a new one.
During the trough stage, surplus capacity pushes freight rates down to operating costs or below, Stopford says. Low rates and tight credit trigger negative cash flows or even foreclosures and bankruptcies. Ships are sold to raise cash, sometimes at distress prices. Eventually, demolitions should increase as the value of older ships falls to scrap value. While demolition levels are at historic lows today, some of these symptoms are very familiar.
In recovery, rates lift above operating costs, ship supply and demand nears balance, liquidity rallies, and prices for second-hand ships improve. However, recovery can prove false or foreshortened — perhaps due to trade wars, economic shocks, business uncertainty, or slowing global growth — and send the market back to the trough stage, as happened to the MPV/HL sector after the oil price slide of 2015.
Rates are up a bit today, project cargo shippers are reporting healthy order books and backlogs, and Hamburg-based ship broker Toepfer Transport sees an improving market for second-hand MPV/HL ships. We are edging toward recovery, albeit with copious baked-in fragility. And with IMO 2020 now imminent, it’s logical that scrapping will increase, cutting capacity and improving the market for carriers.
Perhaps then we’ll see confident optimism, rather than its poorer cousins.