Overcapacity and sagging demand keeping shipping industry in doldrums

International Monetary Fund (IMF) recently mentioned that In FY16-17 there was the lowest levels of global GDP growth since 2009. The year 2017 will be yet another year of competition in the shipping industry. In 2016, the shipping companies went through demolition and consolidation to help market recover. The dry bulk segment needs to follow the same strategy.

For eight years, the world economy has straggled along to adjust to the changes and meet the challenges wrought by the crash of financial markets in 2008, and the economy is still in recovery mode. For reviving the shipping industry, the market will need several years of improvements to enhance fleet utilisation rates. Overcapacity is another major issue that needs to be addressed and resolved.

In the third quarter of FY17, the results were below par. Among the important reasons for poor results were the disruptions in Atlantic basin. India and China are major importers of crude oil. These countries were unable to import crude from from across Atlantic basin due to which they imported it from the Middle East countries, which impacted revenues of shipping companies as the distance of transportation was significantly reduced.

In The shipping industry, We depend global imbalances in raw materials, energy and manufacturing facilities. The year 2016 was the worst year for dry bulk segment as the Baltic Dry Index (BDI) reached an all-time low in Feb 2017. Thereafter, the index recovered through the year, which was aided by the capsize ship that delivered key commodities of iron ore into China.

Even after overcapacity, the companies are still adding new ships to their portfolio of fleets, which is alarming. To neutralize the impact of overcapacity due to addition of new ships, the industry need to scrap 30 mn of DWT annually. This will not create a huge impact, but it may help to create the effect of zero fleet addition in the near future.Overall, we don’t expect much recovery in the shipping sector during this quarter due to overcapacity and lower market demand.