Shipping Sector Analysis Report 

• Shipping is a global industry and its prospects are closely tied to the level of economic activity in the world. A higher level of economic growth would generally lead to higher demand for industrial raw materials, which in turn will boost imports and exports. The shipping market is cyclical in nature and freight rates generally tend to be volatile.
• Freight rates and earnings of the shipping companies are primarily a function of demand and supply in the markets. While demand drivers are a function of trade growth and geographical balance of trade (which determines the length of haul required), the supply drivers are a function of new ship building orders as well as scrapping of existing tonnage.
• The global shipping industry can be broadly classified into wet bulk (like crude and petroleum products), dry bulk (like iron ore and coal) and liners. Under liners, it has containers, MPP and Ro-Ros types of vessels. There are various benchmarks that determine freight rates for these segments. The prominent amongst them are Baltic Freight Index, Baltic Handymax Index (for dry bulk segment) and World Scale (for tankers).

• Supply
• Determined by the addition to shipping capacity
• Demand
• Closely related to growth in world trade.
• Barriers to entry
• Highly capital intensive and adequate cash flows required for funding working capital requirements. Moreover, expertise and technical know-how are critical factors.
• Bargaining power of suppliers
• Diminishing with gradual increase in fleet supply and intense global competition.
• Bargaining power of customers
• High bargaining power as competition is high in the industry.
• Competition
• Competition is price based. However, companies with younger fleet command a premium.

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Financial Year '10

• The effects of the downturn in the aftermath of the financial crisis continued to be felt by the shipping industry in FY10. This was both in the dry bulk and crude carrier segments. Freight rates remained under pressure as demand took a hit. On an average, while crude tanker rates declined by 15% by the end of FY10, dry bulk freight rates were almost flat.
• The crude and product tanker market experienced its worst period during the first quarter of FY10 (July to August 2009). On the other hand, the dry bulk segment recovered somewhat during this period. This was mainly on the back of high unforeseen demand for stockpiling of dry bulk commodities (like food-grains and metals) from China.

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Prospects

• In line with the revised higher estimates of global economic growth and upturn in global consumption, the shipping freight rates have posted some improvement in the current year. Anyways, the outcome of the ongoing European crisis as well as impact of the new-building deliveries would be critical for the future direction of shipping rates.
• While the European crisis is challenging the sustainability of the global economic recovery, thereby regenerating demand side concerns, these are overshadowed by a bigger threat of oversupply for the shipping industry. This looms large in the near future. Out of the existing order books in all the three segments of dry bulk, crude, and product tankers, most of the vessels are due for delivery in 2010 and 2011. This will add to the pressure on freight rates, and would thus impact the profitability of shipping companies.
• Apart from the Euro zone crisis, another concern for the shipping industry the cooling down of the Chinese economy, which can regenerate demand-side concerns. This combined with the supply-side pressures, may just worsen the outlook for the sector.
• The increase in India's refining capacity and a pick-up in oil exploration activity globally will benefit the offshore shipping lines as demand for their services picks up. As a result of the commissioning of large domestic refining capacities, the import of crude is expected to jump in the future. This would benefit shipping majors.
• Under investment in earlier years, surge in Chinese growth and scrapping of vessels built in 1970s have all created conditions for a strong market for tankers, barring the periods of crises. Further, the gap in charter rates between single hull and double hull vessels is widening as more charterers prefer double hull tonnage and many states impose restrictions on single hull tonnage. In the coming years as single hull will be mandatorily required to be phased out, the demand for double bull tonnage will be strong.

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Related Links for Shipping Sector
Quarterly Results | Sector Quote | Over The Years