The “Research” Strategy:
A Basis for Development and Profitability
When we talk about economy and trade, the element of transportation plays an important role in the process of its moving. Accordingly the behavior of economies directly affects transportation. The world that had been faced with the growing economy at the beginning of the new century will create a suitable result for trade and consequently transportation, especially in the maritime sector. With the occurrence of the financial-economic crisis in 2008 and afterwards along with the decline in the growth rate in China, Europe and even America both the economy and trade have entered the recession while transportation has experienced an undesirable bad condition.
We have organized an interview with the managing director of Bulk Division at Islamic Republic of Iran Shipping Line, Ali Akbar Ghonji, who is the analyst of maritime transportation industry in order to analyze the situation and explain the causes of the recession and examine this issue, accordingly.
Below is his interview with Payam Darya magazine:
How do you evaluate the status of the shipping industry, particularly, bulk transportation in the international dimension?
The shipping industry is not in a good condition due to the global recession and there are no signs suggesting the improvements and recovery of the index of bulk shipping to 11-12 thousands. However, it should be noted that the current situation in bulk shipping is better than before. Given the current situation on the world market, we are trying to make a reasonable profit by controlling the costs.
When we are talking about the crisis in maritime transportation, we should note that a number of factors caused this condition. One of the most important reasons for the crisis is the excess surplus of floating vessels, because, at the time when the world market situation was clear and positive both politically and in terms of availability of the cargo, the companies had huge orders for shipbuilding and these orders exactly enter the market when the economic crisis began. On the one hand, companies had faced with the lack of portable cargos for these big vessels and on the other hand, their costs had increased according to the same crisis, as at the time there is no dynamic economy, the costs are increased. For example, some service providers such as agencies and consumables have increased their costs based on the market situation and the companies including ourselves were forced to use this service while the incomes of the shipping lines were reduced and at the same time, the arising costs had increased. Consequently, we should observe the current state of the maritime transportation market from this perspective.
Although, we see changes in rates with the growing trend of the countries, we should say generally that achieving the indices of the time before the crisis of 2008 is very difficult and even impossible.
On the other hand, it must be admitted that today, the container lines have become a serious competitor for bulk carriers. We can state that the phase change to transportation of the general cargo via containers increases the container transportation index and also creates a serious competitor for bulk carriers to transport minerals and food. So in this context, it should be reminded that customer retention and marketing for new customers have now special conditions.
If we want to carefully examine the transportation conditions in the bulk division, we will find out that along with the rapid growth of steel production in China and the demand of this country to the raw materials, such as Iron ore, the golden era before the economic crisis happens for the shipping industry. But with the decline in production in China due to some internal politics and also the surplus of steel production in the world, the bulk transportation enters a recession. Although once again China approaches to its heyday in steel production in the recent two years, we have not seen any sign of improvement in the transportation rates. What is your opinion regarding this issue?
We have to carefully examine the policies and approaches of other countries. In this reason, I believe that China, as one of the most important countries with dense population has significant impact on the global market. Meanwhile, it should be noted that each country has two wings to grow, research and development, simultaneously.
On the other hand, it should be noted that during the same period although China’s growth rate is passing with a gentler slope, China’s growth still is high, so we cannot easily say that this growth has stopped for a while.
However, we must admit China’s macro policies’ importance that is fairly accustomed to move with the lights off. But let us not forget that in the same period, some other important powers have also emerged which have a significant impact on the global economy.
Today, we should pay special attention to India as an emerging world power. Having a good and mass labor force, environmental features and global Business conditions, this country has a special position in the development and its profile represents the rise of another China.
We can see in these days that Russia’s economy is also more stable and dynamic and this leads to a series of factors to be taken into account to scrutinize the situation.
On the other hand, it must be noted that the political situation in the world is not the same way as before.
The conflicts in the world will result in changes in economic indicators. For example, we see that the oil price rose with the America’s attack on the air base in Syria. Then, we have to follow a complete set of factors.
What is clear now is that we have no information about the strategic reserves of China’s minerals in the steel sector and maybe this country is taking advantages from its reserves, instead of purchasing minerals. Although, I still believe that China considered an exact observation regarding reducing
and increasing of the production at the time and put priority for what was explained earlier, i.e. following the research and development simultaneously in order to gain a more effective and huge profits.
Of course, we have to pay attention to other factors that affect steel production, such as scrap metal. Several thousand tons of scraps are derived from the ship scrapping yards annually. Meanwhile, we should see if there is any places to use these scrap metals.
Anyway, we have to accept that the growth of steel production in China can and/or could affect the improvement of bulk carrier index.
It could be one of the reasons but there are other reasons involved. Considering the domestic supplies of China to produce the vast volume of steel, it should also be noted that the index condition of the bulk carrier now is better than before. Though it has not reached its level before the economic crisis, it has witnessed some positive changes.
There is another point to be referred to that the shipping companies have put priority to simultaneously pay attention to research and development and the type of their performances and strategies have also been varied.
So, bulk companies could not corporate in dividing and taking advantage of profit’s share of the market easily. Meanwhile, we observe that smaller companies are acquired by larger ones and some others are driven out by selling the bulk carriers.
In the bulk carrier, for example, we are not dealing with well-known companies, compared to the container lines, such as Maersk Co. However, perhaps it is due to the nature and type of the cargo because in container we are faced with identified transport unity. Moreover, some countries could operate even without having any vessel, but in the bulk carrier, the condition is totally different. In any case, shipping companies must explain their own strategy in order to be able to monitor the market behavior along with the governments that consider the development with the taste of the research to be able to plan an appropriate behavior.
Referring to the strategy, we could see those container companies are moving toward the integration so that they could employ the economies of scale and operational efficiency more than before. This behavior has also occurred in states. It can be seen that the Trans-Pacific Alliance was built to cope with the influx of China. Why do we not observe such a behavior in bulk carrier?
I have already explained that the condition of bulk carrier is totally different from containers and the behavior of such companies also differs. Because in the container division you could find well-known companies each with its own market and they could move toward gaining more profit, accordingly.
But in the bulk carrier, you may observe different behaviors; companies that are active in this type of product cannot move toward the integration or to have a shared interest in any way. Imagine that some percentage of the cargo of a small containership belongs to you. Meanwhile, the capacity of each vessel could be divided between a number of transportation companies and forwarders but the most giant bulk carrier has only one cargo owner!
The world economy witnessed an important event in the last year that is the rise of Trump. He has considered the theory of returning to domestic trade. Does this issue have any impact on maritime transportation?
It must be admitted that any changes have some impacts. In this part we should note that the
USA’s new administration’s approach is based on constructing the USA. This needs its own materials. So it’s difficult to explicitly say that it will create a disruption of order in shipping conditions. We have to accept that if the USA wants to return to domestic trade; it still must sell the output of manufacturing.
This would not disrupt the trade, on the other hand as I said they need raw materials for construction.
But we can see that the new government of the USA has adopted some of their own behavior that has not been observed in any other governments such as denied entry to the US and/or the cancellation of some commercial contracts, what do you think in this regard?
Yes, but we should note that the behavioral and democratic process of the governance in the USA is in a way that the head of government cannot decide alone and you can see that judicial and legal entities have stood against some adventures.
As I said, care must be taken. We can no longer sum up the world in one dimension that is power. Today we can see some countries such as China, Russia and India that each has a specific penetrating power in the economy. If we look at CIS area, we can see that each country has its own specific role. To exemplify this, we can refer to a country like Kazakhstan that has its own role in international treaties and meetings
Considering the geographical locations of the CIS countries for example, they could be more active if they have access to high seas. This is a golden opportunity for Iran to gain profit thoroughly.
Russia on the other side of the coin was an importer of grains such as wheat and barley in the past but today you see that the condition is such that this country has overproduction and hence an acceptable exports.
In general, we should homogeneously look at the world and bear in mind that the situation is in such a way that monolog in the economy cannot alone have an absolute effect. But if we look relatively it may have some effects. In my opinion due to the type of personal life of Trump as a businessman, it must be admitted that there are hopes for both the development and deepening of the trade.