Shipping Industry;

Past 50 Years and Ahead

Will the next 50 years of shipping industry be as chaotic as it has experienced in the last 50 years? This is a very important question which needs to be answered by considering revolutions of the industry in the past 50 years and doing a quick review on the history of maritime transportation history. So, by considering both the experiments of 50 years ago and present condition of the industry, we could analyze the key indicators of maritime transportation industry in different aspects. For predicting future, past experiments would contribute to develop some scenarios for the coming years (until 2065). Finally, the probable scenarios would be explained and analyzed.

News ID: 72345

Date: 14 February 2017 - 14:17

By taking a look at the growth of seaborne trade since 1965, two things can be noticed: First, rapid growth of seaborne trade. During this time, seaborne trade has grown faster than the global economy. In other words, between 1950 and 2015, Gross Domestic Production (GDP) has grown at an annual average of 3.8 percent, while world seaborne trade growth in this period was 4.7 percent. Now, global seaborne trade is about 11 billion tons per year, equivalent to about one and a half tons of goods imports for every man, woman and child in the world.[3] Second is the global seaborne trade tortuous path in this term. In the 70s and 80s, world trade plunged in coma. For about a decade, due to deepening recession in the world economy and seaborne oil trade sharp decline, world trade did not increase. In the first part of this article, the review of trends and developments in the past five decades will be discussed. Then, the questions will be reviewed which have currently engaged the industry leaders’ minds. Finally, the results of the above analysis and predictions are examined.

1- Will the next 50 years be as chaotic as the last?

THE 1960s was a decade of enormous social and economic change. In Europe, the 1950s, a decade of frugal recovery from the Second World War, gave way to an exciting new society - the Swinging 60s. The Beatles topped the charts; color television arrived; direct dialing replaced switchboards; and the Boeing 747 initiated mass global travel. Shipping too was changing fast. In 1966, work started on Queen Elizabeth II, the first of a new generation of cruise ships; Japan’s IHI shipyard delivered the first very large crude carrier; and Malcom MacLean started the first transatlantic container service. Norwegian shipping magnate Hilmar Reksten made a fortune when the Suez Canal closed in 1967.

.The new global economy of the 1960s

By the 1960s, a century of serving the European empires was ending and shipping’s new role was globalization. This came as a result of nations in Asia and Africa being granted independence and the establishment of the European Union in 1958. The US, the world’s wealthiest economy, provided a political hegemony founded on the principles of free trade, established at the Bretton Woods conference in 1944, and the rapidly expanding multinational companies managed the change. The result was a spectacular trade growth. Sea trade expanded from 1.6bn tons in 1965 to 10.3bn tons in 2015, a six-fold increase. Several developments coincided to create a global economic system that produced this record of uninterrupted economic growth. These included the emergence of a global free trade policy, the communications revolution, quicker and easier global travel and formation of globalized materials markets. So, what was the shipping industry like at that time? In 1965, the industry was busy building a new transport system. The drive to reduce transport costs spurred the replacement of cargo liners and tramps, which had served shipping faithfully for a century, with much bigger tankers and bulkers to transport bulk raw materials. [8] In 1966, the first very large crude carrier, the 209,413 dwt Idemitsu Maru, was delivered and also the first cape-size bulk carrier, of 144,000 dwt. Specialized bulk cargoes were transported in specially designed bulk vessels (motor vehicles, forest products, chemicals and gas, for example). Multinational cargo shippers supported this development by building bulk terminals and providing time charters that enabled owners to obtain finance for the big ships. In the mid-1960s, the liner business was struggling to carry the escalating volume of trade with a fleet of breakbulk cargo liners designed for the imperial trade. But in 1966, Malcom Maclean commissioned the first transatlantic container service from New Jersey to Rotterdam, and the OCL consortium was set up. General cargo was unitized and transported by containerships; and air freight took the high-value commodities. During the same period, specialized vessels had developed, including the first chemical tankers; the first LNG ships; the first purpose-built car carriers; and the first open hatch forest products carriers.

New generation of shipping companies

At the same time, a new generation of ship owners and shipping companies emerged, taking full advantage of the newly-developed flags of convenience to cut their costs to levels that allowed them to offer long-term time charters at rates far below what the multinationals could provide themselves. The FOC fleet grew rapidly as a result.

The time charters they obtained were then used to raise finance in the rapidly growing Eurodollar market - the famous “other people’s money” concept - to create a new type of shipping business. Entrepreneurial risk-taking became the name of the game. Gradually, time charters disappeared as the multinationals found there were plenty of ships available on the spot market.

So in 1965, a transformation was in process and over the next 50 years, the industry changed out of all recognition.

Impact of globalization on sea trade

The 50 years since 1965 were generally prosperous. But this prosperity was patchy. World gross domestic product grew at an average of 3.8% per year and world seaborne trade grew even faster, increasing to 13 times its 1950 level by 2005. In the process, almost every aspect of the shipping business changed. However, this growth did not follow a neat exponential pattern. Digging a little below the surface, we find shipping investors had to deal with cycles that seem to have been operating at three different levels. First of all, there were 11 business cycles, some of which were serious enough to be labelled “crises”. Only one resulted in a decline in world GDP, but the six “crises” all triggered a decline in sea trade that rattled the cage of ship owners: the two oil crises in the 1970s; the financial crisis of the early 1990s; the 1997 Asia crisis; the so-called dot.com crisis in 2001; and the 2007-2008 credit crisis.

All six occurred in the period since 1973, which works out at five crises in 30 years or one every six years. 2015 comes seven years after the last crisis, so you can draw your own conclusions on what that means, if anything.

For the shipping industry, each decade brought new developments. The 1950s saw colonial independence; the 1960s saw Europe and Japan rebuilding their economies, importing vast amounts of raw materials by sea; this was followed in the 1970s and 1980s by the growth of South Korea and the Asian Tigers; and in the 1990s, the Soviet Union and China opened their economies to trade.

As a result, the regional structure of trade in 2015 was very different from 50 years earlier. In 1965, two-thirds of all seaborne imports went into countries in the Organization for Economic Co-operation and Development, the home of traditional seafarers. The non-OECD countries accounted for only one-third of trade. By 2015, the pattern has been reversed. The non-OECD countries account for two-thirds of imports and the OECD for only one-third. This pattern, which seems likely to continue, sets the scene for the next 50 years.

The sea trade super-cycle 1965-2015

This pattern of regional development had another important impact on the shipping market. Bringing a succession of new regions into the trading system introduced longterm cycles into ship demand. Sea trade grew much faster than GDP over the 50 years, but it also followed a different long-term cyclical path. There are three clear phases:

1960-1980: Seaborne trade was driven well above the GDP trend as Europe and Japan went through a raw materials intensive growth cycle. 1980-1999: Trade fell below the GDP trend as the pressure on resources caused by the 1960s growth triggered the two oil crises of 1973 and 1979, plus commodity price inflation. This triggered a decline in trade coupled with a world economic recession.

2000-2015: Sea trade was above trend as the world recovered from the 1970s crisis and the Asian growth cycle gathered force. It started with the Tigers, and then China picked up in the late-1990s.

A clearer view of the cycles is obtained by plotting the difference between seaborne trade and GDP trend in a chart. The first phase of expansion lasted 15 years, starting in around 1956, and continued to 1973. Then trade moved into a down phase, which started in about 1974 and continued, with a few wobbles, until 1987. That is another 14-year period. Finally, the upswing lasted from 1988 to 2006, an 18-year expansion.

During these three periods - two expansions and one contraction - the shipping industry faced very different circumstances in terms of ship demand.

As the cycles in trade worked through into shipbuilding demand, the effect was amplified, producing shipbuilding cycles closely following and amplifying the trade cycles. From a practical point of view, these cycles presented the shipping market with a structural problem for two reasons. First, shipyards cannot just stop and start building ships; once there, they are likely to build ships regardless. Second, the “footprint” of the previous cycle is embedded in the age profile of the merchant fleet, resulting in large swings in replacement demand. For example, the build-up in deliveries in the last decade shown will turn up as increasing replacement in 15 to 25 years. But today, replacement is driven by the very low deliveries in the 1980s.

Progress through the Super Cycles 1965-2015

This combination of long cycles in sea trade and structural inflexibility in shipbuilding produced a succession of market phases, each lasting more than a decade. The cycles are illustrated from the tanker market but the dry bulk market followed a similar pattern.

The Swinging Sixties (1963-1973): In the 1960s, sea trade was on an upswing with plenty of demand and the fleet grew at almost exactly the same rate, so the market was pretty balanced. During this decade, the spot market did not really matter because most of the capacity was booked through time charters, some up to 15 years. This was the era of “shikumisen”, the oil majors and the Japanese trading houses were all keen to cut their transport costs by outsourcing shipping. The new generation of ship owners used contracts from major charterers, especially in the oil and steel business, as security on loans. It was a prosperous decade, with a bonus as the value of the ships escalated.

The Shaky Seventies leading to the Awful Eighties (1974-1995): In the 1970s, the trade upswing faltered, but deliveries of new tankers continued. The tanker fleet grew to 350m dwt in 1977, but demand only reached 250m dwt, causing a major surplus of tanker capacity. Things got even worse in the 1980s, following the 1979 oil crisis and the collapse in the crude world trade that it triggered. The recession bottomed out in 1986.

The Marvelous Millennium (1995-2008): Things gradually recovered in the late-1990s and the gap between the fleet and demand narrowed as surplus capacity was soaked up in about 1997 and the demand trend finally pulled ahead of supply, almost 25 years after the gap first opened in the 1970s. But the 1990s were plagued by the world business cycle, with three “crises” in 1991, 1997 and 2001. So it was only in the first years of the 21st century that ship owners finally saw a revival of their fortunes.

The Traumatic (2010s): One way and another, it was a further bumpy ride. So the bottom line is that 50 years of progress and prosperity in the world economy did not mean quite the same thing in shipping. It was a rollercoaster ride.

Four questions about the next 50 years

So far we have focused on the past 50 years, and the lessons we can learn. Turning to the future, common sense says making predictions 50 years ahead is futile. Shipping analysts struggle to predict 50 weeks ahead and since a good deal of the future depends on how the business plays the game, what’s the point of prediction? Well, that’s exactly the point. Players in a high-rolling game like shipping really need to understand the rules and that’s exactly what analyzing the past helps to do. As, Peter Drucker said:

“The best way to predict the future is to create it.” [13] This happened during the globalization boom of the 1960s and 1970s, when the shipping system was transformed by the positive action by investors. So thinking about future pressures and the changes needed to respond makes sense. There are four questions that need to be considered:

Question 1: A new global trade matrix in 2065?

During the past 50 years, there was a very significant realignment of the world economy away from the OECD countries to the non-OECD countries. Today, the OECD countries are mature, still growing but not very dynamic and two-thirds of imports are controlled by the non-OECD countries. As China slows down, the spread of countries around the South China Sea, South Asia, the North Indian Ocean, Africa and South America will grow in importance. From a shipping perspective, this is a very different mix: many small countries, many ports, and possibly a very different trade dynamic. This suggests that the great east-west orientated trade, which dominates the world today, will merge into a much broader trade matrix over the next 50 years. A map of the shipping lanes today shows how little trade there is in some areas.

Question 2: How much sea trade in 2065?

This is a very big one - how much cargo will be shipped in 2065? Trade scenarios put this fundamental question into perspective. Over the past 50 years, the tonnage of cargo transported per capita has increased from 0.5 tons in 1965 to 1.43 tons in 2015. But within that average, in 2015, the OECD economies imported four tons to six tons per capita, while non-OECD countries imported about 0.4 tons per capita. In today’s world of global communications, the aspirations for growth are enormous, and Scenario 1 assumes that by 2065, trade has reached four tons per capita (based on a population of 9.5bn). That would require the shipping industry to move almost 30bn tons of cargo a year, three times the present level. An alternative Scenario 2 assumes that sluggish economic growth, protectionism, climate change, increasing commodity prices and technical advances, which diminish resource use, would keep per capita trade at the\current level of around 1.4 tons. In that case, trade volume would increase to only 14bn tons in 2065: a 40% increase. It is not difficult to think of a plausible explanation why something resembling either of these scenarios might occur. My personal view is that the trade volume of 20bn tons in 2065 is a more sensible working assumption than 30bn tons.

Question 3: Another shipping super-cycle 2015 to 2065?

As suggested, there was a long (20- to 30-year) shipping cycle during the past 50 years, with demand and supply components. This invites the questions: “Where are we in that super-cycle today - and will there be another?” The demand super-cycle was drive by surges of trade as new economies came into the maritime transport system and sharp deceleration as they reached maturity and the imports stopped growing so fast.

We saw this for Europe, Japan, South Korea, and most recently China. In addition, the oil trade, still the biggest single bulk commodity, has been driven by a very long-term price cycle which generated a “stop go” pattern that caused volatility. The position today is that the cyclical upswing of the past decade peaked out and trade could be moving into a period of below trend growth as China slows; oil demand responds to new technology encouraged by recent high prices; and the fact that the next wave of regional super-growth is not in sight yet. This downswing could take us into the middle of the next decade, when the next wave of development of the global economy picks up. On the supply side, the shipbuilding super-cycle seems unlikely to help much. The last shipbuilding cycle lasted 36 years, from the 1976 peak to the 2011 peak, and we are only four years past the last peak. So there could be a long way to go. But on a positive note, this cyclical pattern is now programmed into the fleet demographic, so eventually there will be a lot of fleet replacement.

The shipbuilding Scenario 1 suggests a difficult decade, with capacity above trend demand. But this is a variable the industry controls, so in principle this time it could be different.

Question 4: Another new transport system needed before 2065?

The final question concerns the transport system. In 1965, the sea transport system was in the middle of a radical change from the old imperial cargo liners and tramp system to a new system based on bulk and containerized shipping. At the time, this was expected to produce bigger ships and bigger shipping companies, both of which occurred. This new system was very successful in moving cargo through the terminals and it reduced the cost of freight in a remarkable way. But 50 years later, the system developed in the 1960s is still in place and beginning to look inadequate for the job in hand. The pressure to get the cargo through the ports more efficiently is still there, but there are new pressures from the environment and the need to serve an increasingly complex trading world, as the epicenter of trade moves to a more global trading matrix. Extending today’s national eBay and Amazon model to a global distribution system would require a much more efficient and transparent system than we have today. In the early days, “door-to-door” transport systems were a feature of containerization, but this aspect of the business was never really implemented. Ship owners built bigger ships and bigger terminals. But “door-to-door transport” was never really exploited.

And the control of trade, which under the industrial shipping era in the 1960s was minutely planned by multinational companies, faded away in the 1970s.

Today, shipping is controlled by the spot market. While this is an efficient mechanism for cost minimization, it is certainly not a particularly good vehicle for managing logistics. With a digital and computer revolution that is now going on, it seems that the great challenge facing shipping in the next 50 years is to use information to make the whole transport system tighter, more efficient; to eliminate accidents; and to provide a more meaningful life for those who work in the industry, especially those on board the ships. These are important goals.

Will this happen? Well, as Peter Drucker said: “The best way to predict the future is to change it.” This particular future is very much in the hands of the ship owners and, perhaps even more importantly, the cargo shippers. Unfortunately, the past 50 years has seen alienation between these two key parties that does not provide a good foundation for building a global logistics system.

Another 50 Years Of Sea Trade, But Where’s The Magic?

The Next 50 Years

Looking ahead, the shipping industry faces a daunting task. One problem is judging how fast trade will grow. If global sea trade just increases in line with growth in population, which is heading for 10 billion in 2065, imports would reach 15 billion tons in that year (Scenario 1). But the imports per capita trend trebled from 0.5 tons per person in 1965 to an estimated 1.5 tons in 2015. If the upward trend continues, imports might reach 2.2 tons per capita by 2065 and trade 22 billion tons (Scenario 2). But today although the OECD countries import around 4 tons per capita, non-OECD imports are around 1t per capita. If they were to reach OECD levels, global sea trade would hit a total of 37 billion tons in 2065 (Scenario 3).

3.2. Bewildering Forecast Range

So in 50 years’ time trade could be anything between 15 and 37 billion tons. And there are other scenarios, for example the phasing out of fossil fuels which could radically alter even this wide range. In terms of investment, on a very rough calculation, this means the industry could be spending between $1.5 and $4.5 trillion on new ships over the 50 years at today’s prices. How will shipping handle this? Since 1965 the focus has been on bigger ships, tight overheads, and an aggressive market offering little reward for innovative investment. But as the non-OECD driven world develops, with tougher targets for fuel and emissions, changes will be needed, and maybe a rethink.

Maritime Magic Carpet

So, if shipping is to play as big a part in the global economy in the next 50 years as it did in the last, it needs a new injection of maritime magic. The digital revolution, now global, offers shipping companies a unique opportunity to integrate the management of their high cost assets, improving productivity and offering new ways to manage them that tighten up the whole transport chain. Who knows, maybe that’s just the magic that’s needed. Have a nice day. The graph shows estimated seaborne trade in billion tons in the 1950-2015 period (red line). The three scenarios show potential trends in world seaborne trade for the next 50 year period. The first two scenarios are as described in the text. The third scenario is based on trade per capita into OECD countries remaining steady throughout the period, with trade per capita into non- OECD economies increasing to reach current OECD levels of around 4 tons per capita by 2065, as well as expected OECD and non-OECD population growth trends.

After more than 50 years, it is time for a new business model that is used in the shipping industry where data provide new management tools. Has the time come for marine transportation business is the fourth wave? The current business model which has been Executive for more than half a century for relatively small companies with large balance sheets, earnings volatility and strong cost control, can survive so? Indeed, global maritime industry has the ability today to develop much more sophisticated information management systems and that has to be the key to managing chaos.

Unfortunately, it is much easier to order new ships than to build new systems. We all like our independence and shipping is an old-fashioned business - we like it that way. But luckily there’s a new generation coming along and maybe the information culture will be as natural to them as “trading ships not cargo” was to their predecessors.

The only thing that can be said with certainty is that next 50 years will be just as chaotic - it’s the nature of the beast - and by 2065, we should expect a very different trading world. But somewhere along the way, hopefully, the industry will find new ways to manage chaos, especially the self-imposed variety. The key to the future lies in a more tightly controlled transport system. This means many things - better information systems, more automation, maybe bigger companies; better capacity planning and hopefully a much better career progression for those on shore and on board ship. In other words, a new world!