CMA 2013: Shipping must learn to live with overcapacity

Supply debate: Lunde of DVB and Dacy of JP Morgan Asset Management.

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When it comes to excess supply, the industry is no different to any other, says Lunde

THE shipping industry may have to learn to live with oversupply, according to the head of one of the biggest maritime banks.

Asked whether the industry would recover from the oversupply created during the downturn by record newbuilding deliveries, DVB Bank head of shipping Dagfinn Lunde asked why shipping should differ from any other industry.

Addressing the CMA Shipping 2013 conference in Stamford, Mr Lunde said that although shipping had undergone an exceptional situation between 2003-2008 when China created a boom, other industries such as car manufacturing and steel production have always experienced periods of greater supply.

“You will for a long time, and likely forever, have overcapacity, like any other industry. The question is how do you learn to live with that?” he said.

“If you look at the car industry, there is a constant oversupply, the question is how do you learn to make your living? You have to listen to your customers, do what they need you to do and get paid for it.”

Despite potential weakness in container shipping, whose fortunes are linked to developments within the European economy, Mr Lunde predicted strong demand in segments such as bulk carriers.

He said that it was overcapacity, created by the rapid expansion of the Chinese shipbuilding industry, that was really killing the market.

CC Hsu, chairman of Singapore and Hong Kong-listed dry bulk owner Courage Marine, offered an Asian perspective on oversupply.

“I’m sceptical about a long-term sustained recovery going forward,” Mr Hsu said.

With China generating strong demand for commodities, he argued that it was in the country’s interest to keep the market oversupplied with ships to keep freight rates weak.

He pointed to the voyage costs of shipping Brazilian iron ore to China, which cost less than $10 per tonne a decade ago but topped $100 per tonne in mid-2008. Now, prices have returned to single-digit levels.

“Although Chinese shipping companies and shipyards suffer, for China it is a great benefit,” Mr Hsu said.

Over the last couple of years, some shipping commentators have argued that Beijing would be reluctant to close shipyards as it would entail cutting jobs.

Mr Hsu said that, in his opinion, major Chinese shipyards would not be closed and that if smaller and medium-sized facilities were shut down this would be done so that they could easily reopen if and when the market recovers and orders pick up.

Either way, the news is not good for other Asian shipbuilding countries.

Although South Korea’s yards have been able to diversify to pick up expensive offshore projects to fill their berths, Japanese facilities have been really struggling, said JP Morgan Asset Management global maritime managing director and chief executive Andy Dacy.

He said some Japanese shipyards could now build a medium-sized bulk carrier in around three months, as they have so little work on their forward books.

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