Rising bunker prices, falling freights

During the crash of financial markets in 2008, shipping freight market was one of the serious casualties. With broken back bone, chances of survival were low. However, the crippled shipping industry survived the fatal blow due to dampened bunker prices and a series of immediate preventive and corrective measures taken by ship-owners over the past couple of years.

Slow steaming, weather routing, hot and cold lay-ups, scrapping of older tonnage and other austerity measures taken up internally by shipping companies were among them. I think the most effective of them was the idea of slow steaming pioneered by Maersk Line. It was like killing three birds with a single stone. It reduced the bunker consumption, increased total steaming days there by collectively creating slot for more ships with in a reduced demand and it also addressed the environment issues by reducing carbon emissions.

Besides, there was all round global economy damage control. Demand slowly started coming on line, mainly from emerging markets.

In spite of all that, unfortunately, over supply of vessels is killing the freight market now. Bunker prices have hit the roof, yet this hike is not reflecting in the freights. Besides bunkers, increasing insurance (piracy) premiums are adding up hugely to ship operator's cost. Smitten by the golden era, ship-owners failed to get rid of their fatal attraction for the new buildings. Despite a continuous flood of ships leaving slipways, Orderbooks are full with fresh orders for the next couple of years.

Going by the order book, it seems the demand -supply equation is not going to favour owners until 2013. No doubt, with heat of liberalization spreading fast, demand has potential to get in exponential zone. But we are now at a stage where consumer base along with money base has expanded many folds (thanks to uncle Sam's printing obsession) and at the same time supply elasticity remains low, thus giving rise to Price = e^Demand ie any small increase in demand is countered by large increase in commodity prices. A situation, which is not conducive to economy or shipping.

In addition, environmental concerns are grave. Tough emission regulations are weighing heavy upon already weak shipping industry.

All in all, shipping has become an unprofitable business in the recent past. It is a matter of time, when investors will start running away from the sector in search of greener pasture.