"The shipping industry could be entirely reshaped within the next five to ten years"

Over the next decade the shipping sector could be completely reshaped, writes Danish Ship Finance in a new report. Carriers have discovered the risk of reduced demand going forward, chief analyst Christopher Rex tells ShippingWatch.

Photo: /ritzau/Marius Nyheim

A 3D printer at a lab in Rotterdam recently printed a ship propeller – though it was a miniature version at just 400 kilos and a diameter of 1.3 meters, it was certified with a class approval. This propeller is a good example of where the world is headed and what the shipping industry needs to be prepared for.

And preferably sooner than later, cautions Danish Ship Finance in its latest Shipping Market Review. Artificial Intelligence, robots, 3D printers and renewable energy are gradually changing the underlying nature of demand within the shipping sector, and this could happen rapidly, says the bank.

"We believe the shipping industry could be entirely reshaped within the next five to ten years, but the competitive landscape could be very different across the various segments," writes Danish Ship Finance in the report.

For close to a decade, the sector has been struggling to deliver a proper return on invested capital in a market plagued by far too ships, and in which investors still expect to see asset values improve over time.

According to the bank, the problem is that the dynamics which the sector faces are not just caused by the usual cyclical nature of the market – it is just as much a consequence of the structural change, with the global economy currently in the midst of an upheaval.

"Yet many players in the shipping industry continue to operate as if the economy will return to familiar territory within a year or two," writes the bank, stressing that the global economy, in the bank's opinion, will not return to its familiar growth patterns.

Production can move

Rather, the economy is moving toward a digital future in which the mentioned technologies will change the sector big-time. And players in the industry will have to come to terms with this, says the bank.

This could change our demand forecast across numerous ship segments. It would be better for everyone if this happens slower."

Christopher Rex, chief analyst, Danish Ship Finance

According to chief analyst Christopher Rex of Danish Ship Finance, technology will in the next 5-10 years enable companies to move their manufacturing closer to consumers. This will be toward Europe and North America, while some will remain in Asia and elsewhere. If this happens, it would impact the container sector, among other fields.

"If it moves, it's clear that it will have a huge impact on the vessels that are currently transporting goods from a to b, as they will basically sail shorter distances. Whether this happens within the next 5-10 years, we'll have to wait and see. But we're starting to see fledgling signs emerge," he tells ShippingWatch, citing the fact that expensive brands such as Nike and BMW as examples of firms moving their production home locally.

"This could change our demand forecast across numerous ship segments. It would be better for everyone if this happens slower."

Values need to be rethought

However, the challenge is that many shipping investors seem to cling to the traditional strategy of buying when the market is low and selling when it is high. Where one is close to customers and have access to cargo, writes Danish Ship Finance, acknowledging that the opposite could naturally seem unwise.

"(…) but we question whether it will be sufficient to return the industry to profitability. We argue that shipping companies should work to digitalise their operations to prepare themselves for a new and enhanced value proposition in the industry."

Danish Ship Finance's chief analyst, Christopher Rex, does not expect the global economy to grow in the same way it has in the past. | Photo: Danish Ship Finance
Danish Ship Finance's chief analyst, Christopher Rex, does not expect the global economy to grow in the same way it has in the past. | Photo: Danish Ship Finance

But only a few carriers are currently well positioned to benefit from the value creation gained by digitalization, says the bank, adding that data shared across the sector and between other other industries can bring value. Many traditional carriers have until now been focusing on the potential for savings that can be achieved by, for instance, predicting when a ship needs maintenance.

Rex explains to ShippingWatch that some carriers are likely further along in the digitalization process than they are saying.

"I haven't seen personally what they plan to do, but my impression is that this is not something people are oblivious about. The risk that tomorrow, in light of digitalization, will be weaker in terms of demand than has been the case in the past has certainly been noted among executives and directors. At least at the carriers we're talking to, but there could of course be exceptions. But we're not out here saying that the emperor is walking around without his clothes."

According to Rex, the industry should find new ways to generate earnings, and he points to a significant potential in all the data gathered by the ships, which many carriers are accruing. This data provides intricate knowledge about the underlying global economy's movement of goods back and forth, he explains.

"I can't demonstrate it, as no one, as far as I know, has done it. But if you use the data in the right way, package it and serve it to an end user in some market, this data could be relevant and the potential huge," he says, listing companies such as Walmart or for instance a steel processing plant as companies that could use this data.

"The understanding of who, what, where and why is valuable in all markets, whether you're selling books or transporting global trade. The understanding of micro-behavior combined with something that can become manageable is valuable to some, I'm sure of that."

1 percent growth

As previously stated, Danish Ship Finance projects that the global economy will grow by 2-4 percent annually, and that the main growth driver will be the service sector, as the need for food, water and construction material will continue to grow. Conversely, sustainable energy and recycling of resources will make the global GNP growth decrease, projects the bank.

From today and ahead to 2030, seaborne trade will grow by 1 percent annually, as the bank also noted in its previous report. But this rate could vary from segment to segment.

Analysts and carriers across most segments continue to cite population growth in Asia and Africa in the coming decades as a growth driver, with increasing urbanization creating jobs, growth and an expanding middle class. Though this argument is appealing and the logic is okay, Danish Ship Finance does not subscribe to this idea.

"However, we believe it is incorrect and misleading. The underlying fundamentals have changed," writes the bank.

According to Rex, many stakeholders and observers question the 1 percent growth forecast, with others pointing to 3-4 percent on the longer term. Even though the population is growing, and more people are moving to the cities in developing nations, jobs need to be found for all these people, says Rex. If people are to consume, they need money. But robots and artificial intelligence, and ensuing automation, eliminate a lot of jobs that in the past needed to be done by humans.

"Some are saying that countries such as Nigeria could become a new China, but I think this is very unlikely," says Rex.

English Edit: Daniel Logan Berg-Munch

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