Drybulk Shipping – Strategic Analysis By Hilmi Armoush HA519 Table of Contents Executive Summary2 Macroeconomic Drivers3 PESTEL Analysis3 Key Drivers4 Critical Uncertainties4 Future Scenarios6 Sailing in the Dark6 Imbalance Seas6 The Greener Wins7 Sea Marathon8 Competitive Analyses – Drybulk Shipping8 Market Outlook8 Porter Five Forces Model9 Entry Barriers9 Threat of Substitutes10 Bargaining Power of Buyers10 Bargaining Power of Suppliers10 Rivalry between Established Competitions10 Strategic Views11 Key Success Factors11
Strategic Management11 Conclusion12 References13 Executive Summary In 2008, the global economic crises had a strong impact on the maritime market. A drastic decline of freight rates were immediately visible to below operating cost and many shipping companies found themselves in a very unviable position, struggling to cover costs and sustain existence. Trade slowed down with a 4. 7% growth compared to 5. 7% in 2007, total volume of drybulk cargoes loaded in 2008 stood at 5. 4 billion tons out of which major bulk trade estimated at 2. billion tons. On the other hand, drybulk fleet increased from 368 in 2007 to 391 million-deadweight in 2008 while order book was estimated at 289 million-deadweight. (UNCTAD 2009) As a result, in 2008 fleet productivity was decreased to 5. 36 tons/dwt and to 28. 66 tons-miles, while Baltic Dry Index slumped from its peak 11,793 in the middle of 2008 to 1,100 points in November. In 2008, drybulk carriers reported for demolition reached 3. 1 million-deadweight – the highest since 2003 and is expected to have grown in 2009.
Due to some positive signals in 2009-2010 in the freight market, and comparative lower vessel prices, many owners are now considering to enter the market, or increase their fleet through mergers and acquisitions. Until 2008, it seemed that many players forgot about the cyclical nature of the industry, regardless, what’s important is: Did those players learned their lesson? This report discusses how the future uncertainty could have different scenarios for the drybulk market and analyze how they can impact its competitive structure.
The central question I am going to discuss is “How will the Drybulk Market develop in the near-term Future? ” The time frame covered is 5 years, although various scenarios and analysis can be shaped for longer-term, yet, the chosen timescale should be sufficient to provide an insight on the competitive structure – especially with many deliveries to hit the market by 2010 and 2011 – and identify the current challenging uncertainties on the macroeconomic level which will affect markets’ structure in the near-term.
Therefore, I will first identify the macro-economical environment that could affect the industry and what key factors could drive change in its structure. From the most critical uncertainties, I will provide four different scenarios dated June 2015. The report will then analyze the drybulk competitive structure using porter’s five forces model which will help firms to strategically identify their key success factors and competitive advantages through strategic positioning, choices and implementation. Macroeconomic Drivers PESTEL Analysis The international flavor for drybulk shipping makes it directly affected by any external factors, to identify the driving forces of Drybulk environment, and what opportunities and threats lie within, the PESTEL framework will be used to investigate those factors that affect the industry and companies operating within. (Table-1) Political| Environmental policies could affect world’s trade and economies, they can also affect the maritime sector and the standards required onboard ships. Many conflicts around the globe are causing economical slowdown to many nations, other issues such as piracy, terrorism, and security need to have a degree of international agreements.
The degree of political stability affects the demand for trade and thus demand for transport. | Economical| Growth of world’s economy is dependent on stability of oil and commodity prices, and sustainability in emerging economies’ growth. WTO and increased collaboration would enhance free movement of goods and people and increase trade. The development of seaborne trade affects the productivity and efficiency of drybulk fleet. Depending on banks’ lending policies, interest rates and shipbuilding capacity will determine the international trade and the degree in which barriers to entry may become. Social| The demographic growth in Asia requires intensive infrastructure projects, availability of food and water, and jobs. This requires importation of raw materials, steel and energy. Compared to Developed countries where trade and consumption by aged population is relatively less. | Technological| The shift of technologies from exporting to importing countries, or vice versa affects the seaborne trade. New green technologies could also be costly on many industries. In shipping any new technological efficient solutions or safety equipments may decrease threat of entry and buyers’ bargaining power. Environmental| A possibility for some ports to be severely damaged by extreme weather and sea levels may affect the supply of ships, whereas, ice melting could create new navigational routes which could change seaborne trade. Climate change and extreme weather could also affect many industries and affect international growth. | Legal| An agreement on the “carriage of goods by sea” such as Rotterdam Rules may unify law and increase trade. The existence of more convenient flags could create more threat of new entrants and have two-tier standards. |
Key Drivers In order to create future scenarios for drybulk industry; around 26 key drivers with deep trends working in the world and have an effect on the development of drybulk shipping are identified in the below chart; those drivers are shown according to their degree of importance and uncertainty. (Chart-1) Critical Uncertainties As shown in (Chart-1), the uncertainties surrounding the future of drybulk market are numerous; the most critical uncertainties are expected to be “the growth of global economy ” and “the development of drybulk seaborne trade”. The growth of global economy could take any shape after 2008 financial crises, accordingly; international trade, interest rates, consumption and many other drivers would also take shape. Many industries will be influenced and fairly obviously, shipping is no exception. * The development of Drybulk Seaborne Trade is the backbone of drybulk market. Main dry bulk cargoes grew from 1. 28 billion tons in 2000 to 2. 09 billion tons in 2008, mainly driven by steel industry and related raw materials, iron ore and coal.
Thus, any change in the macroeconomic environment would affect its competitive structure. . ECONOMY GROWTH SEABORNE TRADE Growth Decline Decline Growth Future Scenarios Sailing in the Dark June 2015 The Baltic Dry Index had another slowdown this quarter standing at 3000 points, “as the pressure of intense supply over demand continues, mainly caused by 2009-2011new deliveries, topped with lower exit barriers, less buyers’ concentration and a decrease in seaborne trade have shifted bargaining power to buyers and thus reduced freight rates”.
Hilmi Armoush – CEO/Armoush Maritime Although some positive signals were seen in Q1 2010, but the continuous debt defaults by countries, businesses and individuals throughout the year caused further uncertainty which made most countries trying to apply massive cuts in public services, increase taxes and protectionism policies. In 2014, world’s GDP grew by 2. 4% – a much slower growth compared to 3. 3% in 2007. With less demand for manufactured goods and infrastructure, today, China’s and India’s main economical drivers changed to construction, food and IT services.
As a result, main drybulk seaborne trade stood at 1. 88 billion tons – back to 2006 levels, mainly driven by coal, fertilizers and sugar. On the other hand, drybulk fleet stood at 460 million-deadweight, while scrapping is minimal due to low demand for steel. Shipowners are now looking for new strategic solutions, it is expected to see some mergers and acquisitions in the next couple of months, especially after US president Sara Palin will announce a new economical plan that will introduce innovative patterns of future trade, taking advantage of more efficient and green technologies for all sectors.
Imbalance Seas June 2015 Soon after World Bank expected a U shape recovery in 2012, a series of new shocks and failures in the western banking systems arose. Consequently, consumers lost confidence, weakened western currencies, where prices of oil and commodities were fluctuating. In the past five years, world’s growth was mainly driven by emerging economies led by China and India whose growth reached 14% and 12% respectively. Conversely, the slower economies in western countries have shifted the geo-political power to the east.
The demographic growth in Asia and mega infrastructure projects announced by China and India has resulted to more countries, like Japan, Indonesia and South Africa to join ECOTRADE, previously called BRIC. The increased concentration of buyers and suppliers in the region have somehow balanced the intense supply of drybulk fleet, it is estimated that 70% of world’s drybulk seaborne trade is concentrated within the ECOTRADE. The Dry Baltic Index stood at 8500 this month, while more ships are announced for demolition due to lower cost advantage and lower exit barriers by taking advantage of high steel prices.
The Greener Wins June 2015 The world’s GDP has been steadily growing at an average of 3. 3% since 2010, whereas drybulk seaborne trade growth slowed to 2% standing at 4 billion tons. “The entry of multiple substitutes increased the uncertainty of drybulk shipping future and made profitability under pressure”. Hilmi Armoush – CEO/ Armoush Maritime The positive discussions and controversies during COP16 and COP17 did not result to binding agreements; however, all countries have showed seriousness on their intentions but wanted to test consequences before signing any binding agreement.
In 2012 history is made at COP18, world leaders met in China and agreed to cut GHG emission to 25% from 1990 levels by 2020, thanks to the special agreements from WTO, UNFCCC, and World Bank who jointly enhanced members for free movement of capitals and investments, lower interest rates and sustainable economical and political policies, on the other hand, movement of products and people were subjected to higher CO2 CAP. The new agreements motivated many economies to adapt to new and efficient green technologies for their strategic recovery plans.
Factories with green technologies were financially supported to switch their deep-sea shipping requirement and shift factories and technologies nearer to mineral sources as drybulk shipping failed to offer a differentiated clean method of transport at economical cost. In August 2013, Airbus announced its new technology for the new mega size airplane able to carry bulk and steel across the globe using renewable energy. Whereas, similar to western countries, China, India and Russia announced the hybrid railway service between their countries to transport goods and people in late 2014.
However, MEPC is expected to submit to IMO this year a cost efficient and clean technologies plan that allow existing and new drybulk carriers to increase their economies of scale over substitutes at cleaner and more efficient ways. Will have to wait and see! Sea Marathon June 2015 A faster growth of world’s GDP is expected this year, this came after developed economies were pulled out from recession and in 2013, banks started to lend money to investors. Meanwhile, developing countries led by China and India continued their economic growth driven by high infrastructure spending and rising domestic consumption.
China remained to be the world’s biggest importer and exporter pulling other regional economies growth as well. This month, Baltic Dry Index stood at highest record ever with 12,500 points; this was mainly influenced from reduced intensity of vessels as ton-mile/deadweight reached 32. 2. On the macroeconomic level, the increase in ton-mile average was driven from growing demand for steel and energy. In 2011, China announced the takeover plan for the largest Brazilian Iron Ore producer, Vale, this came as a response to the joint venture signed by world’s largest producers BHP Billiton and Rio Tinto.
In 2012, major eastern shipping companies took advantage of their trade and banking facilities and acquired 20% of world drybulk fleet, on the other hand, many vessels were contracted on Future Freight Agreements (FFA) which reduced spot market competition and increased shipowners’ bargaining powers. However, it is expected that high freight rates would attract new orders from shipyards. The problem remains in finding certified crews and offshore personnel to cope with such supply pressures. The main question is: Have market players forgotten 2008 crises? And would the order book see same figures again?
Competitive Analyses – Drybulk Shipping Market Outlook The competitive structure of dry bulk shipping conform to the perfect competition model; most firms compete without geographical limits and offer the most economical solution to transport commodities in deep-sea which have enhanced the growth of seaborne trade over the past years. Drybulk carriers are similar in design and purpose, key users of bulk carriers are: * Major bulk commodities include iron ore, coal and grain and are usually shipped on Panamax vessels (60,000 – 99,900 DWT) and Capesize vessels (higher than 100,000 DWT) Minor bulks include fertilizers, steel, sugar, cement, etc and are shipped on smaller vessels such as Handymax and Supramax (40,000 – 59,000 DWT) and Handysize (10,000 – 39,000 DWT). In recent years, low entry barriers increased fleet intensity to 391 million-deadweight in 2008. This came as buyers’ concentration were visibly impacted by the financial crises, thus, the competitive structure in the drybulk market faced many challenging strategic choices which forced many owners to exit in many harsh ways. Chart-2) analyzes the competitive structure of the drybulk market using porter’s five forces which collectively describe the state of competition in the market. A complementary force of Future Freight Agreement (FFA) was also added to the forces. Porter Five Forces Model (Chart-2) Entry Barriers High capital and working cash flows increases entry barriers, however, in recent years, the availability of flags of convenience, and specialized financing firms reduced entry barriers while high freight rates increased threat of entry.
The advent of specialized agencies, which enjoy structural distribution channels, cost advantages and economies of scale over rivals by providing commercial and technical ship management to third party owners also reduced entry barriers. However, the difficult task remains in maintaining the vessel with latest safety and environmental standards, in accordance with IMO requirements where differentiation is only offered by few. As standards become more, barriers to entry increase.
Therefore, many firms and individual owners have been recently pooling or merging their fleets to increase their economies of scale over rivals. Threat of Substitutes Drybulk carriers offer the most economical and environmental friendly method of deep-sea transport to commodities and raw materials, however, some regional trade could substitute to container or rail service for shorter trades. Another threat of substitute is the shift of plants closer to resources, or advent of more economical and environmental friendly airplanes. Bargaining Power of Buyers
Buyers of drybulk services are knowledgeable charterers with high sensitivity to price. Because most bulk carriers are similar in design and characteristics, there is no switching cost except the freight rate. Drybulk carriers’ productivity is high as they operate within more concentrated markets compared to other maritime buyers, however, the power in negotiations in charter parties – demise or non-demise – depend on the specification and the geographical position of the ship compared to the level of supply and demand in the region.
Bargaining Power of Suppliers Ships are bought from concentrated shipyards and second hand market, prices mainly depends on the steel prices and freight rates. For many input transactions, the power of suppliers diminishes with gradual increase in operated fleet and intense competition; this could be applicable with port agents, spare parts and bunker providers and underwriters. However, the lack of experienced and certified seafarers and the increasing standards by unions gives shipowners less bargaining power over suppliers.
Rivalry between Established Competitions Until 2008, the growth in seaborne trade increased demand for transport and thus profitability, however, the financial crises had impacted all sectors as freight rates slumped by over 80%. The deluge of bulk carriers into the market during 2008-2010 increased their intensity further, although some positive signals are seen in the market, profitability remains with firms offering economies of scale and who have cost advantage over rivalry through pooling younger and bigger fleets.
On the other hand, the excess capacity of individual owners with relatively small fleet of 1-4 vessels is decreased, due to low exit barriers, many owners were forced to scrap, withdrawn or sell their vessels as operating cost were higher than freight levels. Distribution of profits on agreed levels is found in FFA, as charterers and owners agree on future rate that is acceptable by both, which reduces competition in the market. Strategic Views Key Success Factors
The complexity and volatile profitability in the industry requires that strategic choices be accompanied with a strategic insight that help managements to strategically position their firms within such a challenging competition and realize their advantage while implementing strategy at optimal efficiency. Therefore, firms should first identify their key success factors within the market that determines their ability to survive and prosper. The below table outlines key success factors by identifying the most important requirements, what do customers want, and what needs to be done to survive competition. Table-2) What do Customers Want| How do firms survive competition| Key Success Factors| * Low Freight * High standard and maintained Ship * Safety and Environmental compliance * Reliable Operator| * Cost efficiency and financial strength * Bulk carriers excess capacity, low entry barriers and switching cost mean intense price competition| * Cost efficiency requires bigger fleet with younger age. * Operational efficiency through weather routing, bunkering, speed etc. * Differentiation requires high standards ships complying with latest international requirements. Strategic Management As part of the strategic management, firms need to strategically position themselves by identifying the purpose of the firm. This is only possible after we analyze external factors, stakeholders’ expectation, internal capabilities and culture. Such purpose is then to be communicated through a vision, mission and values statements. Strategic choices are also critical part in the strategic management process. It involves the choices of corporate and business level strategies on where and how the firm competes.
Corporate strategy identifies the purpose and the scope of the firm which meets stakeholders’ expectations whereas business strategy identifies how the business will compete in a particular market; it concerns strategic decisions about choice of products and markets, gaining advantage and creating innovative opportunities. Implementing strategy in action involves proper structuring to support performance, deploying resources such as people, information, finance etc, and to consider the development processes of an organisation.
It should be noted that a successful strategy is only realized gradually from the intended strategy, which what Henry Mintzberg terms “emergent strategy”. Hence, managing strategy very often involves strategic change. Therefore; a winning strategy must be associated with any decision; it gives the direction and scope of activities over the long-term to achieve an advantage over competition within its environment by deploying resources and organizing structure to professionally implement the strategy to meet long term objectives and stakeholders’ expectation. Conclusion
Given that 80% of international trade is carried by sea, any change in the macroeconomic environment will have a great impact on the drybulk market competitive structure and profitability. With a known cyclical and volatile freight rates, players must have a winning strategy within their firms that help in realizing their advantage and meet their long-term objectives. Therefore, and especially that many owners are now considering to enter the market, or increase their fleet, it is important to strategically analyze the effect of the external factors and their effect on the competitive structure in the near and long-term future.
My report has covered some of the personal views on the near-term future, and what various scenarios they can shape. I hope it can help managers to identify their key success factors and formulate their strategies accordingly and be ready for a challenging and uncertain future ahead. References * World Trade Organization, (2010). (online) Available from http://www. wto. org (accessed on 14. 03. 2010) * United Nations Conference on Trade and Development UNCTAD, (2010).
Review of maritime studies 2009 (online) available from http://r0. unctad. org/ttl (accessed on 12. 03. 2010) * Martin Stopford (2008), Maritime Economics (3rd edition), Routledge. * Robert M. Grant (2008), Contemporary Strategy Analysis (6th edition), Wiley * United Nation Framework for Climate Change Convention UNFCCC, (2010). (Online) Available from http://unfccc. int/2860. php (accessed on 14. 03. 10). * International Maritime Organization IMO, (2010). (Online) available from http://www. imo. org (accessed on 12. 03. 2010).