Drybulk Shipping – Strategic Analysis

Table of Content

The maritime market was greatly impacted by the global economic crises in 2008. Freight rates experienced a significant decline, dropping below operating costs and leading to financial challenges for shipping companies. In addition, trade slowed down with a growth rate of 4.7% compared to 5.7% in 2007. The total volume of drybulk cargoes loaded in 2008 amounted to 5.4 billion tons, including approximately 2 billion tons from major bulk trade.

According to UNCTAD (2009), the drybulk fleet increased from 368 million-deadweight in 2007 to 391 million-deadweight in 2008, with an estimated order book of 289 million-deadweight. Consequently, fleet productivity decreased to 5.36 tons/dwt and 28.66 tons-miles in 2008. Additionally, the Baltic Dry Index experienced a significant drop from its peak of 11,793 points in the middle of 2008 to 1,100 points in November. The year 2008 also saw a high number of reported demolitions of drybulk carriers, reaching 3.1 million-deadweight – the highest since 2003. These demolitions are expected to have further increased in 2009.

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Many owners are now considering entering the market or increasing their fleet through mergers and acquisitions due to positive signals in the freight market in 2009-2010 and comparatively lower vessel prices. Until 2008, it seemed that many players forgot about the cyclical nature of the industry. However, the important question is: Have those players learned their lesson? This report examines the different scenarios for the drybulk market in light of future uncertainty and analyzes how they could impact its competitive structure.

The main topic of discussion is the development of the Drybulk Market in the near-term future. The focus will be on the next 5 years, although there may be analysis and scenarios for longer-term as well. The chosen timeframe allows for insights into the competitive structure, particularly with upcoming deliveries in 2010 and 2011. Additionally, it highlights the current uncertainties on a macroeconomic level that will impact the market’s structure in the near-term.

Firstly, the macro-economic environment that may impact the industry and the key factors that could drive changes in its structure will be identified. Four different scenarios, dated June 2015, will be presented based on the most significant uncertainties. Additionally, an analysis of the competitive structure of the drybulk industry will be conducted using Porter’s five forces model. This will assist firms in strategically identifying their key success factors and competitive advantages by considering strategic positioning, choices, and implementation.

The Baltic Dry Index experienced another decrease this quarter, reaching 3000 points. The decrease is due to intense supply surpassing demand, which is mainly caused by the arrival of new deliveries between 2009 and 2011. Additionally, lower exit barriers, reduced concentration of buyers, and a decline in seaborne trade have resulted in buyers gaining greater bargaining power and thus leading to a decrease in freight rates.

Hilmi Armoush, the CEO of Armoush Maritime, noted a mixed outlook in Q1 2010. However, the year was characterized by persistent debt defaults from countries, businesses, and individuals, which led to increased uncertainty. Consequently, many countries implemented measures such as significant cuts in public services, higher taxes, and protectionist policies. The global GDP experienced weak growth of only 2.4% in 2014 compared to the stronger 3.3% growth observed in 2007. This reduced demand for manufactured goods and infrastructure has caused China and India to primarily rely on construction, food, and IT services as their main economic drivers.

Due to increased trade in coal, fertilizers, and sugar, the main drybulk seaborne trade has reached a level of 1.88 billion tons, similar to that seen in 2006. The current drybulk fleet has a capacity of 460 million-deadweight, with minimal ship scrapping due to low steel demand. Shipowners are actively seeking new strategic solutions and it is anticipated that mergers and acquisitions will occur in the near future. These expectations have been heightened by US President Sara Palin’s announcement of a new economic plan which aims to introduce innovative patterns of future trade. These patterns will prioritize the use of more efficient and environmentally-friendly technologies across all sectors.

The western countries’ banking systems experienced disruptions and failures in June 2015, leading to Imbalance Seas. This disrupted the World Bank’s forecast of a U-shaped recovery in 2012 and resulted in a decline in consumer confidence. Consequently, western currencies weakened and there were fluctuations in oil and commodity prices. Over the past five years, China and India have become the main drivers of global economic growth with growth rates of 14% and 12%, respectively. As a result, geopolitical power has shifted towards eastern countries while western nations’ economies have fallen behind.

The population growth in Asia and the implementation of large-scale infrastructure projects by China and India have led to other countries like Japan, Indonesia, and South Africa joining ECOTRADE (formerly known as BRIC). This has resulted in a higher concentration of buyers and suppliers in the region. Around 70% of the world’s drybulk seaborne trade now occurs within ECOTRADE.

Despite these developments, the Dry Baltic Index is currently at 8500. Furthermore, high steel prices are reducing costs and barriers to exit, leading to more ship demolitions being announced.

The Greener Wins June 2015 The global gross domestic product (GDP) has been consistently growing at an average rate of 3.3% since 2010, while the growth of drybulk seaborne trade has slowed to 2%, reaching a total of 4 billion tons. According to Hilmi Armoush, CEO of Armoush Maritime, the introduction of multiple substitutes has increased uncertainty in the future of drybulk shipping and put profitability under pressure. Although the positive discussions and controversies during COP16 and COP17 did not lead to binding agreements, all countries have demonstrated seriousness in their intentions but wished to assess the consequences before committing to any binding agreement.

World leaders at COP18 in China reached a significant agreement in 2012 to reduce greenhouse gas (GHG) emissions by 25% from 1990 levels by 2020. This achievement was possible thanks to the collective efforts of the WTO, UNFCCC, and World Bank, who collaborated to advocate for unrestricted capital flow and investments, lower interest rates, and the implementation of sustainable economic and political policies. However, this also meant imposing stricter limits on carbon dioxide (CO2) emissions for both products and individual mobility. These agreements inspired many economies to integrate new environmentally friendly technologies into their recovery strategies.

Green technology factories were given financial support to relocate closer to mineral sources and switch their deep-sea shipping requirement. This decision was made as drybulk shipping did not offer a cost-effective and environmentally friendly method of transportation. In August 2013, Airbus introduced a new technology for a mega-size airplane capable of transporting bulk and steel globally using renewable energy. Similarly, China, India, and Russia, like western countries, announced the implementation of a hybrid railway service in late 2014 for the transportation of goods and people between their nations.

MEPC is expected to submit to IMO this year a plan that allows existing and new drybulk carriers to increase their economies of scale at cleaner and more efficient ways – a cost-efficient and clean technologies plan. We will have to wait and see! Sea Marathon June 2015.

A faster growth of the world’s GDP is expected this year. This comes after developed economies were pulled out from recession and in 2013, banks started lending 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, as the world’s biggest importer and exporter, greatly influences the growth of other regional economies. This month, the Baltic Dry Index achieved its highest-ever level at 12,500 points due to a reduction in vessel intensity resulting in a ton-mile/deadweight ratio of 32.2. The overall increase in ton-mile average was primarily fueled by an increasing demand for steel and energy on a macroeconomic scale. In response to a collaboration between two major producers BHP Billiton and Rio Tinto, China announced its intention to acquire Vale, the largest Brazilian Iron Ore producer.

In 2012, significant shipping companies in the eastern region utilized their trade and banking resources to acquire a fifth of the global drybulk fleet. Meanwhile, numerous vessels were secured through Future Freight Agreements (FFA), resulting in a decline in competition in the spot market and an increase in shipowners’ negotiating leverage. However, it is expected that the high freight rates will attract new orders for shipbuilding. The challenge lies in finding qualified crews and offshore personnel to meet this surge in demand. The primary concern is whether market players have forgotten about the 2008 crisis and if the order book will reach the same levels again.

Competitive Analyses – Drybulk Shipping Market Outlook

The competitive structure of the dry bulk shipping market conforms to the perfect competition model. Most firms compete without geographical limits and offer the most economical solution to transport commodities in deep-sea, which has enhanced the growth of seaborne trade in recent years.

Drybulk carriers are similar in design and purpose. The key users of bulk carriers are:

  • Major bulk commodities include iron ore, coal, and grain. They 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, the drybulk market has experienced a significant increase in fleet intensity, reaching 391 million-deadweight in 2008. This growth has been accompanied by the visible impact of the financial crises on buyers’ concentration, leading to a challenging competitive structure. As a result, many owners have been forced to exit the market in various harsh ways.

To analyze the competitive structure of the drybulk market, Porter’s five forces model is used. These forces collectively describe the state of competition in the market. Additionally, a complementary force known as the Future Freight Agreement (FFA) has also been included.

The entry barriers in the drybulk market are influenced by high capital and working cash flows. However, in recent years, the availability of flags of convenience and specialized financing firms has reduced these entry barriers. On the other hand, high freight rates have increased the threat of entry.

The rise of specialized agencies equipped with efficient distribution channels and cost advantages has lowered entry barriers in the ship management industry. These agencies offer commercial and technical services to third-party owners, but ensuring vessels comply with the latest safety and environmental standards set by the IMO remains a challenging task. Only a few agencies set themselves apart by meeting these stringent standards, and as they continue to evolve, the barriers to entry for newcomers become even higher.

Many firms and individual owners are currently combining their fleets to enhance their economies of scale compared to competitors. However, there are some potential substitutes for drybulk carriers in certain regional trade scenarios, such as container or rail service for shorter trades. Additionally, the relocation of plants closer to resources or the emergence of more cost-effective and environmentally friendly airplanes can also pose as substitutes. Furthermore, the bargaining power of buyers is an important factor to consider.

Buyers of drybulk services have extensive knowledge of chartering and are highly price-sensitive. Since most bulk carriers have similar designs and characteristics, the only cost associated with switching is the freight rate. Drybulk carriers tend to have high productivity due to operating within concentrated markets, especially compared to other maritime buyers. However, the negotiating power in charter parties, whether they are demise or non-demise, is dependent on the specific ship specifications and geographical location in relation to regional supply and demand levels.

The power of suppliers in the shipping industry is affected by various factors. Ships are typically purchased from a small number of shipyards and the second-hand market. The prices of ships are primarily determined by steel prices and freight rates. As a company’s fleet size grows and competition intensifies, the bargaining power of suppliers tends to decrease for many input transactions. This applies to various actors such as port agents, spare parts and bunker providers, and underwriters. However, shipowners may have less bargaining power when it comes to suppliers due to a shortage of experienced and certified seafarers and increasing standards set by unions.

Rivalry between established competitions was intensified by the increase in seaborne trade until 2008, as it created a higher demand for transport and increased profitability. However, the financial crises affected all sectors, resulting in a significant decrease of over 80% in freight rates. The market was further flooded with bulk carriers between 2008-2010, intensifying the competition even more. While there are some positive signs in the market, profitability still lies with companies that can offer economies of scale and have a cost advantage over their rivals by pooling younger and larger fleets.

However, the surplus capacity of small fleet owners (1-4 vessels) has been reduced. This is because low exit barriers have compelled many owners to scrap, withdraw, or sell their vessels due to higher operating costs compared to freight levels. The distribution of profits at agreed levels is present in FFA, where charterers and owners reach a mutual agreement on future rates that decrease competition in the market. Strategic Views Key Success Factors

Strategic choices in the industry must be accompanied by strategic insight to help firms position themselves effectively and achieve optimal efficiency. It is essential for firms to identify key success factors within the market that determine their survival and prosperity. The table below highlights these factors by identifying important requirements, customer preferences, and necessary actions to survive in a competitive environment.

In order to strategically position themselves, firms must first identify their purpose. This can be achieved by analyzing external factors, stakeholders’ expectations, internal capabilities, and culture. Once the purpose is established, it should be communicated through the use of vision, mission, and values statements. Strategic choices also play a vital role in the overall strategic management process. These choices determine the corporate and business level strategies that determine where and how the firm competes.

Corporate strategy entails determining the objective and extent of the company, satisfying stakeholders’ desires, while business strategy involves determining how the company will compete in a specific market. It focuses on strategic choices regarding product selection, market entry, gaining competitive advantage, and fostering innovation. Executing strategy encompasses organizing support systems to enhance performance, allocating resources like personnel, information, and finances, and considering organizational growth processes.

It is important to understand that a successful strategy takes time to develop from the intended strategy, which Henry Mintzberg refers to as “emergent strategy.” Therefore, managing strategy often requires making strategic changes. Consequently, a winning strategy should be connected to every decision, as it provides the direction and scope of activities in the long run to gain an advantage over competitors within the given environment. This involves utilizing resources and organizing the structure in a professional manner to effectively implement the strategy and fulfill long-term objectives and stakeholders’ expectations. In conclusion,

Given that 80% of international trade is conducted by sea, any changes in the macroeconomic environment will significantly affect the competitive structure and profitability of the drybulk market. Due to the well-known cyclical and volatile nature of freight rates, players in the industry must establish effective strategies within their companies to enhance their competitive advantage and achieve long-term goals. As a result, it is crucial to strategically assess the impact of external factors on the competitive structure in the near and long-term future, especially with an increasing number of owners considering entering or expanding their fleet.

My report encompasses personal perspectives on the near-term future and the potential scenarios they may influence. Its purpose is to guide managers in identifying crucial success factors and devising strategies that can adapt to an unpredictable and demanding future.


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