Oversupply places heavy burden on shipping and energy sectors, AP Møller Mærsk chief economist warns at IUMI conference
By James Brewer
Shipping and oil businesses are struggling to come to terms with oversupply factors, Graham Slack, chief economist at AP Møller-Mærsk, emphasised in a presentation to the 2015 annual conference of the International Union of Marine Insurance in Berlin.
Mr Slack held out little hope of a short-term let-up in the problems, as he delivered his presentation entitled Navigating a New Oil and Shipping Landscape.
On the macro-economic front, Mr Slack said that many emerging markets have been increasing debt at a rate of more than 5% for the last seven years. “The story about the [role as consumers of the] middle class is not as robust as the popular press suggests, ” he asserted.
“The Chinese economy, as we know, needs to restructure, ” he said. “Dealing with this structural adjustment is a challenge.” The intensity of trade seemed to be subsiding, but there were “pillars of potential support” for international commerce.
The TTIP (Transatlantic Trade and Investment Partnership) if approved, would give a tremendous impetus: trade between the US and Europe in the Atlantic could increase by 100%. Advances in analytics and software meant that transport could manage a better logistics chain.
“Still, when we look at the near term outlook, supply has outstripped demand growth for the last nine years, and we do not see it getting better in 2016. Freight rates have fallen on average by at least 2% in the last 10 years.
“We have to reduce that 2%, and reduce by another 2% to retain our margins.” Mr Slack said that Mærsk Line, the world’s largest container line, had taken out 9% of costs by using bigger ships and through its alliances.
“At the same time, [such development] exacerbates a long-standing vicious cycle: bigger ships, more supply pressure on freight rates and lower costs which leads back into pressure for bigger ships.” Mærsk Line in 2014 had an ebit (profit before financial items) margin of 9.2%, top of its peer group.
The bug of oversupply had now settled in the oil industry, said Mr Slack. OPEC had changed from a defender of prices to a defender of market share. “Companies are overspending by 1.6 times operational cash flow. While they are reducing capex (capital expenditure) and costs, prices are falling even faster, so this adjustment is still unfolding. Returns in the industry are hitting new lows. The near-term outlook is soft.
“A number of forecasts are still fairly bullish on the longer term outlook.” Prices would rise above $80 per barrel, it was said, by 2020 to 2025.
“Every single year the oil market loses between 3m to 4m barrels per day because the amount of oil you are getting out of the oil field is declining. Over a 20-year horizon, the amount of oil we will lose is 40m barrels. Current demand is 90m barrels per day. We close some of the gap with shale, but we still have a 20m barrels per day shortfall. Some 10m barrels per day are predominantly deep-water, and the cost of extracting that remains very high: this is a fundamental support for oil prices in the longer term.
“Is the investment being made? It is not. And despite massive capex from time to time of the past several years, production has fallen.”
Mr Slack said that developments such as 3D printers combined with robotics needed to be understood by the maritime industries, and could be a net support to global trade.
Before joining AP Møller- Mærsk, Mr Slack held posts with the Bank of England, as advisor to the European Central Bank, and senior economist and resident representative of the International Monetary Fund.
Earlier in the IUMI session, the subject Managing Emerging Risks in Shipping – Where to Focus was addressed by Tor Svensen, group executive vice-president in Oslo for classification society DNV-GL. Mr Svensen, a former chairman of the International Association of Classification Societies, said of the wider shipping industry: “Maybe the focus on environment has taken our focus off safety.” Serious accidents were on a downward trend, but shipping still lagged behind land-based industries.
One question was whether size represented a risk in large containerships and passengerships. “I believe we can manage the risk, but we have to make sure we put adequate safety barriers in place, and we manage those barriers.”
Mr Svensen said: “The connected ship is coming faster than anticipated. High-speed internet is allowing huge transfers of data. We could in practice run the ship like a drone if we wanted to. But we do not want to and there are many reasons why we do not want to.”
Cyber security was a threat, “an increasing risk we need to manage. The functioning of the software represents the major risk. If you look at a ship or drilling rig, it is tremendously complex and you have to address this in a systematic way. Gigabytes are being transferred today; there will be terabytes in the future. We are building a digital twin of the systems on board, where we can simulate what is happening.”
Mr Sense insisted that malfunctioning software was far more of a risk than a breach of cyber-security. The reliability and integrity of the software represented an increasing concern that needed to be addressed.
He underlined that the problem of liquefaction of cargoes such as iron ore and nickel fines continued to be important but was “entirely preventable, as was the loss of human life and material value. We need more backup for the master [of ship] in case he wants to refuse loading.”
He said the industry would move more to condition-based surveys. Maintenance would become totally different from what it was, but “maintenance can leave things worse.” Reduced maintenance could affect safety, although there was currently no clear evidence of this.