As part of its 60th anniversary celebrations the Hong Kong Shipowners Association welcomed one of shipping’s few celebrities, the shipping analyst, Dr Martin Stopford to an Association lunch on Monday.
Taking the 1957 establishment of HKSOA as his staring point of a history of shipping through to what the industry might look like 60 years from now. The lesson to be taken from the last 60 years would appear to be everything changes while staying the same.
It was in 1957 that Maclean’s first container ship transported a few hundred boxes from New Jersey to Huston via Florida. At the time Mr Moller of AP Moller Maersk fame was distinctly unimpressed and instead saw the future in palettisation while other concerned Scandinavians thought Ro-Ro was the solution.
1957 was just one year in an on-going process that saw the European empires being dismantled, the emergence of the General Agreement on Tariffs and Trade and Europe and Japan rebuilding their economies. “The strategic importance of sea trade was absolutely at the heart of that,” said Dr Stopford.
In 1957 the cost of a barrel of oil was a dollar and the cost of shipping it from the Middle East to the North Atlantic was a dollar. The cost of shipping a barrel of oil from the same loading point to the same discharge point is the same one dollar today.
The new business model consisted of: big modern assets, high leverage, slim overheads and, initially, trading on time charter. “It was brilliant!” claimed Dr Stopford. As a result from 1957 to 2016 sea trade grew 25% faster than the world economy. “That meant we were moving toward a truly globalised world,” he said.
Recognising the importance of the growth of containerisation led to a what if? moment as Dr Stopford claimed that the Chinese economic miracle would not have happened without it.
But every good business model has the potential for its own destruction. “There is a lot not to like about today’s business model, stated Dr Stopford. Number one of things not to like is that: “All the markets are commoditized. What a commoditized market means is there is no margin left. If you are a commodity trader you are not in to serious value added product. You are in to tiny arbitrages.”
Also a plague on the industry are company structure issues where small companies earning skinny returns struggle to find a strategy that will give them value for all the talented people they have in head office.
Ship finance is increasingly a problem, Dr Stopford asserts:
“There is lots of scar tissue out there among the commercial banks after three rounds of coming back for more after having been taken to the cleaners. It’s getting very difficult for small to medium-sized companies to find finance. Banks like to finance companies with value on the balance sheets beyond the value of the assets.”
Finally, shipping is the victim of an aggressive regulatory framework despite the fact that the industry is a commodity business. As Dr Stopford insists: “ Regulators expect the industry to behave as a highly differentiated business capable of achieving high quality standards. But commodity markets don’t really differentiate in terms of quality. And there’s the problem.”
Ending on a high note, with some caveats, Dr Stopford concluded that the future is Asia, digitisation, and personnel restructuring.
The regional trading matrix is evolving rapidly. In 1957 about 80% of imports were controlled by the North Atlantic. In 2007 Asia overtook the North Atlantic and today it controls 63% of imports and climbing.
“Asia is at a level of development where it is hard not to see a lot of potential,” he added. Looking to the moment
Information Communications Technology (digitisation) has been under exploited by the industry, Dr Stopford contends. But to do so there also has to be a change in how personnel are deployed.
The answer, according to Dr Stopford, is to run the business like a transport factory. Shipyards will be engaged in putting the technology on the ship that the shipowner will need to get all the information it needs. The technology will be standardised to make ships cheaper. And after all the information is shared and used across the ship it will be taken back through company systems to management.
A number of shipping companies have already adopted such technologies. The more difficult part of the good doctor’s recommendations may be more difficult to adopt for what is still a very conservative industry: The levelling off of the company hierarchy.
Dr Stopford insisted that the old vertical hierarchy must be dispensed with and replaced by a horizontal personnel system that more effectively exploits a more educated technology savvy workforce.