Basil M. Karatzas: Looking through shipping’s crystal ball for 2017 predictions

2016 has been a difficult year for the shipping industry. Most memorably, the Baltic Dry Index (BDI) recorded the worst ever reading since the inception of the index in the ‘80’s, while one of the biggest containership liner companies in the world (Hanjin), a state-sponsored company nevertheless, filed for bankruptcy. At the end of 2015, few people were expecting a very strong 2016 for shipping; however, the gravity of the weakness of the market in 2016 caught many people by surprise.

The 2017 seems to be starting on a positive note with dry bulk, tankers, containerships and, to a lesser extent the offshore market, earning cash breakeven levels; weakly positively overall, but definitely in positive territory.

Hopes run high for better fortunes in the new year. The truth of the matter, however, is that troubles caused by problems of the severity of the worst freight market in modern memory and the bankruptcy of a state-sponsored 150-vessel strong company are not superficial and cannot be resolved by just a market that has an average recovery. The wounds are so substantial and in-depth, and in best case scenario, it will take many years to be solved. It’s not only the cash that many shipowners burned in the last couple of years to just keep afloat, it’s not the severe risk of a domino-effect with defaults, it’s not only the risk of hollowed trust in the market place; they are also the risks that the market still is oversupplied and many affiliated industries, just as shipbuilding and shipping finance, can inflict even more wounds to the anemic shipping market.

Although the outstanding orderbook is still meaningful, in 2016 few newbuilding orders were placed, which is good news overall. Commodities prices have improved in 2016 and likely the production of crude oil will be more stable which likely to help the markets. Despite the threat of weak economic growth and possibly trade tariffs, etc, it seems that overall 2017 will be tolerably positive for growth in dry bulk, tankers, containerships and offshore. Presuming that no deliveries of the outstanding orderbook will be brought forward, the market likely to start approaching a tonnage equilibrium later in the year.

Still, many risks remain for shipping in 2017. Shipping finance has been very difficult to come by and we expect this to be a major concern for shipowners for the years to come. Shipping banks leave a big gap behind that still cannot be filled with any other source of capital. Shipping banks also can ‘rock the boat’ in the new year given the non-performing loans still on their books and their time pressure to resolve such problems. And 2017 can bring high exogenous risks to the shipping industry given a new administration in the White House and an overall anti-trade attitude. The anti-globalization trend and a trend overall of higher barriers across borders and continents can be seen also in Europe, which attitude, overall, is not positive for shipping. There are many political risks (what has happened to the EU?) and fiscal risks (the multi-trillion un-regulated credit markets worldwide) and monetary risks (ballooning central bank balance sheets at a time when interest rates are too low). There are many variables outside the shipping industry that could have a very substantial impact to the industry.

2017 likely to be a better year for shipping than 2016, mostly because 2016 was so miserably bad. And, because several trends (lower newbuilding orders, decent demolition levels, ‘expensive’ financing, balancing commodities markets, etc) point to a better market. Once again, however, it is to be seen whether a (marginally better) market will be good enough to pull the market out of the current doldrums.

Basil M Karatzas is the founder and President of Karatzas Marine Advisors & Co., a shipping finance advisory and shipbrokerage firm based in New York. For more information please visit: www.karatzas.com