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Impact Of Economic Recession on Wet Bulk Shipping

Info: 1582 words (6 pages) Essay
Published: 12th Dec 2017 in Economics

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Global economic integration and the world economy is closely linked with the world shipping market, 2009 world economic recession caused a negative impact on the economy of each countries, the shipping industry has been seriously affected. This article assesses the economic recession affecting the wet bulk shipping sector from four parts.

Key words: economic recession; freight rates; wet bulk shipping; excess capacity.

The Impact of the Economic Recession on Wet Bulk Shipping


Shipping is a global industry, which is the lifeline of the world economy. The global bulk shipping markets consist of two main sectors – dry bulk and wet bulk (Stopford, 2003). The carrier of wet bulk is tanker. It can transport oil or oil-based products – liquid petroleum gas (LPG), vegetable oil etc., liquid chemicals or liquid natural gas (LNG) (House, 2007). However, crude oil carried in Very Large Crude Carriers (VLCCs) is the biggest wet bulk shipping market. The world financial crisis has brought a great impact to the international economy, which created the economic recession deeply and widely in 2009, especially in transport sector (European Commission, 2009). “The crisis has triggered a slowdown in global economic growth that is manifesting itself in a demand-driven fall in international trade exacerbated by the deficit of credit and trade finance; falling commodity prices; declining remittances; contracting foreign direct investment (FDI); and the potential of declining official development assistance (ODA) (UNCTAD secretariat, 2009a).” This has given rise to the most significant challenges for wet bulk shipping (tanker) that involved volume, freight rates, operational productivity and job cuts.

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Effects on Tanker Freight Rates

Transport market usually makes a direct reflection to a downturn in demand. The price of chartering tanker ships indicates the demand-supply balance for different wet bulk. The demand of tanker can be measured in tonne-miles. Table 1 describes the tonne-mile demand of most tanker sectors. There is a downward trend which dropped nearly 1.6% in 1H09 comparing with 1H08 (TANKEROperator, 2009a). The reason was that the demand of crude oil declined since last year. Different indices can present different market, i.e. The Baltic Exchange Dirty Tanker Index (BDTI) represents the crude oil market, which in major trading routes includes VLCC, Suezmax, Aframax and Panamaxes. Moreover, the Baltic Exchange Clean Tanker Index (BCTI) makes up of clean Panamax, Handymax and Handysize tankers (TANKEROperator, 2009b). Table 2 illustrates that comparing with the same period of 2008, freight rates of tanker vessels in the middle of 2009 were down. The deppening ecomomic crisis cause oil demand decline. BDTI shows an upward trend, which fell from 849 points in January 2009 to 482 in June 2009. It nearly fell half. BCTI also showed an downward trend, from highs of 623 in January 2009 to lows of 479 in June 2009 (UNCTAD secretariat, 2009a).


Table 3 shows average freight rates, which is a unified measure for establishing spot rates. The areas of the table indicated including Persian Gulf, West Africa, the Mediterranean, the Caribbean, Singapore, East Asia, South Africa, North-West Europe and the East Coast of Norh America. Comparing feight indices of tanker market between the first half of 2008 and 2009, it can be seen that the freight rates on all routes declined. Though the feight rates in some routes in June of 2009 had a little increased than previous months, but overall trend was downward. Among them, there was a dramatic declines in freight rates for VLCC and ultra-large crude carrir (ULCC). The routes which they serviced were the Persian Gulf to Easern Asiam Europe, the Americas and South Africa. Table 3 clearly shows that the freight rates for VLCCs in April and May of 2009 on the Persian Gulf to Japan and the Persian Gulf to Republic of Korea routes decreased by nearly 50 percentage, from WS51 to WS27 and WS53 to WS27 separately. The reason can be attributed to the Organisation of the Petroleum Exporting Countries (OPEC) members cutting the oil production thus, the volume of cargo which transport from Persian Gulf to other areas was reduced (UNCTAD secretariat, 2009a).

In addition, LNG shipping reached in record-low freight rates in the spot and short-term LNG trades in spring 2009. The LNG industry has been closely tied to gas demand in Japan and Korea, because the two Asian nations account for nearly one-half of the global trade in LNG (Corkhill, 2009a). “The Arab countries exports to Japan and Korea went down in July 2009 by 4.7% or 88 thousand tons to 1.801 million tons – a share of 27.5% of total Japanese and Korean LNG imports” (OAPEC, 2009).

Effects on Voulme

OPEC which provides about 40% of the world’s oil supply try to stabilise oil prices therefore, it decided to recuce daily production from 4.2m barrels per day to 24.9m bpd (Calderas-Mendez, 2010). Tanker shipping has been dealt with the delayed impact of declining demand. This cutting supply decision caused decline in the amount of oil carried by VLCCs (Calderas-Mendez, 2010). From the international oil market situation in recent years, the oil supply disruption is not happened, the oil market focus mainly on oil prices. In the downturn, table 4 shows that there was a large demand declines from the fourth quarter of 2008 to the second quarter of 2009, whcih attributs to the developed countries economics, particularly the United State (economic crisis). The demand of oil decline, the freight rates decline. Therefore, OPEC carried out a series of production cuts to support prices in order to faced with the demand weakness (International Monetary Fund, 2009).

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Effects on Operational Productivity

Decline in demand for shipping, plus the financial crisis led to banks tightening credit on shipping finance, many shipping companies have been cancelled shipbuilding orders and have a wave of defaults began to appear. According to UNCTAD secretariat (2009) analysis, the share of liquefied gas carriers (of LNG and LPG) has stood at 10.8 per cent on 1st April 2009. As the volume of cargo per carrying capacity and freight rates decreased, the productivity in terms of tons carried per deadweight ton (dwt) of oil tankers were seriously surplus. There was 4.0 per cent of the world tanker fleet overcapacity in April 2009 (UNCTAD secretariat, 2009b). The market always showing that when cargoes fall away and the demand for ships drops. “The fundamental reason for the decline in average productivity in recent years is the oversupply of tonnage available, which contrasts with the reduced growth in world seaborne trade (UNCTAD secretariat, 2009a).” Although taking longer time, some of the shipping companies chose routes that cost less. Some ships are being laid off to reduce the tons carried per dwt because of the reduced seaborne trade. Figure 1 shows the productivity of the world fleet has a significantly decline in 2009 and the values between 27,000 and 28,000 ton-miles (UNCTAD secretariat, 2009a). In addition, after some shipping companies and shipping agencies re-scheduled cargo routes, due to the pressure of freight rate, which is not enough to make up the cost, lay off ships was thought more cost-effective way.


Effects on Job Cuts

Affected by the depressed market, the ship owner started a large number of labour layoffs. Inevitably, some shipping companies wanted to cut additional cost; therefore, they closed overseas offices in the rescue plans in the current depressed market. During this hard time, shipping industry faced up to the challenges of over-tonnage, ship owner try to streamline their fleets in order to ease the increasing cost and manpower burdens. In addition, another reason for job cuts was the rising price of crude oil, other raw materials which had driven up the costs of ship maintenance, repairs and bunkers (Corkhill, 2009b).


With the process of global economic integration, international trade becomes a chain of countries in the world market, while the shipping industry as the main carrier of world trade that has become an important part of the economy. Every time of the fluctuations in the global economy will obviously reflect in the shipping market. In the global context of economic slowdown, both of the volume of trade and demand has a decline in different degrees, and at the same time it leads to the consumer and investor lack of confidence, which has brought great impact on the shipping industry.

There hasn’t been a major bankruptcy in the shipping market, which is an economic miracle in 2009 economic recession (BIMCO, 2009). The growth of the total carrying capacity greatly exceeded the growth of the economy and shipments, thus capacity has become surplus. When supply exceeds demand, the freight rates under the pressure or even have declined, the profit of shipping company dealt a heavy blow in the hard time. Since the outbreak of the financial crisis, the credit system has been practiced in a crisis, some banks refused to provide credit guarantees, which leads traders to pay shipping difficulties. Additionally, the operation of the shipping industry to make matters worse.


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