1999, outlook uncertain 
but cause for cautious optimism ?

 In line with the perceptions presented in our last Annual Review most sectors of the international merchant shipping industry have been seriously affected by global economic and associated developments during 1998.  

 Freight rates have slumped, followed by newbuilding prices and asset values. Volume growth has stalled while trade patterns have been disrupted and reversed. Even the weather - El Nino - proved conspiratorial. 

 Such conditions contributed to further industry consolidation not only among operators such as MOSK / Navix and P&O Bulk / Shougang but also among major charterers such as oil companies, steel mills and grain houses. The quest for scale economies (and new opportunities) continues. 

For 1999, the outlook remains uncertain. 

Merchant shipping is the most important transportation element in international trade and demand for raw materials and finished products will be determined by the health - perhaps better to say the recovered stability - of the world economy. Here, some cautious optimism is emerging.  

New forecasts from the International Monetary Fund and others carefully suggest that the worst of the engulfing economic turbulence may have passed. Nonetheless OECD growth is expected to reach just 2% in the coming year.

In particular Japan may continue to show negative growth while the United States - so significant for Latin American and Asian exports - may slow from almost 4% in 1998 to less than 2% in 1999. But at the same time the structural adjustments undertaken in countries such as Korea may bring a return to growth earlier than expected. 

In view of the medium-term demand side risks it will be essential for owners/operators to adopt a prudent approach to vessel supply.

During the past year scrapping of tankers and bulk carriers increased by more than 50% over recent years and both fleet age profiles plus progressive governmental quality and safety initiatives will help this to continue.

At the start of 1998 there were hopes that the July introduction of the International Safety Management (ISM) Code would bring an increase in freight rates as a result of detentions and delays. If predominant supply and demand factors minimised any possible esca-lation in rates, the ISM Code certainly contributed to the increase in scrapping as operators focused on improving quality standards. 

The campaign against sub-standard tonnage and shipping practices continues apace and, if anything, is gathering momentum. APEC countries, headed by Australia, are looking to replicate the northern hemisphere initiatives taken by EU and North American government agencies in conjunction with the maritime industry. The EU itself plans an enhanced regime of bulk carrier inspections from April through June 1999 at all community ports.  

It is worth remembering, also, that the July 1998 ISM deadline was for Phase One ships but that the biggest tranche is yet to come. The Phase Two deadline of July 2002 comprises all other cargo ships and mobile offshore drilling rigs and encompasses an estimated 75% of the world merchant fleet. 

If good news appears to be in short supply in the merchant shipping sector it can be said that cruise shipping is thriving. Future prospects are bright and demand for increasingly sophisticated newbuilding ships is firm. 

It is with this in mind that we mention the scheduled expiry of the 9% government subsidies to European yards at the end of 1999. 

Whilst every large tanker and bulk carrier is being built in the Far East the construction of cruiseships for international trading has been concentrated in European yards for many years. Without exception every ship in the orderbook - for international operation - is to be constructed in Europe.  

The building of these sophisticated ships, with its demand for access to efficient, high quality sub-contractors remains, perhaps, one of the final bas-tions of European shipbuilding exclusivity. But for how long?

Assistance to replace the current 9% arrangement may take the form of aid for regional industrial restructuring; this hopefully aimed at shipbuilding promotion rather than withdrawal. Certainly if current subsidies are removed without replacement with other mechanisms, or the long-proposed "OECD Agreement Respecting Normal Competitive Conditions in the Commercial Shipbuilding and Repair Industry", the competitive stance of European yards must be further severely reduced. At time of writing this introduction, the Euro has made its much-heralded entry into the financial system and, already, there are signs of a weakening of the US Dollar from its official Day One exchange rate. Perhaps this could be stimulating for European and world economies. However the weakness will have considerable negative repercussions for European shipbuilding where sales are calculated in dollars since purchasing shipowners, mainly, have income and expenditure in this currency. 

Without cruise and other sophisticated newbuildings the prospects for Europe’s remaining large yards would be bleak.

Encouragingly there has been growing recent expression of support from European governments for their maritime industries and associated expertise. But behind this rhetoric there has to be substance and prompt action before it is too late.