Dry bulk shipping has the least sophisticated ships requiring low levels of crew specialization, so there is a low barrier to market entry and therefore small dry bulk shipowners generally struggle to benefit from their experience and reputation.
All these changes are not expected to happen overnight but will accelerate over time, particularly if the current recovery is delayed. There are already some larger shipowning companies acting as logistics providers to the commodity giants with a focus on risk management and ROCE.
BROADER RANGE OF SERVICES:THE NEW INDUSTRY MODEL FOR SHIPBROKERS
Brokers are already facing challenging conditions due to the supply demand imbalance across almost all shipping sectors and the resultant low levels of charter rates, spot freight rates, resale values and newbuilding prices. Consolidation will mean bigger shipowners in all the major shipping sectors. Owners of big dry bulk fleets will want to deal directly with larger customers for major commodities on the major trade routes. They will want to own the customer relationship and reduce the cost of doing business by eliminating broking commissions. The larger organizations will have the scale and resources to manage their key customer relationships directly. Maybe these larger owners will also have the resources to deal directly with shipyards and ship breakers in the future too?
There is also pressure from the shipping customers to eliminate brokers from their supply chain with Vale having recently put in place very long-term COAs for over 50% of the Brazil China iron ore trade from 2018 onwards. It is only a matter of time before there will be similar moves to control the Australian iron ore and coking coal trades.
In summary, shipbrokers that add value to a deal will always be in demand in the shipping market and will continue to bring together shipowners and dry bulk shipping customers for niche trades and for minor trade routes. Shipbrokers are already broadening their commercial offering to what they describe as their full service client offer, seeing themselves more and more as advisers. Brokers are offering services such as consultancy and data provision to a broader range of clients and will need to continue to expand these offerings to survive. For example, a leading broker has recently announced a strategic investment in a company focused on leveraging knowledge.
BASEL DRIVES UP THE COST OF FINANCE FOR SHIPPING
While banks are expected to continue to provide the majority of finance for ships across all the major shipping sectors in the coming years, there will be a need for alternatives such as export credit agencies, bonds, and both public and private equity.
The cost of finance for shipping from banks will undoubtedly continue to increase as a result of the raised quantity and quality of capital levels required by banks due to the Basel III regulations being phased in from 2013 through to 2019. There are further regulations being discussed by the Basel Committee, termed Basel IV. These proposed regulations focus on customer credit risk which, if adopted in their current form, will further increase the cost of bank finance for shipping.
Smaller ship owning companies without an established relationship with a bank will struggle to raise bank finance for the purchase of ships. If successful, the finance will be expensive and the owner will be required to fund a higher proportion of the purchase price with equity. Smaller owners may be forced to seek alternative forms of ship finance; private equity might be an ideal solution, both for shipping companies who need money, and for investors who need a return.