The document discusses several trends impacting the global maritime industry over the next decade: 1. The crisis facing the South Korean shipbuilding industry due to overcapacity and lack of new orders, which is leading to workforce reductions and consolidation. This will impact global ship supply and pricing. 2. The impact of increasing digital technology on ship operations and seafarers, with debates around automation reducing crew sizes versus maintaining traditional ship roles. 3. Rising trade barriers such as Brexit and protectionist measures, threatening the free flow of global trade that shipping relies upon. Increased political interference could distort shipping markets.

1. MARITIME & TRADE
Making Headway:
Passageplanningforthenextdecade
intheglobalmaritimeindustry

2. 2
Making headway: Passage planning for the next decade in the global maritime industry
The pace of change in the maritime sector has increased as the economic downturn
goes on. Partly this reflects external factors such as commodity pricing, and partly it is a
consequence of internal factors like the advance of digital technology. Keeping up with
change has evolved from managing a decline in freight rates to survival at a time of less-
than-breakeven rates. This IHS Maritime and Trade series seeks to identify the trends that
can be discerned beneath the noise to aid future planning for those in the ship owning,
operating, and managing community.
In Q2 2016 we picked out five evolving trends: the restructure of China’s economy,
the world of low-cost oil; mergers, acquisitions, and consolidation, the drive towards
digitalisation, and shipping’s shift from quay-to-quay transportation to a critical link
between manufacturer and consumer. The change taking place within China’s economy
is now widely accepted, although there are signs that the government is rowing back from
reform in favour of stimulus measures. And there are good reasons to believe the era of
50-dollar oil will be with us into the medium term.
For this reason, these two trends are on the back-burner. This paper looks at:
(a) Consolidation in Asian shipbuilding, especially in South Korea;
(b) Seafaring and seafarer training in an era of digital revolution;
(c) Heightened trade barriers interrupting the supply chain;
(d) Popular resistance to globalisation and its consequence for shipping;
(e) Scepticism about data-driven decisions and those who make them.
1. The rise and fall of South Korean shipbuilding
Asian shipbuilding is in crisis. This should worry all of us because Asian yards build more
than 90% of the world’s ships. Japan became top nation in the 1970s, South Korean
took the crown in the 1980s and 1990s, and the years since 2000 have seen China’s rise
to prominence in the number of shipyards and across many sectors of the industry. So
successful have these nations become that they now drive the construction industries in
Vietnam and the Philippines.
But size is no guarantee of robustness. Japanese yards reflect the national demographic: an
ageing workforce and a shortage of young apprentices mean that within five years Japanese
builders will need to refocus. The problem for China is not its workforce but debt. The
pursuit of market share without attention to the need for profitability has left yards deeply
indebted at a time when newbuilding orders have dried up.
Of even greater concern is South Korea, from where the news is bleak. In September
last year, the government, business leaders, and unions drafted a tripartite agreement
on labour market reform as part of President Park’s prioritising economic growth
over what was already a pretty flimsy social security net. Within a few months, both
of Korea’s largest umbrella unions had withdrawn from the agreement, leaving
the way open to strikes and disruptive protests over salaries, corporate debt restructuring,
redundancies, and employee rights.
Partial strike action at Samsung Heavy Industries, Hyundai Heavy Industries, and
Daewoo Shipbuilding & Marine Engineering has already taken place, and is likely to
become a regular feature of the industrial process the longer the dearth of newbuilding
orders goes on. It is feared that protest action both in Seoul and in shipbuilding
communities including Ulsan will involve thousands of workers and could cause
some violence.
In June, President Park called for a “bold restructuring” of shipbuilding by downsizing the
overgrown workforce and a tighter control over costs. If this doesn’t happen, she said, the
future of Korean shipbuilding – and the national economy – will be threatened. What’s the
background to this, and how significant is it to shipping in 2016?

3. 3
Making headway: Passage planning for the next decade in the global maritime industryMaking headway: Passage planning for the next decade in the global maritime industry
In the 1960s and 1970s, a series of five-year plans was
set up to build a self-sufficient and increasingly modern
industrial structure; among the sectors prioritised were steel,
machinery,andchemicals.TheThirdDevelopmentPlan(1972-
76) achieved rapid progress in building an export-oriented
structure focusing on iron and steel, transport machinery,
household electronics, petrochemicals, and shipbuilding.
Critical industries were built up in the south of the country –
which had the benefit of being far from the border with North
Korea but also of providing work for deprived rural areas.
ShipbuildingwasidentifiedasastrategicindustryintheFourth
Development Plan (1977-81) because it was technology-
intensive and skilled labour-intensive. The government’s
generous financial assistance programme ensured that Korean
shipbuildingfocusedonhigh-qualityproductsatacompetitive
price at a time when more advanced economies were cutting
their investment in heavy industry.
By the time of the Sixth and Seventh Development Plans of
the late 1980s and early 1990s, the focus had shifted to micro-
electronics, new materials, fine chemicals, bioengineering,
optics, and aerospace. South Korea had moved beyond heavy
industry and shipbuilding, leaving the world’s largest yards
increasingly separated from the country’s economic theory.
Since the 1990s, South Korean shipyards have shifted up the
scaletocontainerships,chemicalandproducttankers,offshore
vessels and floating production storage and offloading vessels.
But sophisticated ships carry higher risk. Revenue at fourth-
largest builder STX Offshore & Shipbuilding hit the buffers
when offshore exploration and production collapsed after the
oil price plunge in late 2014. The business is now owned by
Korea Development Bank, NH Bank, Export-Import Bank of
Korea, Woori Bank, Shinhan Bank, and Korea Exchange Bank.
AuditorsbelieveSTXO&Sisunlikelytopostanoperatingprofit
before 2021. Because the liquidation value of the business is
less than its value as a going concern, there are plans to keep
it going. However, rising costs mean that many of the 53 ships
on the orderbook no longer make commercial sense: STX O&S
is in talks with the ships’ owners to terminate the contracts.
Third largest-builder Daewoo is currently embroiled in a
financial scandal that has undermined the credibility of the
company. It is possible that this business could collapse, or
be revived on a much smaller scale. Meanwhile, self-rescue
proposals for the shipbuilding divisions of Samsung and
Hyundai are being assessed.
This is an industry in a dark place, and shipping is seriously
worried. Speaking at a Capital Link panel discussion in Athens
in June, Eletson Holdings vice-chairman Vassilis Kertsikoff
observed:“What’shappeningrightnowwiththeyardsituation
in South Korea is a tremendous event that will impact us in
the long term.Tens of thousands of people are losing their jobs
there, capacity is being rationalised, the banks are in charge
and I think that will impact the pricing decisions of the yards
for many years to come.”
Euronav CEO Paddy Rodgers agreed. The supply of shipping
will be determined, he said, “by exactly how clever the Korean
government will be over what they do next. They have an
opportunity to guarantee a valuable part of the support
of Korean GDP by making sure they have a lean, effective
shipbuilding industry, with probably only two major yards.”
Theevolvingtrendhereisclear:decisionstakenthisyearabout
the future of South Korean shipbuilding will feed through to
state support for yards, newbuilding pricing, and the supply of
tonnage in future.
Ordering activity
Source: IHS
0
200
400
600
800
1000
1200
1400
1600
1800
2000
2016201520142013201220112010
China South KoreaJapan
No.ofships
1,412
511 520
1,066
395 382
1,773
617 578
1,408
642
356
918
692
342
148 105 40
988
394
251

4. 4
Making headway: Passage planning for the next decade in the global maritime industryMaking headway: Passage planning for the next decade in the global maritime industry
2. Seafaring in an era of digital revolution
Thought leaders tell us ships are getting more “intelligent”,
by which they mean many functions of vessel navigation,
operation, condition management, and decision support will
be done digitally. We should expect to read much more about
automation, robotics, vessel health monitoring, and energy
optimisation. Some of this new technology will feature on
ships over the next five years, even if the fully autonomous
ship may still be a little way over the horizon for all but vessels
running between fixed points in sheltered waters.
There are two questions that come to my mind: what will
be the roles and responsibilities of seafarers in the brave
new world of digital technology? And how can we revise the
training we provide to seafarers when the new technology is
not yet in place?
These issues are already being debated at international
forums. At a simulation user conference in Singapore earlier
this year, Frank Coles, head of marine equipment firm Transas
commented that: “Traditional shipboard and shore-side
structures appear to be an anachronism when viewed against
the reality of operations.” The master and his navigating
team are under increasing pressure; while the load can be
reduced with technology, Coles added, “automation, alarm
management, and electronic forms are not the answer alone.”
Many seafarer interests have warned about the dangers
of uncontrolled connectivity. Cheaper and faster
communications, together with the explosion of social media,
have changed life on board. Some shipping companies have
reacted by trying to control access. It has proved hard enough
to recruit the next generation of seafarers to sea even without
the killer consideration that there’ll be no Instagram or
WhatsApp connection. “Connectivity is a right; it opens doors
to the future and we should embrace it,” said Coles. “However,
it does lead to more data, more access to the ship, and more
of everything.”
The evolving trend I see here is a clash of ideologies between
those with a more traditional view of the ship master and the
bridge and engine teams, and those who are planning for the
complete removal of trained seafarers from the bridge.

5. 5
Making headway: Passage planning for the next decade in the global maritime industryMaking headway: Passage planning for the next decade in the global maritime industry
3. A world of rising trade barriers
In all the shock of the UK’s referendum on whether to remain
in or leave the European Union (abbreviated to ‘Brexit’), the
implication for trade and shipping between the UK and the
EU’s other 27 states is not fully understood. Negotiations
on terms have yet to begin, partly because the UK has few
negotiators immersed in British trade policy. This matters
to the shipping industry because almost half of British trade
moves to or from the European Union, and much of this goes
by sea.
This is not the only trade negotiation underway at the
moment. There’s an alphabet soup of trade discussions on
the table including CETA (an EU-Canada trade agreement),
TTIP (Transatlantic trade and investment partnership), TiSA
(a Trade in Services agreement under discussion between
23 members of the World Trade Organization), and the EU-
Japan Free Trade Agreement. These talks are not going well.
AccordingtoastudyconductedbytheEuropeanCommission’s
trade department, more than 200 protectionist measures
have been adopted in the 31 countries being monitored,
although hardly any of the protectionist measures hindering
trade had been resolved.
It’s a worrying trend for shipping, says Patrick Verhoeven,
head of the European Community Shipowners Association.
He believes that any barriers to international trade have a
direct negative impact on the shipping sector, and he has
asked theCommission to develop a strong EU external agenda
as part of the maritime transport package in 2017.
Regional trade negotiations and talks to build a globally
connectedtradingnetworkaregoodforshipping,buttheynot
good for everyone. There are reasons for all the protectionist
measures, reasons that lie in governments’ need to limit the
levelofcompetition,whichhelpslessefficientmanufacturers
to survive. Any determined effort to “resolve” protectionist
measures might achieve the opposite of what was intended.
This was one of the messages sent from the UK’s Leave voters,
many of whom have suffered from closure of factories and
the resulting long-term unemployment because free trade
has opened the door to both more efficient and financially-
subsidised competitors from the other side of the globe.
Shipping recognises it plays a significant role in providing
cheap transport for goods and services. Brexit was not about
shipping, although shipping’s ability to link manufacturers
and consumers across the world was at the heart of the
‘Leave’ agenda. Brussels is urged to understand that policy
objectives emerging from the EU’s maritime transport
strategy could drive the adoption of more, rather than fewer,
protectionist measures.

6. 6
Making headway: Passage planning for the next decade in the global maritime industry
4. The stirrings of de-globalisation
Linked to the trend of protectionist measures and higher
trade barriers is the issue of increasing political interference.
In the sector on market structure of their book Maritime
Economics, A macroeconomic approach, British academic
Professor Elias Karakitsos and the former head of shipping at
Royal Bank of Scotland Lambros Varnavides write: “Shipping
is one of the last large perfectly competitive markets where
the laws of supply and demand control the market and prices.”
However, there appears to be plenty of evidence to show
that national interest plays a significant role in distorting the
perfectly competitive market.
Earlier in the year, Euronav chief executive Paddy Rodgers
told delegates to a Capital Link event: “People often falsely
describe shipping markets as being perfect markets… Most of
the time I’ve worked in shipping, we’ve had OPEC, a cartel, on
the customer side, determining production of oil, and on the
shipping side, we’ve had governments choosing to subsidise
uneconomic businesses.”
Rodgers believes the flow of capital into business is what
causes cyclicality. Easy access to capital and a shipyard willing
and able to fund the working capital of building the ships
through government subsidies are the ingredients of what he
calls “a completely distorted market”.
In the early decades of containerisation, senior directors of
state-supported liner companies in Europe, Asia, and both
North and South America argued that their countries needed
dedicated container operators otherwise they would be cut off
from world trade. As debt mounted, governments encouraged
operators with a growing global presence to make regular port
calls; this meant finance ministers could end the funding of
inefficient and costly ships and services.The lines showed that
if the cargo is there to be lifted, the operators will come.
In the 1990s, European governments stopped the practice of
underpinning inefficient and uncompetitive shipyards, which
led shipowners to switch their allegiance to the east. Even
today charterers acting on behalf of many governments tend
to favour domestic shipping companies: for example China
requires that ships carrying crude oil to Chinese ports should
fly that country’s flag.
However, the trend to encourage the transfer of employment
from developed to emerging states – which has been so
beneficial for shipping for more than 30 years – is coming
up against popular resistance. Globalisation is likely to turn
into de-globalisation as governments seek ways to find favour
with voters. Some have forecast that such trade decisions
will distort the free flow of trade yet again. With the benefit
of hindsight, Brexit appears to be a sign of resistance to the
inexorable globalisation of trade.
It is expected that European elections later in 2016 and
in 2017 will be influenced by the need to tackle the issues
of underemployment and unemployment caused by
globalisation. So far there has been little solid evidence to
suggest a shift in outsourcing of manufacturing from distant,
and cheaper, locations to a site in a country adjacent to the
consumer (Near-shoring) or to a site within the same country
as the consumer (On-shoring).
Political interference in the manufacturing and distribution
sectors will have a direct and profound influence on shipping,
especially container shipping but also roll-on/roll-off,
breakbulk, and even shortsea shipping.
Making headway: Passage planning for the next decade in the global maritime industry

7. Making headway: Passage planning for the next decade in the global maritime industry
5. Scepticism over data-driven decisions
It has become trendy to question the work of analysts and
forecasters.Who needs big data if everything it tells you about
the medium-term market outlook proves to be wrong, and
everything it suggests about the long-term is overtaken by
events before the year is out?
The Q2 2016 Evolving trends white paper touched on the need
for a collaboration between analytics and expertise to generate
decisions that go beyond what either data or expertise on their
own might contribute. It was suggested that a new position,
a maritime analytics leader, could be appointed at board
level. S/he would bring critical insight gained from both data
analytics and maritime expertise that is often missing from
boardroom decisions.
Decisions based on uninformed guesswork prove very
expensive if they go wrong: the blight of overcapacity
in shipping is often blamed on shipowners ignoring or
misunderstanding the consequences of placing vessel orders.
The trend of rejecting expert guidance in decision-making –
in business as in government – is at odds with the improving
quality of the data now available through the digital
revolution noted above. There are questions to be asked about
the accessibility of big data, with the latest solution appearing
to lie in ‘small data’, a limited and targeted collection of key
metricsthatreflectthewiderdataset.However,itisunhelpful
to argue that the industry has had enough of data scientists
saying they know what’s best for the business.
It is tempting to say that forecasts falling short of the mark are
worthless; often such forecasts are created by extrapolating a
trend line when it’s not possible to factor in all the variables
that affect the market. A better way forward might be to
identify two or three likely scenarios based on perception of
the price of oil or China’s economic growth; these scenarios
can be tested over time as more data becomes available.
The role of analytics, forecasting, and scenario building will
become more significant in future as data is increasingly used
to support decisions. However, rather than relying on solely
on numerical expectations, forecasts and scenarios should be
given heightened credibility with the oversight of industry
experts from the maritime commercial and technical sectors.
The new skills of maritime analytics leaders could be the
difference between business decisions that give an advantage
over competitors and decision that weaken a company’s
financial basis.
Conclusion
Evolving trends are by their very nature shifting in shape
and substance. Decisions about the future of South Korean
shipbuildingwillimpactonnewbuildingpricingforthenextfive
years; while the rate at which digitalisation is introduced into
vessel operations is likely to change seafarer training over the
sameperiod.Butgovernments’needtokeepvotersonsidemight
lead to an imposition of trade barriers and similar protectionist
measuresthatcouldbringmanufacturingclosertotheconsumer.
Shipping, as a servant of trade, must remain flexible enough
to accommodate both external and internal changes, while
remaining profitable enough to invest in the future.
Author: Richard Clayton, Chief Correspondent, IHS Markit
FormoreinformationIHS.com/maritime_trade
Copyright © 2016 IHS Markit. All Rights Reserved
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