Shipping consolidation ahead as industry sails on from three decade lows

1 shipping industry

The shipping industry is on course for consolidation as it moves off three-decade lows, the president of drybulk shipper Genco said on Wednesday.

Anticipating a cyclical recovery to kick in at the end of this year, president John Wobensmith told CNBC's Squawk Box that a pullback in shipping supply is the main driver of the benchmark Baltic Dry Index's recovery of more than 7 percent this year.

The index, which assesses the price of moving the major raw materials by sea, hit its lowest level ever of $290 during 2016 before resuming a bumpy journey higher towards its current price of just about $1,000.

"Last year we probably saw the low and it was a 30-year low in terms of freight rates and asset values and now we're starting to see just the very beginning of a recovery," Wobensmith said.

"There were just too many ships that were built and delivered and we've seen a real slowdown in the number of ships that have been coming on to the water," he explained.

"The order book on ships is at its lowest point since 2002, it's only 9 percent of the existing fleet right now, and that's been helpful," Wobensmith added, agreeing that the slowdown has primarily been driven by a slackening in supply from Asia, particularly from industry players in countries such as South Korea and China.

Demand dynamics have also been a critical factor with Chinese demand for iron ore to support its steel industry ramping up again after a sharp downturn that reached its nadir just over a year ago.

"What we're looking at going forward are the new production projects that are coming on from Brazil and Australia on the iron ore front which will increase volumes not only this year but also significantly next year as well - which has been very positive obviously from a volume standpoint," said Wobensmith, noting that a key trend to watch was the displacement of domestic iron ore in China by higher quality product from Brazil and Australia.

The challenging industry conditions of recent years have particularly punished smaller companies, who have been unable to access European bank financing. For those with stronger balance sheets, the time for consolidation is approaching, according to the Genco boss.

"What we really wanted to do was position this company so it was in a position of strength to try and consolidate this industry and now that we've started to see the beginning of the recovery, we think it's the right time," Wobensmith declared, saying his company bolstered its balance sheet last November, in order to be ready for the looming opportunity.

Source: cnbc.com

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