Source: bhp billiton Author: Rashpal Bhatti Date: 30 May 2017
BHP is one of the largest dry bulk charterers in the world. We procured freight for close to one quarter of a billion tonnes of iron ore, coal and copper in 2016, over 1500 voyages.
Ocean freight is vital to our success as a reliable global supplier. We are taking a lead role in driving changes in the dry bulk freight industry to focus on safety, environmental sustainability, innovation and efficiency.
To understand the transformation challenge ahead, where is the industry today?
The dry bulk freight market tends to follow the commodity price cycle. Given we think early 2016 was the low point for bulk commodities, we expect that if the freight market has not yet bottomed, then it soon will. Our expectation is that the length of the upswing in freight rates this time around will be relatively short versus the historical average.
Following the boom in the global commodity trade that followed China’s accession to the World Trade Organisation in 2001, which saw freight rates increase six fold in seven years, excess shipbuilding capacity was created. Much of this new capacity was built in China. This was a response to the fact that just before the global financial crisis, orders for Capesize ships were roughly eight times what they are today. The legacy of that era is a substantial supply of finished ships and the yards to build them. Modest growth in bulk freight demand and elastic shipbuilding capacity will combine to keep ‘forward cover duration’2 and prices in check.
Consistent with its role as the world’s largest importer of dry bulk commodities China has an enormous presence in the freight market. China’s share of the Capesize order book (from the construction side) has doubled since 2007, rising from 34% to 71%. Leveraging economies of scale, a pronounced learning curve, a competitive wage bill, policy support and ease of access to finance, China’s rise as the “dry dock of the world” has substantially altered what an internationally competitive cost base looks like. In our estimation, the cost of producing ‘the last required ship’ to keep the freight market in balance has been reduced substantially over the course of the last decade.
With a supply side productivity shock occurring at the same time that the commodity cycle turned, global dry bulk shipping rates fell toward historic lows in late 2015, early 2016.
These conditions have forced many freight providers to have a short term focus on lowering costs, to the detriment of industry-wide improvements in safety and innovation.
We believe there are four improvements that we can help drive given our global view, the scale of our business and success with safety and sustainability.
And our first priority is safety.
Three decades ago, tragic incidents like the Exxon Valdez drove transformation within the oil and gas shipping industry, led by Oil Companies International Marine Forum (OCIMF) . Today OCIMF standards set the benchmark for marine safety. Along with our industry partners, we intend to bring dry bulk shipping standards up to and beyond that benchmark.
Last year, together with various industry players, we led the formation of the Dry Bulk Forum (DBF). This group will serve as a catalyst for necessary cultural change by evolving continuous improvement of safety standards, with a focus on crews and equipment. As a leading member of the DBF we intend to globalise and raise the safety standards across the ocean freight shipping industry.
Secondly, the industry’s environmental performance should be addressed. If global shipping were a country it would be the sixth largest emitter of CO2 – higher than Germany, Canada and the UK.
We fully support the International Maritime Organisation’s mandate that by 2020 all ships will burn fuel with less than 0.5% sulphur.3
Due to our size, the decisions BHP makes around the vessels we choose to charter are important symbols for motivating change.
We now use data analytics to measure greenhouse gas emissions generated by the marine fleet on all our voyages. Having benchmarked this output we are working on initiatives with our partners to reduce emissions and drive change in the industry on sustainability.
Thirdly, our pioneering move towards an online auction application, where shippers compete to transport our commodities, is demonstrating how technology can improve our business. eAuctions drive productivity through process efficiency and cost reductions for ourselves and our vendors, which can only build stronger partnerships over time. Only ship owners with excellent track records on environmental and safety criteria pass the necessary vetting process to participate in our eAuctions.
We are strong advocates of efficiency and transparency in markets. We feel the dry bulk freight market is on the verge of a transition similar to one seen in bulk