Short term geopolitical gains have obscured deteriorating long-term fundamentals, "said Danish Ship Finance.

The report suggests that the structural decline in demand and the sustained high cost of new shipbuilding will force the shipping industry to accept more long-term contracts and utilize more institutional funds in the coming decades

Looking ahead, how will the demand for maritime transportation and shipowner profits change from now until 2050? Amidst diverse opinions, the prospects do not seem optimistic.

One of the future scenario predictions is that today's geopolitical turmoil foreshadows an increasingly multipolar world, followed by more fragmented trade, longer shipping routes, reduced efficiency, but supporting ton mile demand, different fleets serving different countries, more tariffs and sanctions, continued disruptions leading to skyrocketing spot prices, longer service life of old ships, and a lack of consensus hindering efforts to significantly reduce fossil fuel consumption and impose a global carbon tax on shipping.

The latest Danish Ship Finance Shipping Market Review outlines a completely different scenario.

DSF believes that the inefficiencies caused by geopolitical influences have led to current high freight rates, but these inefficiencies are temporary and will ultimately be offset by demographic and decarbonization trends: aging populations result in service spending exceeding commodity spending, reduced fossil fuel use leads to a structural decline in shipping volume, and more regional trade reduces travel distance and emissions - all of which will lower future ton mile demand and freight costs.

Therefore, DSF believes that in the coming decades, ships will inevitably shift from spot business to longer-term charter models. Investors will become more institutionalized. The number of ship owners who buy low and sell high will decrease.

Geopolitics conceals the 'deterioration' of fundamentals

According to the DSF report, in the first two decades of this century, sea freight volume grew in sync with global GDP, reaching 1.04 times GDP from 2000 to 2010 and 1.02 times GDP from 2010 to 2020.

From 2020 to 2023, this ratio will decrease to 0.66 times, and it is expected to reach 0.75 times this year. The linkage relationship between 2010 and 2020 has significantly weakened, "said DSF

But in recent years, the impact of this proportional relationship on freight rates has been offset by the reduced trade efficiency caused by the pandemic, and later by geopolitical and other disturbances.

Geopolitical tensions have led to longer sailing distances and reduced the cargo carrying capacity of fleets. In terms of fleet utilization, the impact of longer transportation distances and increased traffic volume is the same, although over time, they are difficult to exist in the long term without the driving force of fundamental factors

The report states that from 2019 to 2023, the global merchant fleet will grow at an average annual rate of 3.4%, while the annual average growth rate of maritime trade volume is only 0.6%. During this period, longer voyages increased the demand for ships by 1% annually.

The Clarkson Shipping Index shows that freight rates are currently in their highest range since 2000, while second-hand ship prices are at their all-time high since the shipping industry boom from 2004 to 2008.

DSF insists that "the high shipping costs and second-hand price environment... mask a potential shift, casting uncertainty over the medium to long term prospects.

The trade disruption is currently overwhelming the less obvious structural changes driven by the overall trend, which are reducing the ratio of transportation volume to GDP and leading to potential deterioration of shipping fundamentals.

Population statistics and decarbonization trends

One of the major trends is the change in population structure. DSF stated, "The aging of global consumers is shifting global GDP towards service industries such as healthcare, which will not result in significant sea freight volume

Another major trend is decarbonization.

There is still debate about how decarbonization will affect fossil fuel production and future shipping volume.

Coal is definitely retreating in the United States and the European Union, but not globally. According to the International Energy Agency (IEA), coal production is expected to reach a historic high in 2023, driven by demand from China, India, and Indonesia.

At present, there is a significant divergence in the long-term forecasts of oil demand between the International Energy Agency (IEA) and OPEC. The current global demand for oil is 103 million barrels per day. In its latest long-term outlook, the IEA proposes three forecasts: by 2050, oil demand may drop to 97.4 million barrels per day, 54.8 million barrels per day, or 24.3 million barrels per day, with demand peaking in 2030 in both hypothetical forecasts.

In contrast, Opec's latest long-term outlook forecast shows that global demand will continue to rise, reaching 116 million barrels per day by 2045.

The outlook report released by DSF assumes that with the transition to renewable energy, the highly dependent fossil fuel industry in the shipping industry will be "eliminated", global decarbonization efforts will reduce maritime freight volume, and after "pricing carbon", global supply chains will be readjusted, with production moving closer to consumption.

Many types of large sea freight will continue to grow with the growth of the global economy, but the demand for ships transporting fossil fuels (accounting for nearly 40% of sea freight trade volume), chemicals, iron ore (in the context of the emerging green steel industry), and long-distance containers is expected to peak at some point in the 2030s.

DSF states that "production can be relocated to increase supply chain resilience while reducing emissions." The report predicts that by 2050, maritime trade volume will be reduced to "primarily transporting goods that are difficult to produce locally.

The report warns that if the trend of relocating production facilities accelerates, the main outbound transportation volume may unexpectedly evaporate

Overall, "a contraction in demand may lower shipping costs and increase volatility. Periods of excess ship capacity and low shipping costs may occur more frequently

Shipbuilding difficulties

The scenario envisioned by DSF holds an optimistic attitude towards global emissions reduction. However, it poses a challenge to building new ships that use sustainable fuels, which are essential for the shipping industry to achieve its emission targets.

DSF predicts that although shipyard utilization is expected to decline in the medium term, what is the ratio of shipyard prices to new shipbuilding prices? Will maintain a high position. Excess shipyard capacity "may not generate too much deflationary pressure", "even if shipyard capacity structurally decreases by 25% before 2040".

Assuming that new ship prices remain high for the next few decades, while freight rates are suppressed due to population structure and decarbonization, and assuming that geopolitical factors are temporarily favorable for freight rates, investors investing in new fuel ships will face an environment of "income deflation and rising costs".

Oil tankers and dry bulk carriers carry the majority of ocean going cargo, primarily operated on an irregular basis and typically controlled by asset trading focused shipowners. Most of these ships are active in the spot freight market.

DSF Outlook proposes that in the case of low structural freight rates and transportation demand, the shipping industry will ultimately have no choice but to shift to a long-term contract model to adapt to the high cost of new fuel ships.

The report states, "Only when shippers are willing to commit to long-term purchase agreements can the supply of sustainable ship fuel grow

This means that the future business model of irregular bulk transportation is more similar to liquefied natural gas transportation, characterized by multi-year contracts where investors focus on returns rather than asset appreciation. LNG ships typically require long-term contracts to support high construction costs

DSF states that "fleets serving long-term freight contracts create value for investors through their cash flow earnings, while vessels serving the spot market are more likely to create value through buying low and selling high assets. Institutional investors with longer investment periods than traditional shipping investors are more likely to own vessels with long-term freight transport contracts

In this scenario, higher contract coverage "may expose the remaining fleet to more excess vessel capacity and lower freight rates," while asset arbitrage "may become a niche activity primarily targeting older and less efficient vessels.