Shipping is undoubtedly one of the most vibrant sectors of the Greek economy. Controlling 16% of the world’s seagoing merchant fleet, Greece rates first in the international marine sector, a significant and highly competitive sector, as it carries 95% of world’s total trade volume.
However, the Greek shipping sector is currently undergoing important cyclical as well as structural changes. In particular, freight rates, following their peak over the past two years, are now on a downward course, while heightened competition, combined with loose financial conditions, have resulted in a rapid restructuring of the sector, and the creation of larger and more modern fleets, controlled by fewer ship-owners.
As a result, the sector’s total revenues and market share have narrowed further. Foreign exchange, generated from freight rates increases and quality improvement of Greek fleet, has made a significant contribution to the Greek economy, especially in recent years. As a result, the current downward trend raises concerns. In our analysis we address issues such as: the international shipping environment, the course of the Greek-owned fleet, and the share of maritime operations absorbed by the Greek economy.
The upward course of the economy had a positive influence in the international freight market over these past few years. In particular, world GDP growth averaged 4% during the past 5 years, spearheaded by strong growth in emerging markets, especially the BRICs (Brazil, Russia, India, China), with an average annual growth rate of 7.8% over the same period. In this context, global trade increase has averaged 10% per year during the past 5 years, mainly due to increased demand in raw materials from the aforementioned countries, which are undergoing a period of restructuring and industrialization.
Responding with a lag to the demand for new tonnage (with the average waiting time until delivery reaching 2 ½ years) and with tanker accidents leading to stricter environmental regulations (e.g. the compulsory withdrawal of the vast majority of single-hulled tankers), freight rates regarding both dry bulk and oil cargo skyrocketed (by 70% between 2003-2004). However, with the completion of a large number of new ship orders between 2003-2004 freight rates are expected to drop sharply. As such, total waiting orders are equivalent to approximately a quarter of the existing fleet.
Based on the previous analysis and being aware that the estimation of freight rates is exceptionally difficult in view of their high volatility, we attempted an estimate on the course of dry bulk and oil transport markets for 2006. According to the results from our empirical study, freight rates sensitivity to changes in demand (particularly by BRIC countries) and/or new ships supply is high, while oil prices still remain a significant factor regarding tanker freight rates.
According to our empirical analysis, in 2006 we expect a drop in freight rates by 25% as concerns the dry bulk market as compared to 2005, while freight rates for tankers are expected to decline by nearly 20% in 2006, a course that partly depends on geopolitical issues in Iran and Nigeria. In any case, as the influence from the healthy economic growth pace is counterbalanced by the world fleet increase, freight rates are expected to drop by at least 15% in 2006 as compared to 2005.
In this context, the Greek-controlled mercantile fleet remains a world leader. Reflecting its market share, the shipping sector contributes up to 4.5% of Greek GDP, employing around 160,000 people (around 4% of total employment), while shipping receipts represent 1/3 of the country’s trade deficit. However, Greece’s premier maritime fleet market has declined by 2.2 percentage points during the past 2 years, mainly as a result of the modernization of the Greek fleet and consolidation in this fragmented sector.
Until recently, an important problem of the Greek fleet was its increasing age. However, new environmental legislation and heightened world competition has put an end to the business strategy of Greek ship-owners, who preferred old ships. In addition, a series of factors contributed to speeding up Greek fleet modernization: massive cash flows between 2003-2004, high second hand prices, a low interest rate environment and entry into the stock markets. As a result, the average age of Greek-controlled oil tankers has fallen to 15.3 in 2006 as compared to 20.3 in 2000, thus narrowing the gap with the world average to 0.4 years in 2006 from 3.4 years in 1998.
Meanwhile, due to economies of scale and globalization, there is an ongoing downward trend in the number of Greek shipowners (by ¼ during the past 7 years), mainly regarding operators with one or two ships. In fact, Greece still remains the country with the most fragmented and family-oriented shipping industry – suggesting that the new trend will last for a considerable time.
Despite the fact that the aforementioned changes are expected to have a positive effect on the Greek shipping sector, there are still two weak points as concerns its contribution to the Greek economy. The number of Greek seamen is declining continuously, under the pressure coming from the wage advantage of countries such as the Philippines, Eastern Europe and India.
In particular, the ratio of Greek seamen to total employment on Greek-flag ships linked to the Seamen’s Pension Fund (NAT) in 2004 narrowed to 57% down from 85% in 1986. In addition, the Greek register is continuously losing in competitiveness, as there has been a steady drift towards “flags of convenience”, mainly due to the mandatory quota in native seafarers in the crews of Greek-flag ships. Thus, the Greek shipping register in 2006 contains only 31% of the Greek fleet, down from 42% in 1996.
In our analysis of world and Greek shipping, we attempted to assess the influence of the Greek-owned fleet on the Greek economy. According to the results of our empirical study, the increase in net receipts from sea transportation by 4.6% of GDP in 2005 compared with 2.5% of GDP in 1999 is mainly due to freight rates increases and secondary to the quality upgrade of Greek-owned fleet (following its modernization). In fact, the lower share of the Greek crew has tempered the rise in shipping net receipts by 3 percentage points annually on average over the past 7 years.
According to our projections on the course of the freight market, net revenues in the external accounts from sea transportation is projected to increase by 2.0% in 2006 to €8.5 billion (4.5% of GDP). In fact, the net contribution of the shipping industry to GDP growth – both directly and through multiplier effects should be approximately 0.2 percentage points in 2006 (1/6 of the 3-year average for 2002-2005).
Although Greek shipping makes a significant contribution to the Greek economy, it is small with respect to its market share in such a large sector. Specifically, receipts to the economy per grt amounted to US$150 – just 1/3 of the corresponding average for the largest maritime countries. Part of the reason is that Greece is neither a country with ports of origination nor destination. As the volume moving through Greek ports is too small there are further difficulties in creating a maritime cluster offering an extensive range of services in Greece. Although Greece controls over 40% of the EU-controlled fleet, its contribution to the turnover produced by the maritime industry in the EU is merely 3%.
Therefore, whether the Greek economy can benefit further from the Greek shipping’s premier position depends largely on exploiting synergies from the development of SE Europe (requiring efficient links with air, rail and ship transport). Indeed, the freight volume per km of rail networks is 0.2 million tons in Greece versus 1.8 million tons in the EU, thus reflecting the potential to expand further its rail network. Since maritime cluster operations are interdependent, Greek ports need to be restructured as a first step towards the further expansion of the shipping sector. Such policy would also result in improving employment in the shipping business and as demand for sea officers is increasing globally, Greek seamen may enjoy better prospects.
This Bulletin can be viewed at:
Economic & Financial Bulletin