Weaker demand from a slower-growing Chinese economy is putting the global freight industry through rough waters, but for Singapore-based IMC Pan Asia Alliance Group, there’s a bright side to this downturn.
“Actually, [the slowdown] is good because such cycles can clean up those crazy people who do not belong to the industry,” Chavalit Frederick Tsao, chairman of the privately-owned conglomerate with its roots in shipping, told CNBC’s “Managing Asia.”
“They will realize there’s no easy money to make and they will stay away. The more educated [industry] players [become], the more stable the industry will be [but] with more opportunistic people, the industry is going to be [worse off],” he added.
According to the 58-year-old, the company’s shipping and logistics business in China is still holding up despite mounting concerns about the world’s second-biggest economy amid wild gyrations in its stock markets.
“China is actually doing better than anywhere else. Our ports, shipyards, logistics are all doing well and [remain] profitable,” said the fourth-generation leader who took over the helm of the family business 20 years ago.
China’s gross domestic product (GDP) grew at 7 percent in the second quarter, unchanged from the first three months of 2015. While this figure remains in line with Beijing’s annual growth target of “around 7 percent,” the recent slew of disappointing data, such as factory output which fell to a three-year low in August, suggests that Beijing’s policies to jump-start its economy have yet to take hold.
Apart from China, the freight market is also plagued by a chronic overcapacity of ships ordered during the heydays of the industry. The Baltic Dry Index (BDI) – which tracks global freight rates for ships carrying dry-bulk commodities such as coal – finished 9.3 percent higher on Thursday, but remained at its lowest level in two months. On a year-on-year basis, the index has declined 28.5 percent.
When asked about his take on the sector’s oversupply woes, Tsao believes that the situation “can’t get any worse” but a recovery will need time.
“It cannot get much worse because it’s already the worst it can be, but it can stay for a long time,” he said.
“If you look at the oversupply situation, statistics told us it’s going to be bad. If it [has been] good for a long time, it will be bad for a long time [especially] this time [when] the capacity is all new. It was added on very quickly and so [the oversupply] is more persistent as it is more difficult to digest,” he added.
Tsao is not alone. According to a Platts report which surveyed 100 shipping market players in June, 89 percent of respondents felt the dry bulk freight market will need at least one year to recover, while the rest do not expect any positive changes for at least three more years.
“While demand-side developments, particularly in China, remain of key importance to this sector, the overriding concern remains the oversupply of vessels.” Peter Norfolk, Platts editorial director for global shipping & freight, wrote in the inaugural “Platts Dry Bulk Market Survey.”
Tsao believes that global freight rates will recover in the longer term and until then, the company is opting to stay the course.
“We have tremendously scaled down during the good times. Now we have some new buildings on order… and we’re just going to ride the bad times,” he said. “This is just another cycle… a big long up and hence, a big long down. It’s natural.”
This interview with Chavalit Frederick Tsao, chairman of IMC Pan Asia Alliance Group, is the third of a five-part special series called “Managing Asia: The Next Generation”. CNBC’s Christine Tan will be speaking to leaders from the second- to fourth generation in Asia, to find out what it takes to transform family businesses to new levels of growth.