June 16, 2012

Steel in the spine times

I feel sorry for ship-owners today. They are not just caught between a rock and a hard place; they are almost buried under the stone. High costs and ridiculously low freight rates- coupled with the need to service asset borrowings have, at a time when finance has dried up in a punishing marketplace- combined to push many to the edge of the abyss. Some have gone under; many others are teetering, shell shocked, praying for better times soon.

Sadly, it is likely to get worse long before it gets any better.

One reason I say so is because if this is the greatest financial crisis we have seen since the Great Depression, as is widely believed, then the blood seen on the street should be more copious than it was in the eighties- the last serious downturn. So far, there is no evidence that this is true. I don’t see stories of hundreds ships laid up- abandoned dark and gloomy derelicts- across the world. I don’t hear stories of significant arrests of vessels because some creditor or the other has taken the owners to court. I don’t even hear the gaggle of woebegone tales from seafarers that were so common in the 80’s- wages unpaid for months and then never, sailors working for peanuts and sometimes just for food, shelter and seatime, salaries slashed and dreams afire. There have been no demonstrations so far; no anecdotes of certified officers quitting the profession in droves, working as parking attendants in Connaught Place in New Delhi or unemployed. All that was happening in the eighties. It was in the news. Thirty years later, during a period when mass media and the internet have exploded, there areso far no reports ofsimilar things happening. This financial crisis has, so far, been almost civilised as far as shipping is concerned.

Which means that either a) the present crisis has been overrated enormously or b) the worst is yet to come. I am putting my money on b.

I think what happened was that the initial period of gloom and doom- 2008 and 2009- was followed by a sporadic recovery of some sectors in shipping, after which they promptly tanked again. That rise- even some temporary- gave owners breathing space. Today, this has lulled us into believing that the worst is over, or it at least that the worst can’t get any worse. I think, also, that we have started believing too much in past cyclical downturns as an indicator of either the length or the depth of the depression today. The same rules may not apply this time; in fact, I bet you that they won’t, because I suspect the paradigm has shifted.

Why? Because, for one, the world’s economy faces an existentialist crisis today. What if what we are seeing is the beginning of the collapse of unsustainable crony capitalism, the aftermath of which will singe us all? What if consumers in the US (by far the biggest economy and the biggest consumer) do not, well, consume as they did before, ever? What if China and India follow their lead? (Note that there are initial signs in India, at least, that consumerism is easing off). What if demand stays depressed for years? Sure, economies will still need to move some amount ofore, coal, oil and other such commodities,but what happens to the zillion other things that we buy at the likes of Kmart, almost all of which are produced elsewhere, mainly in China? What if demand falls permanently, plateauing at a lower but more sustainable level? What happens to China? What happens to shipping long term?

Then, the climate in Europe continues to deteriorate by the hour. The mid June Greek elections may or may not provide some respite- if they do, it may well be a temporary reprieve more than anything else. The fact is that Greece is a failed economy whether the Greeks exit from the EU or not. A ‘Grexit’ will pose particular problems for that country, but there is no guarantee that staying in the Eurozone will be some sort of get out of jail free card for Greece. It will pay through its nose either way. Spain (and then Italy?) are hanging in by a whisker and a prayer, but many think that the story is over; Spain has been downgraded again by Fitch to near junk status; it is looking for a hundred billion euros to recapitalise its system, and that may just be the beginning of the end for the fourth largest economy in the Eurozone.Can you imagine the shockwaves that will ripple through Europe if Spain falls like Greece? If pressure comes on Italy next?

Yes, the story is over for the time being, at least. It is just that the fat lady still has to sing.

For shipping, even an informal collapse of the Eurozonewill prove to be very messy. It’s financial, insurance and reinsurance markets lie there and so do many of its biggest ship-owners, including in tottering Greece; although they are putting on a brave face so far, many are asking Greek ship-owners to contribute more to the economy. Add to this shipping’s peculiar problems with tonnage overhang and you have the recipe for considerable chaos going forward. A good outcome for shipping will be if the Greek crisis is deferred somehow for a year or so (as is usually done, this will be accomplished by printing more Euros and pretending that all is well). This is because reports suggest that the tonnage overhang may ease off by the end of this year or the beginning of the next, although I am not holding my breath yet- China is trying its best to keep its shipyards afloat, offering sops and what not. Whatever happens, however, we will be in a slightly better position if we can at least pretend to absorb tonnage before a complete Grexit blowout- or similar. 

That still leaves us with worrying questions on commodity prices (have they peaked?), the Chinese and Indian growth stories (have they ended or even significantly paused long term?), new heads of vessel operating costs, (both regulatory and otherwise)and questions on the daily agonies of the marketplace. These questions may light fires under the balance sheets of shipping companies, sure, but it is the bigger questions that supply the fuel for the conflagration.  It is the questions that are being asked in Europe and the United States about the sustainability of the present economic system that can burn us badly.

As I write this, Japan's stock market index, the Topix, has hit 1983 levels as investors show concernthat the derailment of the global economy will worsen the country's economy; incidentally, an economy that has not gone anywhere since the Topix peaked in 1989. It has fallen 76 percent since then- a quarter of a century ago; Sony has fallen to levels not seen since 1980, when it started selling the famous Walkman in the United States. A generation of zero returns is a long time. Even more worrying is that the same thing can easily happen elsewhere. 

Which is why I say that we should stop trying to predict- as so many are doing today- when shipping will turn around and start worrying about the real possibility that it is not just the economy that is collapsing around us, but the system. A systemic collapse will be far more painful and go on for much longer than a few years more. It will also require more backbone to handle; shipping will need more steel in its spine.

Have a nice day.
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1 comment:

Unknown said...

Intriguing insight sir.