January 24, 2013

Shipping- A different recession?

In a sentence, this is what I think will happen in shipping- or happen to shipping- this year. It will get bloodier out there. 

This recession, when compared to 1958–60, 1975–78 and 1981–84, will be markedly different, I think. For one, because operational, labour and regulatory costs- especially those connected to the environment- are much, much higher this time around. Also, although I cynically believe that the costs of MLC implementation will be diluted by circumvention and subterfuge, this will not be so easy with the costs associated with the upcoming Ballast Water Convention, or with the much stricter emission norms that are being implemented today, particularly in the US and Europe. 

It is also different this time because the existing global economic system is under severe existentialist pressure, and no recovery is in sight. The economic outlook for the United States and Europe continues to be negative, and all the BRICS countries have considerable problems of their own- high inflation, shrinking export markets, fiscal deficits and socio-economic compulsions are just some of the troubles at the tip of the iceberg there. In any case, these countries cannot take up more than very little of the slack of a collapsing EU and an in-hock USA. Times are a changing, and old economic models may not apply, or another collapse may be seen in the near future. Shipping seems to think that the resumption of business as usual is a matter of time; it may be a matter of a new world economy instead, so don’t hold your breath waiting for freight rates to revive anytime soon.

I don’t know when the net expansion of tonnage in shipping will top out. I know, however, thanks to the UNCTAD review of maritime transport last year, that, even with record demolition activity, no end is in sight there either. Fortunes in shipping have often been made by asset plays- buying ships at low prices and selling them high. I believe cash rich investors- and new kids on the block- are still trying to catch a falling knife here, ordering ships now or buying second hand ones at what they think are rock bottom prices, hoping for a spike in asset prices soon. This can prove to be either brilliant or dangerously stupid; while nobody can time any market absolutely, one can lose one’s already threadbare shirt getting into the act way too soon. 

For operators of ships, another sobering thought: even if net tonnage expansion stops today, there is still a hell of a lot of excess tonnage to be absorbed before the supply-demand graph flatlines.    

So, this is what I think will happen this year:

·     More ship owners will go bankrupt. More banks will control vessels directly as a result.
·     There will be consolidation in the industry. Bigger players will announce cooperative arrangements, formal and informal. Some ashore will scream cartelisation.
·     Many, many more vessels will be laid up. Cold laid up, that is, not hot and ready to roll in a week or two. Containers and bulk carriers will be particularly hard hit. Lay ups will be more complicated and expensive than ever before because environmental protection of coastlines where ships are laid up will become an item on the agenda. It never was, before.
·     China will, at some stage, stop supporting its State run shipyards. This will set the cat amongst the pigeons in a part of the industry.
·     Some mini markets, particularly the liquefied gas segment, will do better than others. There is a threat here, of course, if too much excess tonnage is ordered, but my sense is that- since LNG carriers are big ticket items- this won’t happen easily. I hope.
·     The so called shipmanagement companies may actually do okay, although margins will be squeezed. Banks may acquire ships by default or otherwise, but they are not qualified to run ships and will have little choice except to place them with these firms. And smaller shipowners will be forced, thanks to the increasingly complex regulatory regime, to hand over their ships to outside management. Not that those companies do it better, but they do enjoy economies of scale.
·     Seafarers will find jobs drying up. Maybe not immediately, since so much tonnage is around and not laid up, but surely later, once cold lay ups increase, as demolition already has.
·     We will see many more owners defaulting on wages. We will see many more stranded, starving and destitute crews on arrested or detained ships around the world.
·     We will see more unseaworthy and poorly maintained ships threatening our coastlines and harbours than ever before.
·     Crew costs will not fall by too much too quickly, although there will be pressure to reduce wages. This is because, unlike the eighties, shipping is not a preferred profession in many parts of the world, so sourcing quality seafarers will remain a long term headache. This is also because the requirement of quality seafarers- given the complexities in operations and insurance today- will be higher than ever before. Crew costs may actually rise in some segments of the industry that are making a little money and require special skills.
·     Shipowners will not be able to save too much any longer by cutting way back on maintenance to save money, as they did in the eighties, because a)they are already doing this,  b)State and Flag controls are more stringent today and c) break-down maintenance does not really save money.
·     If some of the biggest heads under costs- insurance, crew, bunkers, maintenance, for example- cannot be cut back upon or controlled ( as in oil) substantially, and if freight and hire rates continue hitting the floor, cash strapped shipowners will have no place to hide.

Everybody knows that there is no impending shake up of the global economic order, such as it is. Countries will continue to print money to get out of the self-created mess. Besides sloshing around creating havoc, this money will distort markets even further, and cause mini economic collapses around the world from time to time. It will be extremely difficult to predict these collapses, or, indeed, recognise false flag mini-recoveries for what they are. 

Shipping, with its high asset costs, will be particularly vulnerable; long term players even more so, sadly. Unfortunately, big money will be made, in this increasingly chaotic industry, by big ticket speculators who will buy and sell ships like they are trading stock. Big money, in the next year or so, will not be made by the traditional shipowner pursuing traditional shipowning ways. 

That is not just sad. That, given the repercussions of such speculation on the maritime industry and its people, is actually the scariest thought of all.


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