September 20, 2008

Preparing for the end of the Boom

In June this year, I had felt that, “ the honchos at Bear Stearns will tell you, every boom has a bubble and every rose has a thorn. With the world's largest consumer, the USA, in recession and with growth rates in India and China slowing down a bit, trade is likely to drop.” (Marex, column titled Monster’s Maritime Ball)

I also said there that, “Boom graphs cannot be extrapolated to infinity. The consequence of such a slowdown is likely to ease the pressure on manpower to an extent; how much, of course, remains the million dollar question.”

It is with mixed feelings, therefore, that I now report that the Baltic Dry index has crashed 40 percent since around the middle of May, and that Goldman Sachs predicts another 40% drop next year, and another 47% in 2010.

VLCC hire rates have crashed, too. And so have shipyard stock prices in Korea and shipping company stocks almost everywhere, including in India, where SCI’s stock price has crashed 26% and Mercator lines 32% in 3 months when the BSE fell just 11%.

The think seems to be that oil prices may have stabilised after the US Georgian expedition and that the dollar will now strengthen. In any case, there is fear that oil demand will fall along with other raw material demand, assuming that the world economy follows the US into a slowdown.

In a separate development, Morgan Stanley predicts that about 23 billion dollars worth of newbuildings will be cancelled in the next three years, and there may be delivery delays for up to 20% of the scheduled order book. About seven percent of contracted new build deadweight is what that 23 billion means, in real terms.

The reasons cited for the predictions are many; recession in the US, slowdown in raw material demand in China and India, the Olympics when China shut down polluting steel mills (which will not reopen till after mid September, given that the Paralympics are scheduled in that month) and financial turmoil in the world markets, led by the US subprime crisis, effecting shipbuilding. As usual, bad news always has much justification that the so called experts parade after the event.

Some others, no doubt hedging their bets as any good management graduate tends to do, say that fears of recession in shipping are overstated, and that though shipping growth may moderate a bit, there is no real cause for concern. China will reopen its factories, and VLCC
demand will pick up as it is a seasonal blip, the US crisis will abate, and all of us will live happily forever after.

Now that I have the experts and their macroeconomic picture out of the way, this is what this layman thinks will happen to shipping worldwide and in India:

· One cannot have the world’s largest consumer, the US, in recession without worldwide impact. This means demand for oil, raw material and finished goods and services. Much of these finished goods come from China. Ergo, China will slowdown too and its demand for raw materials, including oil and ore, will drop. Impact on shipping.
· The upcoming US Presidential elections will force focus on their pressing domestic financial subprime crisis; though this may have some collateral advantage to world financial markets, the fact is that the losses incurred by major financial corporations are being socialised in that country. Which means that the common citizen will pay for financial fraud, and which means that the deficit will grow, not lessen. The subprime crisis may hit prime borrowings too, around the world, with consequent financial turmoil in the shipbuilding markets. Some owners may default on payments to yards, particularly as they see freight and hire rates dropping.
· The ruling coalition in India will do everything in its power to keep inflation down. They want power before they want growth. Growth is already being sacrificed towards this end, and inflation is still rising. The economy, including agriculture, has slowed down. I think this cycle is not complete, and further slowdown will have a further negative impact on Indian shipping. Things are likely to get worse before they get better.
· As shipping slows down, the worldwide seafarer manpower crisis will stay on the front burner, but the flame may be lowered quite a bit. Estimated future numbers pertaining to seafarer shortages will be lowered. Ship managers may heave a small sigh of relief, though I think that a shortage will persist unless there is a prolonged worldwide recession.
· Freight rates will continue to drop for some time. As newbuildings come into the market, existing ships will have a competitive edge with cheaper available tonnage.
· The bulk market will be noticeably oversupplied with tonnage. Maybe some others too.

In short, I feel that though there may not be a large recession in shipping, a slowdown is very likely. Soon, the boom cycle may be peaking, though a bust is probably unlikely. At the very least, though, we will have to get used to numbers that are more moderate.

This slowdown, if it happens, may well be a blessing in disguise for Indian owners and ship management companies, given that a boom afforded us a peek, of sorts, into the future.

We know, for example, that the maritime community needs to fix many issues related to seafarers, primary amongst them being HRD policies, encouraging long term associations and countering worldwide criminalisation. We know that we have to scale up management skills to handle growth in shipping. We know this growth will come, even if it is delayed a bit. In addition, because we may be able to take a step back away from firefighting, we may well have some time to fix systemic problems, especially with managing attraction, retention and attrition of seafarers. We have been reminded that without sufficiently qualified and experienced officers to operate ships, we are up the creek without a paddle.

I suggest that this possible slowdown should be used by owners and ship management companies to get a handle on this critical (and critically ignored) element: the seafarer. On the ‘To Do’ list, in order:

1. Analyse manpower requirements over the next three years. Set up this analysis every six months to review changing environments.
2. Make a workable model which details, for each firm, where these bodies will come from. Fund this model appropriately.
3. Have a robust programme for attracting youngsters into the industry. Fund it and operate it. Newspaper advertising alone is not a robust programme, by the way.
4. Think up a new mechanism for retention and other HRD issues. Discard the present nonexistent HRD policies and adopt ones suitable for this century. Match them with other industries; your potential employees certainly do.
5. Set up a system in place for review of administration essential on board, including review of all paperwork. Remove unnecessary workload.
6. Address STCW fatigue issues that are widely and universally violated at present.
7. Setup industry initiatives to promote or amend seafarer issue legislation. The ISPS and the STCW are the first two here; with regard to criminalisation, the ‘fair practice’ guidelines need to be strengthened and made into law.

Create a sustainable business model that factors in true employee costs after you have this well thought out programme in place. Else, as usual, ideas will be shot down because ‘where will the money come from?’ or for a million other alarmist reasons.

Detail what you need to do and what it will cost. Factor the cost into your business model and churn numbers. Reach a decision and then implement. The whole world does it this way; we in shipping, however, often tend to ‘save costs’ without thought on the long term impact of this one sided, immature style of management. Unsurprisingly then, a kingdom is lost for the want of a nail. It is also lost because ship management companies often look at their own financial interests at the expense of the ship owner’s.

Saving costs is not the reason for our existence. Professional operations while making a reasonable profit is.

Doing this will, in my view, make us stronger. It will create a sustainable well thought out business model and address demands of this cyclical industry. Demands, which so far have been managed by what I call the fish market style of management. Which is, take what you can get, and do not think of tomorrow.

We need to do all this, and more, regardless of a slowdown. A slowdown just gives us a breather to get our ducks in a row, so to speak.

All that said, I hope I am wrong and this slowdown never happens. However, if it does, we need to do one more thing.

This time around, please don’t treat seafarers like cattle even if you do not need them.



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