April 10, 2009

Risque Assessment

It is obviously impossible to expect a revival of the shipping industry without a simultaneous recovery in the global economy. We in shipping may well be bellwethers of the state of the world’s economy; however, at times like this we are also the first victims of it. The sheep that leads the others wearing a bell is likely to be the first one that falls off a cliff.

Thankfully, I am not an economist, but I have many questions about the worldwide response to the present worldwide crisis. The main one is that much of the West seems to be throwing good money after bad. The think is clearly, as in the case of the now infamous financial institutions with their managers parasitically bloated with the blood of us plebeian grunts, that their survival is critical, they are too big to fail, and that the financial macrocosm will collapse if we do not feed these devils. One question in all this: what if some of them collapse anyway next year? Many now openly acknowledge that the present system of unregulated crony capitalism is not a free market; it is a roulette wheel loaded in favour of the insiders. And we are playing Russian Roulette with it.

Of course, like many I remain bewildered by the fact that the applied solutions to clawing back off the cliff edge are what caused the disaster in the first place: the availability of massive amounts of unregulated money. But this has all been said before. It is enough to say, now, that we have chosen to remake our bed this way, and now we must lie in it. We must lie down with dogs and get up with fleas.

The maritime industries across the world and the economy in general may be surprised, though. Mr. Obama may appear like a deer caught in a car’s headlights at times, handling two major crises, both of which can end the world as we know it. The two large threats of the economy and AfPak are also huge risks to global trade in general and to the Indian economy and shipping in particular.

The fact is also that President Obama has, for the first time by a world leader and certainly a first for a US President, put Global Warming on his country’s political agenda. He has announced calibrated plans to reduce fossil fuel dependency; that fact alone would normally have sent shudders down the tanker industry’s spine had there not been enough shuddering going on there already because of the condition of the markets. The US has been the driver of the global economy for decades. As said, we seem to be looking at a revival of the same economic system, collapsed or not, to get us out of the present mess. It then seems to me that, unless the US gets back to consuming like an intestine with tapeworm, there is little hope of a global recovery anytime soon.

Wait a minute. What if, given the clear unsustainability of the present economic system, the US citizen chooses not to go down the consumption driven intestinal route from now on? What if this, coupled with Obama’s stated agenda on climate change, finally convinces the Americans that this hell for leather consumption course is unsustainable in every way? What if (gasp) they switch to smaller or fewer cars and televisions and actually switch off the lights as they leave the room? What if they consciously reduce conspicuous consumption in a million other ways, killing the consumption frenzy that America has become famous for? In addition, what if this ethos spreads across the world, with the billions of us finally realising, individually and collectively, that present lifestyles are economically and ecologically unsustainable? What if India and China realise the full import of the much quoted maxim: If we want to consume as the Americans do, we will need two more planets for resources in addition to this one.

As the actress said to the Bishop, then the whole thing will go down my tube top.

This risk, as I see it, is the largest one the shipping industry faces. That the industry, in this eventuality, will be part of a revamped economic order will then be no consolation at all. In this alarming but common sense scenario, the bellwether may well toll the signal for greatly constricted shipping demand as trade shrinks across the board.

There are other big risks too. The Chinese Premier and the head of their Central bank have in recent times, put out strongly worded statements against the US financial culture, even warning, paraphrased, that ‘the US cannot expect China to subsidise its spending’. A clear indication, to me, that China will, at an appropriate time during a hopeful global recovery, flex its economic and political muscle to the detriment of the US (and quite possibly India). Equally alarmingly, China has been joined by some Western countries in calling for a revamp of the IMF and a movement away from the US dollar as the global currency. This thought is nothing new, and has been expressed by Russia and Iran, amongst others, in the past. China is different, though; it owns massive amounts of US debt. Although this move is very unlikely to happen anytime soon, given that a huge part of the world’s reserves are still held in US dollars and that China would be cutting off its nose to spite its face, the first graffiti is appearing on the wall, and is a harbinger of things to come.

We in the shipping industry will then have to manage another risk well: the exchange rate risk. Move to SDR’s? Euros?

One suggestion, though. Let us not start speculating in currencies now or later, in this eventuality; that is not our core competence and is a high risk exercise. Hedging is prudent. Speculation, as the recent victims of FFA speculative trades will tell you, is likely to get you rogered.

The Indian economy, and by extension the Indian shipping industry, faces a few other large and particular risks: one of them, Pakistan, is a clear and present danger. Consider this. All it will take to set the cat amongst the pigeons is one newspaper headline somewhere down the line: ‘Pakistan falls to the Taliban. Can the US afford another major war?’

In one fell swoop, Indian ratings will go down the same actresses tube top and India will be starved of investment faster than an anorexic teenager is starved of calories.

Other risks are internal. The slow and continuing degrading and subversion of our institutions and the institutionalisation of corruption being just two. Another is the fact that the millions of Indians living in poverty will be joined now by the new jobless to increase resentment and discontent levels substantially. If we are lucky, this problem will be solved politically, at the ballot box, with politicians like Mayawati becoming more powerful.

If we are unlucky, this problem will be solved on the streets of our cities.

If one must be logical, an overwhelming thought is this: The shipping industry, like the rest of the global financial community, needs a paradigm shift in its thinking if it wants to remain sustainable. We must collectively come up with new ways of operating our ships in an economically and ecologically sustainable manner. This will require intensive brainstorming by all stakeholders in the industry including its consumers. Not an easy ask for a cyclical and capital intensive industry strapped of resources and struggling with manpower. Even more difficult in the present economic climate with everybody struggling to keep the wolf from the door.

I am slowly getting convinced, however, that if we continue down the present unsustainable route, we will be setting ourselves up for the next big crash. If we are lucky, that may not happen for years. I am sure, though, that it will happen sometime, especially given that the present system has been proven unworkable. I am not confident of increased regulation and a ‘new’ international system being able to do the trick. This is a sustainability issue, one that will not be solved by putting new lipstick on an old streetwalker. We have no option but to come up with something different, and something that works long term.

Actually, we do have one more option. Not to sound too risqué about it, but we can choose to go the way of the testosterone pumped man drooling over a topless calendar.

We can choose to go from bust to bust.

Author’s footnote: Any risk management must take into account worst case scenarios, and so by definition seem alarmist. Maybe I have overstated some risks; at least some of you will agree, however, that none of my scenarios is too far fetched at all.