January 27, 2011

‘Tonnage overhang’ blues

The mood seems to have turned bearish in the last few weeks. The possibility that countries in Europe are actually in bigger trouble than we previously thought may have spooked everybody initially, but that does not fully explain the funk that the maritime industry seems to be going through today. To add to the grey, reports in the last month or so- particularly one from BIMCO and another one from Bloomberg- paint a pretty gloomy picture for shipping in 2011. Bloomberg seems to be quite pessimistic, in fact, suggesting that the dry bulk sector may be headed for the lowest freight rates since 2002. Hire for capesize bulkers will average just $22,000 a day in 2011, it says, quoting an analysts’ survey it conducted.

The lowest freight rate part may turn out to be hyperbole, I feel, although these things have an uncanny habit of appearing to be self evident after the event, so please ask me again next year. Things appear to be not so bad at first glance- the US recovery seems to be hobbling along in fits and starts, the Eurozone crisis seems to be shakily contained somewhat- with emphasis on the shakily, China seems to be chugging along albeit with the usual concerns about currency valuations, overheated real estate and internal stresses, India seems to be doing kind of okay- record inflation and the recent stock market mini crash notwithstanding, Brazil seems to be doing well thanks to the commodity boom- although whispers about its mining industry growing at the expense of many other businesses and jobs (as China takes the country’s raw materials but floods it with cheaper Chinese products- including, tantalisingly, bikinis) are getting louder.

More seriously, there appears to be no prima facie evidence of an impending collapse of the global economy; 2011 is certainly not looking like 2008. Hence the question: is the 2011 gloom and doom scenario for the industry justified?

The short answer is probably. For the longer answer, read on.

Everyone agrees that the tonnage supply overhang is the Sword of Damocles hanging over our heads. An article at BIMCO calls this ‘a wall of new ships,’ with the dry cargo fleet expected to grow 14 to 18 percent this year. Containers and tankers will grow at eight percent. Worrisome as those numbers are, the fact that this supply will come on the back of a bumper year-2010- for new deliveries will severely test the industry’s capacity to absorb new tonnage in the present economic climate. That a larger percentage of these ships are bigger than their last year’s siblings – 8000TEU containerships and capesizes, for example- skews the supply paradigm even further. Listen to this from Bloomberg: “About 200 capesizes, spanning some 35 miles end-to-end, will leave shipyards this year, expanding the fleet by 18 percent.”

That, if Bloomberg is right, translates to more than one delivered ship every two days, by the way. For the full year. Staggering.

“The market was able to take a punch in the face in the form of 200 capesizes and loads of smaller vessels last year but I doubt it will manage another punch without having to hit the deck,” says Erik Nikolai Stavseth from Arctic Securities ASA in Oslo.

(Aside: That makes me wonder about the ambitious expansion drives of many Indian ship owning companies- including SCI and the Tatas, not to speak of all those new ports that will mushroom along the coastline like toadstools. The ‘Vibrant Gujarat’ summit has just announced astonishing commitments to investment in the State’s port sector by the cream of Indian companies, all of whom would have undoubtedly done their due diligence twice over before any commitment.)

Asides aside, analysts seem to be indicating, quite clearly at the moment, that the tonnage supply demand mismatch may be a bigger threat this year than a sluggish global economic recovery. Looking at those alarming delivery numbers, I would have to agree- even though, who knows, some deliveries may well be cancelled or delayed and many more ships scrapped than last year. Even if that happens, I tend to think that we may see pressure on freight rates even if freight volumes actually increase- especially in the dry bulk segment- thanks to new ships being churned out like beef mince.

My beef, if any, is that most analysts seem to take the global recovery- or, more accurately, the momentum of global recovery- as a given in this paradigm. I am not so sanguine about this: I feel that there is, economically and otherwise, a tectonic shift underway as countries in the East and West both realign to new realities- the gradual decline of the West and the emergence of China as the economic superpower, for one. Massive shifts in currency valuations, trading patterns- even consumption matrices-are inevitable. As an example, I cannot, for the life of me, expect that the US will go back to its old debt- fuelled consumption habits. I cannot imagine that China- which has just declared record foreign exchange reserves and is now selectively buying European debt in addition to American- can avoid a quicker strengthening the Yuan indefinitely. I cannot believe that the Indian growth story- somewhat hyped, I am afraid, though I will not call it a storm in a teacup as some analysts have- will not be hit with food inflation out of control, the price of oil threatening to hit a hundred dollars again and weak IIP numbers this month. And, finally, I do not believe the contraction in European economies- or even in the US- is well and truly over.

The other thing, of course, is oil. The think is that it will become cheaper after winter as demand falls in the Northern hemisphere, struggling with one of the coldest winters in years. Perhaps. But China has now become a huge consumer of oil- and every other raw material, of course. Will demand for oil- and price- really fall that much? I don’t know the answer to that one. Time will tell, and the uncertainty- which freight markets hate- will remain until it does.

Then, the recent collapse of the Baltic Dry Index has skewed some objectivity, I fear. Many say that this is temporary fallout of the Australian flood crisis. This may well be true, but I suspect that the BDI will not spiral upwards steeply once the Australian raw material pipeline resumes normally. I think that there was a little too much optimism going around in the second half of last year, especially with the boxship market doing comparatively well. I also think that the QE2 effect (not the ship, but the US Fed’s Quantitative Easing, a flowery way of saying ‘we will wriggle out of the mess by printing more money again’) will hit us harder later on this year. I fear that commodity and agricultural prices will go up even further.

Paraphrasing Connery from the movies, much of the world is between a rock and a hard case today; surviving, as it is, on the QE2s and such stimulus packages. The optimists will say these measures were absolutely essential to avoid economic catastrophe. The pessimists will say that these do nothing but postpone the inevitable. The reality- and the near term future of shipping - probably lies somewhere in between.

I don’t think I will rush out to buy shipping stocks just yet; I suspect there will be more pain before we are granted some pleasure. And so I believe that the industry would do well to be cautious- even overly so. However, I do think that while caution is justified, pessimism is not. Many analysts seem to be looking at the last few tough years in the rear view mirror and getting spooked, but objects in that mirror sometimes appear closer than they actually are.


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