November 10, 2011

Strategy for Shipping: survival, not growth

I hope shipping does not react the way stock markets across the world did last week in response to the latest Greek bailout; the euphoric unthinking rise in indices did not hide for long the deep structural problems that exist in many economies across the world. Two days later came ILO warnings of a likely dramatic drop in future global employment and the associated 'ignition' of civil unrest. More bad news surfaced, this time about Chinese manufacturing slowing down. And of course, the biggie- plans for a Greek referendum on the new bailout plan- a vote that could see Greece defaulting and exiting the EU in the worst-case scenario. Many Greeks prefer this; they want to be able to print Drachmas again.

The stock markets, true to form, promptly went down again after the referendum story broke.

There exists great risk that we are all in for a multi-year economic slowdown, and shipping would do well to be realistic- even circumspect- in these times. Which means hold on to those new building plans for a bit, please, for a start. 

The European Union- read Germany and France here- has written off half the Greek debt to try to keep that country afloat. The problem is that the Eurozone is reeling under sovereign debt even if one ignores Greece; numbers out of Italy, Spain and Portugal make the Greek figures look positively rosy in comparison. Just one of them- Italy, the world's eight largest economy, has $2.6 trillion in outstanding sovereign debt, the fourth largest in the world after the United States, Japan and Germany. French banks have the biggest exposure here- $500 billion- but banks across the world, especially in Europe and the US, have significant Italian risk- and will be tottering should Italy collapse Greek style. No wonder Standard and Poor downgraded Italy's debt ratings recently. 

The Greek bailout has to be seen in this context: Greece is the domino that cannot- in Brussels' eyes- be allowed to fall and take down everybody else with it. To me Greece is not the end; it is the beginning of a series of steps that will need to be taken to prop up many others in the Eurozone. The US may be even worse off, mired in debt as it is. However it can, in comparison to individual countries in Europe, print dollars to prolong, postpone (and deepen) its inevitable economic slide. European countries cannot print Euros; only the Union can. Which means that the entire European Union will continue to be economically hamstrung because of the follies (and fraudulent figures, as with Greece) of its weaker members, of which there are many.

With fifty percent of Greek debt written off, recapitalising banks and building the 'European Financial Stability Facility (EFSF)' - a bailout contingency fund- will require belt-tightening in Europe. Even if these plans go smoothly (Within days of the announcement, The Federal Constitutional Court in Germany issued an injunction against the committee on the EFSF and barred it from taking any decisions pending clearance about its constitutionality), money will be sucked in to service European debt at the cost of growth. Overall, not even the beginnings of a recipe for European economic recovery. For shipping, therefore, cause for grave concern. I will be keeping a sharp lookout for signs that the EFSF plan is unravelling.

News from the rest of the world is not much better. The Arab Spring- or parts of it- is slowly morphing into a war for resources. With President Obama announcing last month that he was sending US troops to Uganda to join the civil war there- and with US troops ready to go to Sudan, the Central African Republic and Congo on one excuse or the other, I can easily buy into John Pilger's assessment that rapidly growing Chinese involvement in African resources is driving Obama's actions. "With Libya secured, an American invasion of the African continent is under way," he says. This may not necessarily be bad news for shipping- except that instability and conflict in Africa will inevitably threaten trade, and may even increase piracy.

The Indian story, such as it is, has been hard hit with high inflation and a paralysis of Government. Some economists have already started talking about possible growth figures that are closer to 6 percent than the eight or nine that the Prime Minister wistfully tom-toms. A six percent figure may seem quite good, given the global economic scenario today, but the cumulative effect of a two percent differential in GDP growth over the next few years, if it happens, will be devastating for trade and investment- and shipping.

Then there is the biggie, China. An export economy that is starting to feel the pinch of weakening global demand. Consumers in the US and Europe are already rapidly scaling back consumption and repaying personal debts; this drop in demand of goods from China will probably stay weak for years. China may be rich- with reserves of $3.2 trillion, it certainly appears so- but it has its own problems. To begin with, it may have to start shutting down factories should its two biggest markets- Europe and the US- stagnate. In addition, Chinese banks are said to be riddled with bad debts- the country had to shore up some of them recently. 

It is easy to see that a prolonged Western slowdown will have a cascading effect on the rest of the world that will not go away in a hurry. Demand for raw material may drop significantly in China if it finds no markets for finished products. Additional risks to shipping include a commodity bubble that may burst and civil unrest like the Greek riots and the 'Occupy Wall Street' kind of protests that, amongst other things, shut down the port of Oakland in California recently. Things can get hairy in other parts of the world- rising disparity and the war over resources will together prompt yet unseen upheavals in populations.

One of the few bright spots for shipping may be a mini-collapse of bunker prices, should commodities crash; the industry may feel, additionally, that falling commodity prices will by themselves stimulate demand. That scenario is far from being an open and shut case, I think. Recessions are funny things. They tighten belts and encourage protectionist policies- both anathema to free trade. Remember that the world is in recession with some of the highest unemployment figures seen for many years- in the case of the US, since the 1930's.

I fear that the biggest risk to the global economic order is that the western model of the crony capitalist system followed almost worldwide - the only game in town since the collapse of the Soviet Union- is coming apart, and there is nothing on the horizon to replace it. Can anybody tell me why the rest of the world, following an identical model and heading down the same road, will not similarly collapse sooner or rather? We are all persisting with the same doctrine that has proven to have spectacularly failed.

So once again, my advice to shipping will be to be very careful. It is already plagued with huge overcapacity issues and rising environmental, insurance and operational costs. Problems in the US, Europe, China-and India- are fundamental; they will not be resolved next year. Things in India may worsen by 2013, as a paralysed and besieged government starts preparing for the next general elections- and ignores policy in favour of populism. The European and US crises will probably play out over a few years, and I doubt there will be many soft landings here. Or anywhere else. 

Shipping is already struggling to stay afloat. It will be wise for the industry to pause now, to circle its wagons and remain extremely defensive. It is time for the short timers to quit the industry; they will be the first victims of the consolidation that will surely happen. For the others, sitting on cash may be a good idea- although it is probably too late to start now. 

In the midst of all the mayhem, appreciate the irony, if you will, of Europe looking to China- where 200 million people live on around a dollar a day- to shell out money for the Eurozone bailout. China may well do this in the end, for reasons to do with its own strategic goals and its inevitable expansion at the centre of the global stage, but I can't see how China buying European bonds will do anything to bring economic growth back to the Eurozone- just as their buying US debt over the years has done nothing except keep the US afloat. But that is exactly the imperative today. 

So forget growth; survival is the recommended strategy here, for shipping and the global economy both.

No comments: