May 21, 2015

Blurred vision 2020

I normally try to ignore anything coming out of Goldman Sachs; according to me, many of its senior employees should have kept Rajat Gupta company in prison. So I will only mention, in passing and with a suggestion that the following be taken with a sackful of salt, that Goldman Sachs said this month that shipping freight rates will remain weak for the rest of the decade.  

We don’t need analysts to tell us that the Baltic Dry Index has fallen through the floor, reflecting the bloodbath out there in the dry market- the BDI has lost a quarter of its value this year alone, and the last couple of years have been an unmitigated disaster. However, 2020 is five years away; much can change by then. Nonetheless, the signs across the container and bulk segments do not look encouraging, and the recent mini-boom in part of the tanker market appears unsustainable to me.

My biggest reasons for unease, going forward, would probably be, not in any priority a) Chinese slowdown and its economic transition from producer to consumer b) circumspection about the speed of the US recovery c) a feeling that the other smaller economies, including BRICS’ members, are not going to do half as well as expected and d) the overtonnaging and reckless over-ordering of ships that continues even today. 

Take container ships. Rates are down close to a third this year in Asia. However, as a Drewry report points out, shipping has ordered as many as 40 Ultra Large Container Carriers (18,000 TEU plus) since January. Clearly, there is a mismatch between supply and demand at a time when many are getting skittish about China, the undisputed driver of Asian trade. Export orders are slackening and the hope that domestic consumption in China will take off remains just that, a hope. The other large Asian presence, India, has seen poor company performances across almost all sectors; a realisation that has pulled its stock markets back sharply in recent times after the puzzling euphoria after Modi was elected Prime Minister. 

The US seems a little more complicated. Numbers on growth and employment were better than expected a few months ago and recent employment numbers remain encouraging, although wages are almost stagnant. Going forward, I am unsure- given the volatility in oil prices and the fact that its shale industry went from hundred to zero in six seconds after oil prices crashed - if the US will grow at the same rate or faster. The US Department of Commerce said recently that first quarter (2015) GDP had grown annually at 0.2 per cent, a niggardly number compared to the 2.2 per cent in the last quarter of 2014. Although this ‘advance estimate’ is based on incomplete data and subject to change, these indications are not good at all.

The US Fed is expected to bump up rates later this year. If it does, (I am not sure it will be in a hurry to do so), the impact of a flight of money to safety on investment elsewhere in the world may be significant. 

Okay. Now that you have read this much, forget it all, for a moment, and consider a possibility-another alternative-to-the-present scenario that will be calamitous for trade and shipping. Humour me for a moment or two.

What if global consumer consumption- particularly discretionary spending- never takes off? What if more and more people realise that things do not make you happy? That buying more and more stuff- and building bigger houses and wardrobes and storage to keep it in- is not such a good idea after all? What if some halve the ‘extra’ stuff they buy- some of which they don’t need and some of which they don’t even like? What if they realise that buying unnecessary stuff is a trap: that you are working for your stuff instead of- as it should be- the stuff working for you? What if they realise that the alternate lifestyle is, additionally, good for the planet and may help take a step back from the precipice?

Our present paradigm of commerce and trade is built on the premise that consumer consumption will increase exponentially (and ad infinitum) in future at the same rate that it has in the past. Forget the fact that the planet cannot sustain the populations of China and India consuming at US rates for a moment, and think about the impact on trade and shipping of even a fifth of the world’s population embracing this alternate lifestyle.

That possibility, if it at all happens, will be a nightmare for shipping. But it probably won’t. I have faith in mankind and its follies.



Paul, Dammit! said...

I'm seeing more and more that the bulkers that visit New York harbor are changing hands (and names) rapidly. In looking at the bunker delivery notes for these vessels, there have been a lot of new names in the customer blank- little companies that are popping up with a mailbox address and not much more. It looks like more investment funds and trusts are buying bulkers and using them to park their value as assets for a time, write off some losses, then write down their value and save on taxes a few years later. This was done in containers in the US a few years ago with Horizon Lines, with predictably disastrous results (from an employment perspective), but worked out well for the investment bank behind the move.

manu said...

I didn't look at it that way, but makes sense. Same thing happened (on a lower scale, I suspect, the world was not awash with that much money) in the 80's recession with bulkers. I had the misfortune of being involved, as Mate, in the reactivation-short trading-change of ownership with one or two.