Shipping- A different recession?

In a sentence, this is what I think will happen in shipping- or happen to shipping- this year. It will get bloodier out there. 

This recession, when compared to 1958–60, 1975–78 and 1981–84, will be markedly different, I think. For one, because operational, labour and regulatory costs- especially those connected to the environment- are much, much higher this time around. Also, although I cynically believe that the costs of MLC implementation will be diluted by circumvention and subterfuge, this will not be so easy with the costs associated with the upcoming Ballast Water Convention, or with the much stricter emission norms that are being implemented today, particularly in the US and Europe. 

It is also different this time because the existing global economic system is under severe existentialist pressure, and no recovery is in sight. The economic outlook for the United States and Europe continues to be negative, and all the BRICS countries have considerable problems of their own- high inflation, shrinking export markets, fiscal deficits and socio-economic compulsions are just some of the troubles at the tip of the iceberg there. In any case, these countries cannot take up more than very little of the slack of a collapsing EU and an in-hock USA. Times are a changing, and old economic models may not apply, or another collapse may be seen in the near future. Shipping seems to think that the resumption of business as usual is a matter of time; it may be a matter of a new world economy instead, so don’t hold your breath waiting for freight rates to revive anytime soon.

I don’t know when the net expansion of tonnage in shipping will top out. I know, however, thanks to the UNCTAD review of maritime transport last year, that, even with record demolition activity, no end is in sight there either. Fortunes in shipping have often been made by asset plays- buying ships at low prices and selling them high. I believe cash rich investors- and new kids on the block- are still trying to catch a falling knife here, ordering ships now or buying second hand ones at what they think are rock bottom prices, hoping for a spike in asset prices soon. This can prove to be either brilliant or dangerously stupid; while nobody can time any market absolutely, one can lose one’s already threadbare shirt getting into the act way too soon. 

For operators of ships, another sobering thought: even if net tonnage expansion stops today, there is still a hell of a lot of excess tonnage to be absorbed before the supply-demand graph flatlines.    

So, this is what I think will happen this year:

·     More ship owners will go bankrupt. More banks will control vessels directly as a result.

·     There will be consolidation in the industry. Bigger players will announce cooperative arrangements, formal and informal. Some ashore will scream cartelisation.

·     Many, many more vessels will be laid up. Cold laid up, that is, not hot and ready to roll in a week or two. Containers and bulk carriers will be particularly hard hit. Lay ups will be more complicated and expensive than ever before because environmental protection of coastlines where ships are laid up will become an item on the agenda. It never was, before.

·     China will, at some stage, stop supporting its State run shipyards. This will set the cat amongst the pigeons in a part of the industry.

·     Some mini markets, particularly the liquefied gas segment, will do better than others. There is a threat here, of course, if too much excess tonnage is ordered, but my sense is that- since LNG carriers are big ticket items- this won’t happen easily. I hope.

·     The so called shipmanagement companies may actually do okay, although margins will be squeezed. Banks may acquire ships by default or otherwise, but they are not qualified to run ships and will have little choice except to place them with these firms. And smaller shipowners will be forced, thanks to the increasingly complex regulatory regime, to hand over their ships to outside management. Not that those companies do it better, but they do enjoy economies of scale.

·     Seafarers will find jobs drying up. Maybe not immediately, since so much tonnage is around and not laid up, but surely later, once cold lay ups increase, as demolition already has.

·     We will see many more owners defaulting on wages. We will see many more stranded, starving and destitute crews on arrested or detained ships around the world.

·     We will see more unseaworthy and poorly maintained ships threatening our coastlines and harbours than ever before.

·     Crew costs will not fall by too much too quickly, although there will be pressure to reduce wages. This is because, unlike the eighties, shipping is not a preferred profession in many parts of the world, so sourcing quality seafarers will remain a long term headache. This is also because the requirement of quality seafarers- given the complexities in operations and insurance today- will be higher than ever before. Crew costs may actually rise in some segments of the industry that are making a little money and require special skills.

·     Shipowners will not be able to save too much any longer by cutting way back on maintenance to save money, as they did in the eighties, because a)they are already doing this,  b)State and Flag controls are more stringent today and c) break-down maintenance does not really save money.

·     If some of the biggest heads under costs- insurance, crew, bunkers, maintenance, for example- cannot be cut back upon or controlled ( as in oil) substantially, and if freight and hire rates continue hitting the floor, cash strapped shipowners will have no place to hide.

Everybody knows that there is no impending shake up of the global economic order, such as it is. Countries will continue to print money to get out of the self-created mess. Besides sloshing around creating havoc, this money will distort markets even further, and cause mini economic collapses around the world from time to time. It will be extremely difficult to predict these collapses, or, indeed, recognise false flag mini-recoveries for what they are. 

Shipping, with its high asset costs, will be particularly vulnerable; long term players even more so, sadly. Unfortunately, big money will be made, in this increasingly chaotic industry, by big ticket speculators who will buy and sell ships like they are trading stock. Big money, in the next year or so, will not be made by the traditional shipowner pursuing traditional shipowning ways. 

That is not just sad. That, given the repercussions of such speculation on the maritime industry and its people, is actually the scariest thought of all.
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Steel in the spine times

I feel sorry for ship-owners today. They are not just caught between a rock and a hard place; they are almost buried under the stone. High costs and ridiculously low freight rates- coupled with the need to service asset borrowings have, at a time when finance has dried up in a punishing marketplace- combined to push many to the edge of the abyss. Some have gone under; many others are teetering, shell shocked, praying for better times soon.

Sadly, it is likely to get worse long before it gets any better.

One reason I say so is because if this is the greatest financial crisis we have seen since the Great Depression, as is widely believed, then the blood seen on the street should be more copious than it was in the eighties- the last serious downturn. So far, there is no evidence that this is true. I don’t see stories of hundreds ships laid up- abandoned dark and gloomy derelicts- across the world. I don’t hear stories of significant arrests of vessels because some creditor or the other has taken the owners to court. I don’t even hear the gaggle of woebegone tales from seafarers that were so common in the 80’s- wages unpaid for months and then never, sailors working for peanuts and sometimes just for food, shelter and seatime, salaries slashed and dreams afire. There have been no demonstrations so far; no anecdotes of certified officers quitting the profession in droves, working as parking attendants in Connaught Place in New Delhi or unemployed. All that was happening in the eighties. It was in the news. Thirty years later, during a period when mass media and the internet have exploded, there areso far no reports ofsimilar things happening. This financial crisis has, so far, been almost civilised as far as shipping is concerned.

Which means that either a) the present crisis has been overrated enormously or b) the worst is yet to come. I am putting my money on b.

I think what happened was that the initial period of gloom and doom- 2008 and 2009- was followed by a sporadic recovery of some sectors in shipping, after which they promptly tanked again. That rise- even some temporary- gave owners breathing space. Today, this has lulled us into believing that the worst is over, or it at least that the worst can’t get any worse. I think, also, that we have started believing too much in past cyclical downturns as an indicator of either the length or the depth of the depression today. The same rules may not apply this time; in fact, I bet you that they won’t, because I suspect the paradigm has shifted.

Why? Because, for one, the world’s economy faces an existentialist crisis today. What if what we are seeing is the beginning of the collapse of unsustainable crony capitalism, the aftermath of which will singe us all? What if consumers in the US (by far the biggest economy and the biggest consumer) do not, well, consume as they did before, ever? What if China and India follow their lead? (Note that there are initial signs in India, at least, that consumerism is easing off). What if demand stays depressed for years? Sure, economies will still need to move some amount ofore, coal, oil and other such commodities,but what happens to the zillion other things that we buy at the likes of Kmart, almost all of which are produced elsewhere, mainly in China? What if demand falls permanently, plateauing at a lower but more sustainable level? What happens to China? What happens to shipping long term?

Then, the climate in Europe continues to deteriorate by the hour. The mid June Greek elections may or may not provide some respite- if they do, it may well be a temporary reprieve more than anything else. The fact is that Greece is a failed economy whether the Greeks exit from the EU or not. A ‘Grexit’ will pose particular problems for that country, but there is no guarantee that staying in the Eurozone will be some sort of get out of jail free card for Greece. It will pay through its nose either way. Spain (and then Italy?) are hanging in by a whisker and a prayer, but many think that the story is over; Spain has been downgraded again by Fitch to near junk status; it is looking for a hundred billion euros to recapitalise its system, and that may just be the beginning of the end for the fourth largest economy in the Eurozone.Can you imagine the shockwaves that will ripple through Europe if Spain falls like Greece? If pressure comes on Italy next?

Yes, the story is over for the time being, at least. It is just that the fat lady still has to sing.

For shipping, even an informal collapse of the Eurozonewill prove to be very messy. It’s financial, insurance and reinsurance markets lie there and so do many of its biggest ship-owners, including in tottering Greece; although they are putting on a brave face so far, many are asking Greek ship-owners to contribute more to the economy. Add to this shipping’s peculiar problems with tonnage overhang and you have the recipe for considerable chaos going forward. A good outcome for shipping will be if the Greek crisis is deferred somehow for a year or so (as is usually done, this will be accomplished by printing more Euros and pretending that all is well). This is because reports suggest that the tonnage overhang may ease off by the end of this year or the beginning of the next, although I am not holding my breath yet- China is trying its best to keep its shipyards afloat, offering sops and what not. Whatever happens, however, we will be in a slightly better position if we can at least pretend to absorb tonnage before a complete Grexit blowout- or similar. 

That still leaves us with worrying questions on commodity prices (have they peaked?), the Chinese and Indian growth stories (have they ended or even significantly paused long term?), new heads of vessel operating costs, (both regulatory and otherwise)and questions on the daily agonies of the marketplace. These questions may light fires under the balance sheets of shipping companies, sure, but it is the bigger questions that supply the fuel for the conflagration.  It is the questions that are being asked in Europe and the United States about the sustainability of the present economic system that can burn us badly.

As I write this, Japan's stock market index, the Topix, has hit 1983 levels as investors show concernthat the derailment of the global economy will worsen the country's economy; incidentally, an economy that has not gone anywhere since the Topix peaked in 1989. It has fallen 76 percent since then- a quarter of a century ago; Sony has fallen to levels not seen since 1980, when it started selling the famous Walkman in the United States. A generation of zero returns is a long time. Even more worrying is that the same thing can easily happen elsewhere. 

Which is why I say that we should stop trying to predict- as so many are doing today- when shipping will turn around and start worrying about the real possibility that it is not just the economy that is collapsing around us, but the system. A systemic collapse will be far more painful and go on for much longer than a few years more. It will also require more backbone to handle; shipping will need more steel in its spine.

Have a nice day.

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Why Indian seafarer jobs are at greater risk today

The problem with trying to figure out how badly Indian seafarer employment is likely to be hit by the present slump in shipping is compounded by methodological issues with respect to the absence of any reliable, accurate or timely statistics on seamen of the kind easily available in most Western countries and the Philippines. That aside, Indian mariners face other existential threats today; a dwindling share of a job market that is likely to shrink considerably in the near to medium term is one of them. Likely moves by owners to cheaper nationalities and crippling structural issues to do with the education and intake of new seafarers in the country are others.

The global economic meltdown shows no signs- despite recent encouraging numbers from the US that hint of a recovery- of easing. The largest economy in the world, with its massive debt overhang, may have postponed the inevitable, but Europe's day of reckoning is here: the Eurozone will shrink by 0.3% this year, the European Commission now says- it had predicted a growth of 0.5% just three months ago. Not just Greece, but Portugal, Belgium, Spain, Italy, Cyprus, the Netherlands and Slovenia have now been added to the EC's list of countries that will see a contraction. 

Asia is far from immune. The World Bank's recently warned that sweeping economic and political reforms were needed in China. Said Robert Zoellick, World Bank president, bluntly, “As China’s leaders know, the country’s current growth model is unsustainable.” Analysts are warning that the world's second largest economy is running out of steam, and that, even if reforms were implemented, its growth will decline to 5.9% by 2021, and 5% in 2026. Despite this, China will be the world's biggest economy by 2030, but the 10% growth rate days may be over for the export-dependent and investment-led economy. 

Other less important countries- like India with its domestic consumption story of hope- are also slowing down. The Indian economy has just posted its slowest growth in three years, and may end the year closer to 6% than 7% GDP growth. That is more than a one percent drop from the forecast less than a year ago; analysts say that translates into a shortfall of over ten million jobs. With dozens of State elections and a general election due in the next two years, high chances of populist financial imprudence from a government that seems to be in a state of paralysis means that the economy is unlikely to be a priority. 

Amazingly, in the midst of this doom and gloom, some international ship owners seem hell b

ent on adding to their own woes. Despite persistent and universal warnings against newbuildings and seemingly oblivious to the existing massive tonnage overhang, many of them are still booking orders at shipyards to take advantage of present low prices. Small wonder that industry analysts expect more defaults with heavy debt and low freight rates combining to devastating effect. This, when leading consultancy companies are warning that the shipping industry will not see any respite for at least a couple of years. I think it will be longer. Even much longer, unless the present orderbooks for newbuilds suffer significant cancellation. Not good news for jobseekers.

Increasing Chinese domination of the global economy will be a negative for Indian seafarer job prospects, because this will likely be accompanied by a demographic shift of tonnage ownership to China. Chinese crews will dominate on those ships- they are already a significant source of manpower in Hong Kong and Taiwan. Owners have so far chosen, for many reasons, not to mix Chinese crews with other nationalities; As Chinese crew numbers go up, Indians will lose out on Hong Kong flagged vessels in the future.

Japanese and European shipowners continue to show a marked preference for Filipinos over Indians. No doubt, the fact that the quality of product from India has declined has much to do with it; it is hard to justify higher wages with uneven performance. Nonetheless, increasingly strengthening links between countries in the EU and the Filipino maritime machine- despite the threatened EMSA boycott of Filipino certificates- is an ominous development for Indian seamen. It is clear that Europe is betting on Filipino officers in the near future; EU member States are putting resources in the Philippines to improve quality of their officers- whose numbers are growing, unlike in India. 

As just one example, 176 Filipino officers recently completed training in a joint project between their nodal seafarer agency DOLE and the Netherlands. In comparison, although quite a few shipmanagement agencies have set up their own training establishments in India, I remain unconvinced that the calibre of the output is significantly higher than that of the Philippines that is producing far greater numbers of tomorrow's officers.

Norwegian owners Gearbulk announced last week that they will lay off all European seafarers on their ships and replace them with Asian crews. This trend may well accelerate, and it will be interesting to see how many of these jobs will come to Indian officers and Ratings. I am guessing not the majority. 

A shrinking job market, the advent of giant ships and a paucity of training berths are factors that affect seafarer jobs regardless of nationality and contribute to a decline in overall demand.  (A Valemax carries twice or thrice the load of even a large bulker and 18,000 TEU boxships are coming out in numbers; remember 6000 TEU ships were considered huge not so long ago). Along with the consolidation and route collaboration between large companies as they fight market conditions, this will reduce the number of oceangoing ships in future, with a corresponding decrease in overall jobs. In this scenario, consistent preference for non-Indian crews (or East European and, who knows, the Chinese or even Nigerians tomorrow) may well strike another blow to an Indian seafarer's job prospects. 

No doubt, experienced senior officers will remain in demand for a while, but perhaps jobs will start drying up at the junior officer level. It is logical anyway- when Ratings and Cadets struggle to get training berths even after paying about a fifth of a million rupees to touts, where will the junior officers come from? Moreover, what will be the calibre of those who do?

That said, I think there is good reason to be cautiously optimistic about some sectors.  The Liquefied Gas market, for example. Rates for large LNG tankers have doubled or tripled than a couple of years ago, creating stellar profits for owners and making this the most profitable sector in shipping. Norwegian Investment bank Pareto recently said that an additional 352 LNG carriers could be needed- globally by 2020, because of the consequences of the Japanese earthquake last year and increasing regulatory and industry stress on the environment and cleaner fuels; Japanese LNG imports are up 28% YOY, and Chinese imports will be up 42% this year. Even in the short term, Stena Bulk has said that as many as 70 LNG tankers will be required by 2014. It looks almost certain that experienced gas carrier crews will be somewhat insulated against job uncertainties for sometime. I would advise any young officer to try to get good experience on these ships today.

The offshore sector will likely do all right too, including in India. With a sedimentary area of 3.14 million square kilometres where most of its hydrocarbon reserves lie, this oil thirsty country is already seeing much expansion into this sector from mainstream shipping companies and others as exploration is being intensified. The demand for oil will not go away in a hurry; new vistas are being exploited across the world, from the US Gulf to the Arctic, in Africa and from SE Asia to Latin America. Demand in the offshore businesses will probably dry up only before the oil does. It is possible that this sector will be more stable than the wet tanker sector that is plagued with its own problems.

I do hope that India does not make the same mistakes in the offshore space that it made with its main fleet, which has seen a steady decline over the decades and become, in the words of one commentator, a minnow in its own backyard.

Unfortunately and broadly speaking, though, what I see happening in India is that a weak regulatory authority, an unscrupulous Maritime Education and Training establishment and a corrupt seafarer recruitment apparatus will continue to stymie maritime job prospects. I believe that we are in a situation similar but much worse to the eighties' recession, when foreign owners felt- rightly or wrongly- that Indian ratings were just not worth the cost, effort or headache. I see the same thing happening- albeit to a lesser extent- with Indian officers in the present recession. I look at this possibility with deep sorrow, because the professional advantage Indian officers enjoyed for so long has been frittered away so quickly. Momentum was with Indian mariners a generation ago.  Alas, no longer.

Shipping- worse than the eighties?

"D/S Norden A/S, Europe’s biggest publicly trading commodity shipping company, hired a Supramax vessel at no cost other than fuel charges, its first such transaction in a quarter century", a Bloomberg report said a week ago.

Shipping is in the midst of its own lost decade; predictions of industry recovery, which initially forecast a turnaround of sorts by the early next year, have started talking about conditions not improving until at least 2014. My own opinion is that even these analyses- God alone knows from which hat experts so confidently pull out these years- are somewhat optimistic. It seems near certain that we are heading for times that will be more scorching than the eighties recession some of us remember with a shudder.

One major difference this time around is that shipowners will find it impossible to slash costs as they did so easily then. This is an era where a shipowner cannot find competent crews easily, a time when safety cannot be compromised as easily thanks to regulatory and PSC regimes or oily water pumped overboard so dismissively. More stringent STCW and MARPOL regulations are in place. New regulations- with ballast water, for example- come with additional costs. There was negligible focus on cleaner, more expensive fuels, carbon footprints or air quality then; environmental protection was near ignored. When seafarer competence was not a big question and training costs to shipowners- but not to the sailors- were zero. When K&R insurance did not exist. When shipping finance had not constricted as much as it has today. 

All these costs have escalated- and many new ones added. Many of these are not small; most of these will only increase with time as more States take tougher steps to protect their coastlines from substandard ships, callous or greedy owners and ill trained or incompetent crews. With the inevitable advent of mammoth ships, this process will rapidly accelerate. The industry may find that- quite soon- newer heads of expenses make for a larger piece of the overall basket than some of the more traditional ones. The industry may find, for example, that it cannot get competent crews for the new generation of technologically advanced behemoths without paying through its nose. Economies of scale may not look as attractive then as they appear on paper today.

Unfortunately, higher costs are just one jaw of the pincer; an industry can survive those if there is a somewhat proportionate rise in income- or even the hope of one in the near future. The eighties recession stabilised and reversed on the back of genuine demand- and shipping is a cyclical industry anyway- friends tell me, so why am I so bearish now? 

I am long term pessimistic for many reasons. The lesser of these have to do with the weak and shortsighted structure of the industry. Put simply, shipping is not- and has never been- anything but reactive; it does not have the structure, the visionaries, the organisation or the ability to do anything but respond to present stimulus. This is a weakness that will hit us more in the future than it did in the past simply because the demands of the future will be heavier than they were, say, in the eighties. These weaknesses will be laid bare for all to see the tougher times get.

But the larger- perhaps the largest, and this is the second jaw of the pincer- reason for my pessimism is that I simply do not see demand for goods, and therefore for shipping, picking up easily. Europe will take many years before it fills up the hole it has dug itself in. The US appears somewhat better placed, having the ability to at least print more money, but the piper will have to be paid sooner rather than later. Most of the rest of the world is in a similar situation- with the possible exception of China. But then, how long can an export-dominated economy prosper if its customers are broke? How long can it afford to feed its apparent unquenchable hunger for ore, oil and other commodities when it cannot sell as much? 

I think that some sectors in shipping- bulk carriers and tankers, maybe- will do a little better than others but only if China stays buoyant. Some countries will do well if this happens too- Brazil and Australia come to mind. Unfortunately, even two or three swallows do not make a summer. Taking a broader view, I expect trade to remain sluggish for many years, or grow slowly at best. 

After a few of these, shipping would have largely dealt with -absorbed or demolished or whatever- its humungous tonnage overhang, but I am afraid that will not solve the debilitating issues that will probably still exist: stagnant or slowly growing global trade, rising operating and capital costs and an abnormally weak industry structure that does not know how to be proactive.

Those who expect a shipping recovery in 2014 may find, when they eventually get there, that 2014 makes 1983 look like 1995.

Blood on the sea: the impending shakeout in shipping.

Those in the container trade are calling it a consolidation; looks more like a shakeout to me. 

Soon after industry leader A.P. Moeller-Maersk merged some of its Asia to Europe services saying that it was prepared to outlast the competition in difficult times, news came in last week that the second and third largest container companies in the world- Mediterranean Shipping Co. and CMA CGM- have entered into a vessel-sharing agreement that will cover routes from Asia to Europe, Africa and South America. CMA CGM and MSC obviously feel that this is the best way to fight Maersk in the marketplace.

The hope, in the beginning of 2011, that the box trade would stage a recovery by winter or even by early next year has evaporated completely today. Instead, freight rates for the China-Europe box trade - by value, the biggest route- have fallen by almost 40 percent in the last three and a half months. The reasons for the crisis are well known- years of overcapacity ending in falling markets amidst a global economic collapse can only result in disaster. What is lesser appreciated is the fact that even today, when shipowners are trying every trick in the book to survive, too many container newbuilding orders are- inexplicably, seemingly suicidally- being executed. 

An estimated 2.5 million TEU of capacity may be added to the box fleet in the next couple of years, including a large proportion of around-8,000TEU tonnage. These orders were placed starting the summer of 2010. Amongst others, Maersk (20 18,000-TEU ships), NOL (10  14,000-TEU) and OOIL (10 13,000-TEU) are contributing to this glut of deliveries that will hit the market around 2013, give or take. Singapore based Island Shipbrokers says that the demand growth in the container trade is around 5% while fleet growth could reach 8-9%,  resulting in an additional capacity-demand mismatch. Container tonnage is not reducing; it is increasing, that too at a time when freight rates are slated to be under continued pressure for the next year or more.

Something has to give.

Some things already have. Last week, Malaysia's largest shipowner MISC pulled out all 16 of its container ships from what it said was a bleak market- after three consecutive years of losses totalling US$789 million. The sudden exit will cost the company another $400 million, MISC says, pointing out that market conditions are "challenging the validity of today’s operating models".

The strategy of the big boys in the container industry seems to be to shift to bigger and bigger ships to take advantages of economies of scale and also- in the case of newbuilds- greater fuel efficiency. Merge routes (maybe even merge companies later?) and services. Increase or maintain market share at almost any cost. Use your size and cutthroat pricing to dominate. Hold back supply cuts. Squeeze weaker players. Be the last man standing. Above all, outlast. Outlast. 

There are obviously no guarantees that this strategy will work- sometimes, as shipping as seen before, there is a thin line between the philosophy of 'too big to fail' and 'the bigger they are, the harder they fall.' Regardless, the outlast strategy will guarantee one thing for sure- the shakeout of smaller players from the market. This is inevitable. MISC could take a billion dollar hit and survive; many others will simply fold with much lower stakes, especially at a time when sources of capital are drying up for the industry.

Incidentally, the CMA CGM collaboration with MSC may be the beginning of such relationships in other sectors too. John Plumbe, the CEO of London based shipbrokers ACM Shipping said last week that owners of at least a hundred of the world’s largest oil tankers must form a combined fleet and sell their services jointly to raise depressed freight rates. Plumbe, a 37-year tanker-broker veteran, said, “There are some advantages for owners to consolidate for a short period of time. In order to have any real effect on freight rates in the VLCC market, you need a pool of a minimum of 100 ships, as there is a fleet of 600 trading.”

Seen in the backdrop of recent troubles in tanker businesses- General Maritime's bankruptcy, news reports of Frontline possibly running out of cash to pay its debts and Torm talking to creditors to restructure its own debt of around 1.8 billion dollars, this course of action may make sense. I wonder, though, whether the pockets of even the biggest in the industry- whether container or tanker or whatever operators - are deep enough to wage what appears to be a very expensive war of attrition, even if there appears to be little other choice. 

With enough resources, one can win the game of outlast, I guess. Alternatively, one can end up just cutting off one's nose to spite one's face.  

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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.

‘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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