Dry Straits

The Baltic Dry Index crashed, at the beginning of February, to its lowest level in almost three decades. Is the long touted bellwether of economic activity- bellwether being the sheep that leads the herd with a bell around its neck- trying to tell us something? 

To be sure, the BDI’s importance has declined over the years. One reason is that the BDI measures shipping demand for dry resources such as iron ore, cement, grain, coal and fertiliser, but the overall shipping market, with container and tanker trade thrown in, is today much broader than it used to be. 

The BDI may not be the sole indicator of the future any longer, but a 60% drop in three months is not something that should be ignored; it has spiralled well below 2008 levels, when it crashed 90 percent in a few months to herald the global economic crisis.  

Some say that the oil price crash has much to do with the BDI’s tanking, and that the index is inherently sensitive to oil prices since moving massive amounts of dry cargo is an energy intensive activity.  That may be true but I believe it is also convenient- but it is hardly the full story. What is happening, I think, is also that the BDI’s constituents are being squeezed breathless from both the demand and the supply sides. Somewhat bitingly, one writer has called this the ‘structural convergence of massive mal-investment meeting economic reality’.

Dropping demand from a slowing China is a biggie hitting the BDI, and is reflected in today’s lacklustre commodity prices. That country’s economic expansion will be the lowest in a quarter of a century this year, and it is the biggest buyer of coal and iron ore in the world; unsurprisingly, here is where much of the heat is coming from. And, some of the rest of the world is in even worse shape. The Russian rouble has crumbled. Europe’s growth is forecast slower, according to their central bank. Japan’s recession continues- even deepens. Brazil is in some trouble, and India is still a question mark. No wonder the price of everything from copper to iron ore has collapsed.

For shipping, the supply side is equally fraught. The dry-bulk fleet has exploded 80% since 2008. Shipbroker Poten and Partners say that, at the beginning of this year, a staggering 336 Capesize bulkers were still on order. The waters have been muddied somewhat by some owners rushing to try to convert large bulkers to tankers in an attempt to take advantage of the present demand for tankers- low oil prices leading to increased stockpiling and a relatively benign fleet expansion in that segment. But this is easier said than done. Lack of management experience in tanker operations from big bulker operators and the lack of ship conversion expertise at many yards are major obstacles here, not to speak of the ships that have reached a stage of construction where they are beyond conversion anyway.

No, things are looking terrible for dry bulk shipping right now. The Baltic Dry Index may not be all that much of a forecaster of global economic activity any longer, but its crash is still telling us something. Just four statistics tell the story. It hit 11,753 in May 2008. By December, it had dropped 94%, to 663. At the time of writing this piece, it is at 590, close to its all time low of 554 is July 1986- twenty-eight and a half years ago.

Ignore these numbers at your own risk. 

This piece was published in the Marex Bulletin today. It is a mere coincidence that the BDI crashed yesterday to its all time low- 553 points, one point below the previous record low set in July and August of 1986.

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Sailing into the mystic

Just last week, when I was sitting in my favourite chair with the cat in my lap and a whisky in my hand, working out some distressing financial problems that eventually will not matter, I recalled something that I had first realised on a ship long ago. That, like human life, the sea ebbs and surges relentlessly, and that all one can do- all one should do- is to let the waves wash over you. Just ride them while you still can. 

That the sea teaches you many things is a trite understatement. In reality, those of us who have sailed find it has transformed our very lives. It does not really matter that some of us choose to forget what we have learnt at sea once we step ashore- many years later, if we are lucky. Our existence has been changed completely anyway, whether we remember the lessons of the metamorphosis or not. 

For me, the beauty used to lie in the fact that I was often not even aware of what the sea had taught me.  The wonder used to be that, just when I thought, somewhat arrogantly, that I had learnt everything, the lady would teach me something new. She still does, even a few years after I have hung up my sea boots. She still teaches me things. Not just about me, but about life itself.

For many years, I used to think that the qualities that a life on the water promoted were obvious. After all, everybody knows that sailing teaches you, amongst many other lessons, the values of integrity, self-reliance, resilience, mental and physical toughness, fortitude, patience, discipline, quick-thinking, tolerance, independence and responsibility. Good lessons to learn, no doubt, even if a trifle mundane.

The greater, magical power of the sea was revealed to me later, with the gleaned knowledge that the ocean mirrored life itself in all its serenity and brutality. Coinciding with the knowledge- realised anew- that we have all come from the sea and perhaps that is the reason why some of us want to return to it, my experience became almost mystical. It transcended learning, because many of my questions did not have any answers. But that did not matter; no answers were needed. The experience was everything.  

The young man who went out to sea used to seek adventure and escape from the alternative- the treadmill of a soul-sucking office job. Alas, no longer, but that does not really matter.  The reasons for making the choice are irrelevant to the outcome. In this calling, they will find adventure and escape even if they are not actively seeking it. They will discover the answers without asking the questions. And for those- very few, today- that still actively seek the maverick existence without dollar signs in their eyes, everything they find will be a bonus. It will be more than that, actually, because the experience will transform them wondrously. At the end of it all, they will find, as Van Morrison sang, their souls and spirits flying into the mystic.

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Double-edged sword

How quickly things change!

 

The oil bust last year has been a blessing to shipowners who have been struggling to survive ever since the global economy tanked six years ago. Bunker costs have halved, which means that, for example, even a medium sized container vessel’s fuel costs today are almost a million dollars lower than they were a year ago. Given that the industry has been struggling to control even nickel and dime costs, this is a life-saving number.

 

Another blessing has been bestowed upon owners of very large tankers, who have seen their ships back in demand as traders and speculators rush to store cheap fuel to be sold later at higher prices. China is stockpiling fuel; the contango market in oil- where forward prices are higher than existing ones- has meant a stampede towards large tankers. With things expected to stay copacetic for the next few months- or so experts would have us believe-this will continue.

 

But-and alas, there is always a but- there is a flip side to this. For one, the shale industry in the US is going from boom to bust in quick time. An industry that exploded in the last couple of years, generating hundreds of thousands of jobs in a country struggling to emerge from the ruins of the 2008 financial meltdown, is collapsing at the same speed. The steep oil price fall has oil companies preparing mass layoffs this year in the US, reminding people of the eighties when as many as two thirds of oil rigs in Texas shut down within two years.

 

Billionaire Ross Perot Jr says that the shale industry will contract by 30% and prices will go below the $40 mark. BHP Billiton has said that it was cutting US rig operations by 40% this year. Baker Hughes is cutting 7000 jobs and Schlumberger 9000. All these biggies in the business are slashing expenditure by a fifth or so.

Clearly, the oil bust is not good news for everybody. Any period of financial chaos has, in any case, much collateral or peripheral damage that is often realised later but is nonetheless threatening- sometimes even devastating. There will be many shale producing countries around the world that have invested heavily in recent years and now face uncertainty. Unlike the US, many poorer nations will be hobbled by the relatively sudden collapse.

Oil prices aside, things do not otherwise look too rosy for shipping, where issues like overcapacity and anticipated high environmental regulation costs continue to create massive headwinds. The industry has, however, a bigger and more immediate problem, which is slow global GDP growth. The International Monetary Fund has just released its January World Economic Outlook update lowering projected global economic growth figures. The decrease is less than half a percentage, but has already had a huge impact on sentiment. The IMP expects global GDP to grow to by 3.3% in 2015 and 3.7% in 2016, which is hardly better than the 3.3% figure for the last two years. The IMF figures indicate that higher than expected growth will come from the US. The biggest laggards will be Russia- hardly surprising, given the oil shock, China and Brazil.

 

This is, obviously, not great news for trade and shipping, which will have to take whatever comfort it can from low oil prices alone.

 

While preparing for the end of the oil bust, of course, if it believes, as I do, that market forces are only part of the reason of the oil price collapse. The other reason- a US-Saudi backroom deal to bring Russia to its knees, similar to what they did to the Soviet Union before it imploded- is one I have written about before. If I am right, then the situation can reverse quickly; a politically strategic decision, after all, can be easily reversed once objectives are seen to be met or if policy is changed for any other reason. For example, if the US feels that there is too much damage being done at home to the powerful oil industry by staying the course.

 

Like in much else in life, a double-edged sword awaits us here, too.

 

Ghosts of the future

The European refugee crisis is out of control. The rest of the world has shown limited interest in it, though, although the new year has brought with it sensational images of coast guard officers boarding ‘ghost’ crewless ships to disable autopilots and locked in engines and stop the vessels heading for disaster with hundreds of refugees aboard.

The world should take more notice, though. For one, this not just an ‘African problem’ any longer- these asylum seekers are coming through Turkey now. But, more importantly, we need to pay attention because this crisis is a beginning; is showing us a sketch of what is yet to come. Desperate refugees will not be a black swan event in future; just wait until environmental migration is forced upon us. The migration that we see today- conflicted, violence ridden and tragic as it is- is nothing.

Figures from the UNHCR and the International Organisation for migration are compelling.  Three hundred and fifty thousand people crossed risky seas in decrepit boats last year. War torn Syria and Eritrea produced half of all asylum seekers; Libya, the Ukraine and Iraq were other big contributors. Then, almost three and a half thousand people died or went missing in the Mediterranean in 2014- a figure greater than the combined number of deaths seen in the previous three years.

Middle class Syrians are fleeing the country through Turkey. Human smugglers are charging them three times what the poorer asylum seekers pay from North Africa to make the voyage to Italy. These high rates allow gangs to buy larger- even if dilapidated- vessels that they are happy to abandon near western coastlines- the so called ‘ghost’ ships- with refugees aboard. This new modus operandi has increased in the last few months; the recent media spotlight on the livestock carrier Ezadeen and the ‘Blue Sky M’- abandoned by their crew with hundreds of refugees each near Italy- does not alter the fact that other cases have gone relatively unreported. Ships are bought at around 100,000 USD a pop, but the smugglers are making around 5 million dollars a trip, so abandoning ships is well worth it.

The UNHCR describes the Mediterranean crossing from the Middle East and Africa to Europe as “the most lethal route in the world.” Desperate asylum seekers have threatened to kill their own children unless they are rescued.  Hundreds of migrants have been thrown in the water by people smugglers. Crews of merchant ships have been threatened by survivors they have picked up. Tales of horror and despair come in with each boat.

This is not just an Italian problem. Riots amongst or with migrants have become a regular feature in Calais, where asylum seekers live in squalor around an area called ‘the jungle’ – a tinderbox of mainly African, Middle Eastern and Afghan refugees desperate to cross the channel into the UK. Other countries are facing similar problems. Thousands of Germans in the city of Dresden are protesting what they call the ‘Islamisation of the West’- most of the asylum seekers are Muslim.

I have been saying for a long time that shipping needs to have in place a systemic response to piracy, so it can react quickly and effectively whenever piracy inevitably rears its head elsewhere in the world. Shipping may also need a similar rethink on asylum seekers that shipmasters are bound- by law, tradition and the demand of humanity- to rescue. Shipping needs to consider carefully the security and other implications of the possibility that crews can be very easily overwhelmed by these migrants.

No doubt, governments and organisations like the UN have a major role to play going forward; shipping cannot solve this problem alone, even though it is at the front line and is, often, the first responder to the crisis. All I am saying is that everybody needs to start thinking of systemic solutions to the migration of massive numbers of displaced people. So far, we are talking about annual numbers of about a third of a million. Imagine if the figure was ten million, or twenty- the kind of figure that, for example, rising sea levels will easily force upon us down the line.

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