Attend any given conference on shipping, particularly maritime finance, and you will hear, and see, many presentations, accompanied by PowerPoint, predicting a recovery some time in 2013. Read some articles in the trade press, and you will learn that "cash-rich Greek shipowners" are heavily invested in second-hand and newbuilding-resale purchases, notwithstanding ominous economic and market signs.
What, however, if these omens of recovery are wide of the mark? Indicators seem to be pointing toward a much longer global recession, which is not a good sign for shipping in general. For a change, let's look at the big picture:
- Shipping, particularly in the dry and liquid bulk trades, is dependent on China, and to a larger extent, Asia. The drought and severe storms in North America, which is the world's granary to a large extent, have led to forecasts of the worst harvest in a generation. China in particular is heavily dependent upon what Americans call soybeans, and British insist on terming soyabeans. These are used primarily to feed livestock. Higher soya prices mean that the cost of food prices in China will go higher. Food is a big part of Chinese consumer spending, and is therefore politically a "hot button" for Chinese policy makers. The Chinese government will, if this trend continues, probably react by tightening monetary policy, when many in the rest of the world, including the United States, are looking for a looser money policy in that country. This may well mean that Chinese consumers will reduce their non-food consumption, stifling China's growth. In any case, unless agricultural prices somehow begin to drop in the next few weeks, unrest is likely to develop in much of the world as food prices soar. This has happened before, with dramatic results for the global economy, including shipping.
- What's happening in Europe, often shrouded in obfuscation, really does matter. In light of what is happening in Spain, with Germany's cherished credit rating now under threat, Chancellor Merkel will likely face even more trouble obtaining the support of members of her own party, the Christian Democrats, for measures to prevent a disintegration of the euro zone. Last week, the Chancellor struggled to get a majority of her own governing coalition to support the rescue of what are familiarly termed "ailing Spanish banks". It is very clear that support in Germany does not exist, or is very slight, for giving any more aid to Greece, beyond what has already been promised. This week's warning on German credit, issued by Moody's, is likely to strengthen the dissenters in the German parliament who think that Greece should leave the Euro. We should not be under any illusions; if Greece does leave the Euro, which now looks likely, it will mean that euro zone countries will lose much of their connectivity to one another. If the euro zone does allow its bailout fund to buy up Spanish debt, it is likely that the Spanish economy will itself be virtually crippled, along the lines of what we have seen in Greece. This will be one more powerful blow to general world trade.
- The decline, or exit, of German ship finance lenders, primarily banks, needs to be factored into shipping's potential to recover from the present slump. It will prolong the recession in our sector.
- Then there's energy: the price of oil continues to be driven, up and down, by political troubles in the Middle East. At one point, Brent crude fell 31% from its early March high, as worries of a conflict in Iran receded. However, in the past few weeks, the prospect of a prolonged civil war in Syria and the return of threats of war in the Gulf from Iran, drove up Brent by about 20%. A high oil price may be good for some tanker owners, but overall it will act as a tax on global economic activity, particularly by China. Which is why CNOOC is buying up every oil company with assets in places other than the Gulf. It is also a reason why China continues to invest in its own tanker fleet.
- Copper prices are down nearly 25% over the past year, as metals markets have been driven largely by demand from China, as it tries to build its public and private infrastructure. As Chinese import growth has weakened, so has the price of industrial metals.
When we look at the losses suffered by many companies across the shipping sector, the notion that we are an industry of cash-rich buyers needs, to put it charitably, to be revisited. The freight markets are likely to remain at levels that permit very little debt to be serviced, and debt as a whole within the industry remains far above the true value of ships themselves. As one observer has pointed out, there is now the highest percentage ever of liquid and dry bulk ships trading in the spot markets. This tells us that the sale and purchase markets are dealing in ship values without any reference to actual or projected future charter revenues.
Shipping, like the rest of world, should be prepared for unwelcome political developments. Primarily, these still draw attention to the Middle East, but the future of certain prominent Asian governments also looks vulnerable to political unrest. With regard to Iran, the combined impact of increasingly tight sanctions, a probable decline in the price of oil, and the loss of its chief client, Syria's Baathist regime is likely to give rise to a tendency to lash out militarily. China's future problems are referred to above. The problem of chronic overtonnaging across a broad swath of our industry, and the end of the commodities boom, means that although shipping may have "bottomed out", it looks like a long, chilly winter ahead. Enjoy the warm weather while you can!
Fouding Chairman of NAMEPA and Managing Partner of International Registries
This article has been initially published at www.claymaitland.com