Friday, November 6, 2015

Global Shipping Veers into Capital Destruction......

Global Shipping Veers into Capital Destruction

Overcapacity "will be even greater than in 2009."

"I would be open to the possibility" of reducing the fed funds rate "even further" and go negative, explained Minneapolis Fed President Narayana Kocherlakota last Thursday. 

Some folks just don't get it!

Here are the results of seven years of global QE and zero-interest-rate policies:

Global demand is going from sluggish to even more sluggish. Emerging market countries are leading the way, it is said, and China is sneezing. Brazil and Russia have caught pneumonia. Japan is feeling the hangover from Abenomics. Even if there is some growth in Europe, it's small. And the US, "cleanest dirty shirt" as it's now called, is getting bogged down.

And here's what this is doing to the shipping industry, the thermometer of global economic growth.

On one side: lack of demand.

Due to the "recent slowdown in world trade" shipping consultancy Drewry on Thursday slashed its forecast for container shipping growth, in terms of volume, to 2.2% for 2015 and lowered its estimates for future years. BIMCO, the largest international shipping association representing shipowners, issued its own, even gloomier report also on Thursday:

On the US West Coast, it's been slow all year, starting with the labor disputes that weren't resolved until mid-March. Since then, year-on-year growth in the second quarter was almost on par with 2014. But for the first half year alone, inbound loaded volumes dropped by 2% according to BIMCO data.

On the Asia to Europe trades, volumes were down by 4.2% in the first half of the year as 7.4 million TEU (Twenty-foot container Equivalent Units) was transported. Northern European imports fell by 3.6%, while the East Med and Black Sea imports fell by 4.8%.

Intra-Asia shipments remain a stronghold with ongoing positive growth around 4-5%, but the increased uncertainty surrounding the economic development in China adds doubt as to whether such a strong growth rate can be sustained for the full year.

At the same time, as shipping volumes struggle, freight rates have collapsed, and revenues with them.

"The severe lack of exports from China" is reflected in the China Containerized Freight Index (CCFI), BIMCO pointed out. The index, which tracks freight rates from China to major ports around the world, plunged below 800 in early July for the first time in its history (it was set at 1,000 in 1998). It's currently at 814. The red line marks 800:

On the other side: over-capacity.

Drewry estimates that an additional 1.6 million TEU of new capacity is being added to the container shipping fleet this year, and not enough ships are being scrapped. Hence a fleet growth rate of 7.7%.

As a result, Drewry's Global Supply/Demand Index, a measure of the relative balance of vessel capacity and cargo demand in the market where 100 equals equilibrium, has fallen to a reading of 91 in 2015, its lowest level since the recession ravaged year of 2009.

But in 2016, another 1.3 million TEU of new capacity will be delivered. Drewry projects that its "Global Supply/Demand Index will fall to its lowest level on record over the next few years, indicating that the overhang of excess capacity will be even greater than that experienced in 2009."

So freight rates have crashed globally. But graciously, the oil price crash led to lower bunker fuel prices, which has kept some, but not all shippers afloat.

Shipping lines have responded half-heartedly with idling some of their ships, but so far without great success in raising rates. And these ships are heavily leveraged, so idling them and not earning revenues while having to service their debts isn't helping matters.

As a result of moronic monetary policies, the cost of capital has been close to nil for the right folks for long enough, and desperate investors are out there blindly chasing whatever yields they can get, there are consequences: malinvestments.

And they beget overcapacity and over-supply, which beget the destruction of pricing power, which unleashes deflationary forces, which inflict heavy losses on companies in the sector, which finally seek refuge in bankruptcies, which finalize capital destruction. None of which beget a healthy economy. AND STILL THE FED THINKS LOW RATES ARE THE ANSWER!

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