Archives for posts with tag: Europe

With the festive season almost upon us, and (for most people!) the holiday shopping done and dusted, it’s a fine time to take a look at the mainlane container trades which deliver consumer goods from Asia to Europe and North America, to get an idea of how full Santa’s sack might be looking. This year dear old Saint Nick might just be rubbing his head in confusion…

For the full version of this article, please go to Shipping Intelligence Network.

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Global seaborne trade has nearly doubled since the turn of the century and in the consensus view, looks likely to continue on an upwards path in the long term. One important element of this trend is rising per capita trade as the world becomes wealthier. But where, exactly, might further per capita seaborne trade growth come from? The concept of an economic ‘tipping point’ and a few examples can be helpful here.

For the full version of this article, please go to Shipping Intelligence Network.

Container shipping is often thought of as the ‘glue’ which keeps the world economy turning, providing a low unit cost way of moving both manufactures and a range of other goods between producers and consumers around the world. As such, container ports and terminals are crucial nodes in the world’s transportation system, and their sheer number and ubiquity merits a close look.

For the full version of this article, please go to Shipping Intelligence Network.

As shipping market observers of a certain vintage will recall, 1980s Swedish rock band ‘Europe’ scored a huge hit with ‘The Final Countdown’. Following the global economic downturn, the European economy was facing up to a similarly fatalistic reckoning. Here we take a closer look at how things worked out in Europe, and the impact on seaborne trading patterns.

Not The Orient Express

When the economies of Asia even twitch, shipping market observers pay close attention and rightly so. China’s growth story has driven much of the expansion in seaborne trade in recent times, so when industrial production (IP) growth reportedly slowed to 6.9% in August, that made headline news. As has been well documented, industrial output growth in China and other Asian economies has driven rapid growth in imports of raw materials and also led to increased exports of manufactures to consumers in the West. Chinese and Indian IP combined is up by 99% on 2007 levels. Performance in Europe hasn’t got anywhere near those levels as its economies, particularly those in the Eurozone, have struggled badly since the crisis, but that doesn’t mean that it’s not worth taking a look at.

North And South

In fact, last year Europe was still close to China’s size as a seaborne importer, with volumes estimated at around 2 billion tonnes. But of course in terms of today’s economic performance, Europe is way behind. Industrial production in Europe, as the graph shows, is still below pre-recession levels and this has impacted strongly on bulk imports to Europe. In Northern Europe, IP in Germany, France and the UK combined is around 7% down on 2007 levels, and in Southern Europe things have been even worse, with IP in Italy and Spain combined down a whopping 27% on 2007. As a result, Europe’s coal imports in 2014 are projected to remain below 2007 levels at just under 200mt and iron ore imports are set to be well below 2007 levels at less than 130mt. Crude oil imports are projected to hit 8.4m bpd in 2014, 16% down on 2007.

Count The Boxes

But intriguingly, not all aspects of recent European economic activity are such bad news for shipping. Europe is a major importer of finished goods too, and in 2013 volumes on the Far East-Europe container trade started to expand again. In the first eight months of this year, European box imports from Asia were up by 8% year-on-year. Growing demand for manufactures, production of which has been outsourced far away, backed by inventory rebuilding, has left monthly box imports from Asia this year so far up 11% on 2007 levels, even if forecasters are suggesting that darker economic clouds are gathering once again over Europe.

Old Habits Die Hard

So, the economic crisis in Europe hit shipping hard, and the key drivers of trade are today elsewhere. But European consumers can’t kick old habits and they love a shopping trip. Industrial activity in Europe may well be weak, but in one arena at least, European activity has supported seaborne volumes. The ‘final’ outcome awaits but so far this year there’s been some counting up as well as down.

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In the classic movie The Seven-Year Itch, hero Richard Sherman is left sweltering in his Manhattan flat as wife and kids head for the beach. A daunting prospect, until Marilyn Monroe turns up in the flat below. That’s where the fantasy starts as Richard exercises his “seven-year itch” in an amusingly unlikely relationship with the charismatic Monroe.

Shipping’s Seven-Year Fantasy

2014 has been a hot summer in Europe and shipping investors have been getting the seven-year itch themselves. Although the Lehman Brothers collapse in September 2008 triggered the meltdown in rates, the seeds of the crash were sown exactly seven years ago on 10th August 2007. On that date the European banks became so suspicious of each other that the interbank market seized up. To celebrate, seven years later shipping investors are busy indulging their seven year itch with the residents of the flat below – not Monroe, but the equally attractive Asian shipyard representatives. 174m dwt of orders in 2013 and 66m in 1H 2014 show what a good time they’ve been having.

Cashing In At The Top

But how did the investors’ last big fling in August 2007 (273m dwt of orders were placed in full year 2007) turn out? Surely this was a bit of a disaster? Actually things did not turn out quite as badly as seemed likely when the market crashed. For example, a Suezmax resale costing $105m in August 2007 would have made around $57m trading since then, after OPEX (see chart). If this cash was used to pay down the vessel, the balance in August 2014 is $48m, compared with a market value of around $41m. Of course this does not take account of waiting, slow steaming and mishaps. But even allowing for these, it’s not the disastrous story veterans of the 1980s expected.

Off To A Good Start

Getting an investment off to a good start is vital and that’s what helped the 2007 investments shown in the chart. The accumulated cash flow of six August 2007 resale purchases shows that 50% of the cash was generated in the first year; 25-30% over the next 18 months; and very little in the last 4 years. For example the Cape generated only $6m between Dec 2010 and August 2014.

But the good news is that thanks to financial easing and near zero interest rates, residual values have remained firm. In 1985 a Panamax bulker delivered at a cost of $25m had a market value of around $8m. Today a Panamax bulk carrier ordered a couple of years ago at a cost of $29m has a resale value of $31m – it’s actually made money. So although the cashflow has been reminiscent of the 1980s, asset values this time round are a very different story.

7 Years On – Is the Cycle Over?

So there you have it. What looked like a disastrous shipping recession has turned out to be surprisingly benevolent, at least compared with the traumas of the 1980s. With shipyard credit available on a grand scale and not much in the secondhand market it’s a no-brainer – head east and you’ll find Marilyn standing over a subway ventilator. But don’t forget this is only a summer fantasy – the wife and kids will be back soon. Have a nice day.

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The film Transporter starring Jason Statham ought to appeal to shipping folk. There’s a big action scene on a containership and the “transporter”, with his computer-like karate skills, has a commercial philosophy which consists of three absolute rules. Rule 1 – “never change the deal”; Rule 2 – “no names”; Rule 3 – “never open the package”. Could these be helpful in our branch of the transport business?

Our Word Is Our Bond

Rule 1 certainly can. Shipping is famous for sticking to its word, and Baltic members will enjoy the opening scene of the movie. Statham is waiting outside a bank, in his impeccable BMW get-away car, when four bank robbers jump in. But the deal was to transport only three, so Statham refuses to move. As police sirens wail, his clients solve the problem by shooting number four and pushing him out of the car. A better solution than arbitration, given the circumstances, but not one the Baltic recommends!

Shipowner With No Name

The Transporter’s second rule is also close to the heart of many shipowners – “no names”. During the 20th century shipping became a rather anonymous business, with the majority of ships flagged out under brass plate companies to avoid unwelcome costs. This practice of giving the ship a different name and nationality from the owner has gained wide acceptance and the “flagged out” fleet grew to 40% of world shipping in the 1980s and over 70% today. But Mr Statham’s “no names” rule is under pressure as the EU and US seek transparency so that the “responsible party” for pollution and terrorism incidents can be traced and apprehended.

P3 Package Poker

Which brings us to the 3rd rule – “never open the package”. The problem this rule addresses is that opening the package can produce unexpected consequences. It happens in the movie when the transporter opens the package and finds a girl and it can happen in business too. Take the recent “P3” package. The world’s three biggest (European) container operators decided that cooperation would give them a cost advantage. They packaged themselves as “P3” and asked for approval from the authorities. The EU agreed, but unexpectedly China did not. Why? One explanation is the balance of fleet ownership. Europe is a massive exporter of shipping services, with a fleet twice its ship demand, whilst China and SE Asia are big importers and exporters with relatively smaller fleets (see graph). To date China and Asia have accepted this imbalance, but maybe the world is changing.

Who Rules The Waves?

So, can the shipping industry learn from Mr Statham’s pithy approach to the transport business? “Never change the deal” is a core market principle and although “no names” does not work so well today as it used to, shipping has something to gain from keeping its head down. But it’s the unexpected consequences of opening the package that drives the film and maybe smart shipping players can learn something from Mr Statham’s error. Stick to the deal, keep your head down and whatever you do, never open the package, however interesting the contents may seem. Have a nice day.

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