An overarching theme of the shipping industry this year has been "uncertainty"; not that shipping has even been an easily predictable industry, but this year, uncertainty has been hanging over the market as a modern-day Damoclean sword from tariffs and trade, to new regulations and bunker fuel spreads to the shipping finance market. At conferences we participated this year, from Athens to Odessa to Amsterdam, company executives have kept stating that uncertainty and lack of conviction has been keeping companies from investing, traders from trading, and shipping and shipping companies have been left at the mercy of political and trade and macro- gyrations.
In the past, the market was, and this is an over-simplifying statement, either good or bad – meaning that freight rates were good or bad, and there was a clear driver of what was driving the market toward that certain direction. China, of course, has been the monumental trend since the beginning of the millennium that has driven the market mostly higher, and every time China sneezed, shipping was the first industry to hear about it. When capital and its associate terms in shipping became plentiful and tonnage supply increased, freight rates moved accordingly (in the other direction). Along the main trend, there have been smaller, regional, topical, seasonal, opportunistic trends that either alleviated or exaggerated the larger main trend. But, once again, these were trends that could be identified, and more importantly, there were drivers that could be identified, and some, to be quantified.
At present, and until recently, the freight markets for dry bulk, tanker and containership vessels had been rather disappointing this year. Original predictions for 2019 were much more robust that the reality we have experienced this year until recently, and yet no-one is certain why the market has been weak. Conceptually, tonnage supply has been increasing at a much slower pace than any other time in the last eight years, and tonnage demand has been keeping positively steady, and on occasion, growing faster than tonnage supply. Logically, the market would had been better this year.
There is a clear need for explanations, even if those are limited in scope or efficacy.
For starters, there is the geo-political risk of the current US policies and an ensuing trade war (and possibly currency war) with PRC. When in 2017, the US imposed tariffs on Chinese imports (and there was a certain reaction from PRC), the consensus opinion, at the time, was that was just saber rattling, and a few concessions later and some more “horse trading”, it would be a scenario of “business as usual”. However, more than a year later, and after several escalations and expansion on tariffs and even threats for complete financial annihilation of the other side, we do not seem any closer to a resolution than at any time in the past. We live on a feed of Twitter messages and “breaking news alerts” and gyrating stock markets (instead of real news and analyses), and quite often, what is considered hot “trade news” is often obsolete by the time the newspapers hit the pavement the next day. Even worse that the lack of any substantive progress, and thus high uncertainty, there is no clear answer of what exactly the US President wishes to accomplish and what would consist a victory in these negotiations: there is no definite stated ideal outcome to be achieved from these negotiations, and often the goalposts tend to move to fit the mood of the moment and other political considerations. Irrespective of objectives and execution and negotiation for this trade war (which definitely is not the topic of this article), in this political environment, for any business CEO is hard to commit to any long-term strategy, and they focus instead mostly on reacting to short-term trends and pronouncements. In the US, two years after the trade wars started, manufacturing production, selectively manufacturing employment, and optimism by business executives have been dropping fast. Hauling and transport and shipping in the US have been reflecting such trends, and of course, international shipping cannot stay immune.
And, just to jump on the east side of the pond, political developments in the UK with Brexit defy any expectations of a political and government system that had acted as a lighthouse to many inspiring democracies around the world for centuries. And, either reflectively due to shifting of powers in continental Europe or because of its own fiscal and monetary and political decisions of the last decade, the continental European economy cannot be considered an inspiring story. Negative interest rates have been pushing central banks to the limit of their toolbox, with unknown repercussions in the future. Negative interest rates, for example, already have been pushing the residential real estate market out of control in several countries in the northern Europe, and in the event of another recession, it’s hard to see how central banks would react.
All in all, political and geo-political and economic and monetary and fiscal uncertainty in most of the western, established, stable world; because, you see, there are many countries on the periphery (the events in Syria are the most conspicuous example) that can push several western countries to the brink of new and untested policies, at a time when citizenry globally seem fed up with globalization and open-door policies to foreigners. And, trade and movement of cargoes.
Which is what shipping does as a service… keep moving cargoes…but not so much, at times when uncertainty is high and companies and traders have little faith and intentionally keep a short horizon.
This post is provided by Karatzas Marine Advisors & Co, a preeminent shipping finance, shipping advisory and shipbrokerage firm based in Manhattan, New York, and Hamburg, Germany. To explore how your firm can benefit from Karatzas Marine Advisors & Co.'s expertise and industry knowledge, please contact us via email by clicking here.