Monday, 4 January 2016

Shipping's parlous plight heralds economic storms

The critical point to ponder about soothsayers is that they are often overly paid, unashamed practitioners of charlatanry, no matter how often their predictions are wrong, usually otherwise known as economists. With that caveat in mind, here is my take on the global economy this year and the threats to logistics.

The consensus appears to be that the outlook for global economic growth is modestly bullish, but like a harlot GDP figures can be deceptive. America's 2016 GDP growth is being touted at 2.5% and Britain's 2% plus but GDP figures have an irritating habit of being subsequently revised downwards, and being more divorced from reality. When, for example, Chinese premier, Li Kequiang, was a regional official he examined the real figures that mattered, like electricity consumption, rail cargo volumes and loan disbursements to gauge the economy, telling the US ambassador in 2007 that such data captured the reality of growth better than "man-made" GDP. India, another fast-growth economy, is now taking a leaf out of China's book by paying more attention to data from various industries instead of relying on the official GDP figure. The result is that the private estimate of India's year-on-year GDP growth for the latest quarter is 6%, palpably less than the 7.4% official calculation. So the prudent decision would be to regard national GDP figures with caution.

Is there, however, one index that comes close to being an accurate bellwether of the global economy this year and if so what does it herald? Yes, there is, and it's called the Baltic Dry Shipping index, which when allied to other 'wether' vanes, like developments of a financial and political nature, paint a disturbing picture.

The Baltic Exchange's main sea freight index tracks cargo rates for ships carrying dry bulk commodities like coal, iron-ore and grains, and as such is regarded as a forward-looking indicator, because about 90% of the world's traded goods by volume is transported by sea. Investors look to this index for any signs of changes in sentiment for industrial demand. Given that this index plunged to an all-time low last month, more than 95% down from a record high hit in 2008, it is hardly surprising that Basil Karatzas, head of New York Consultancy Brokerage, Karatzas Marine Advisers, opined: "The state of the dry bulk market especially indicates that economies worldwide are likely to stay weak, much to the disappointment of Central banks....foreign exchange traders, miners, steel makers, trading houses and commodity economies." Commercial banks, in particular, have good cause for concern owing to their heavy exposure to non-performing shipping loans, even though they have already written off billions of pounds from such loans. In the first nine months of 2015 the cumulative loss from revenues of 13 shipping companies publicly listed in New York reached over $3.36 billion. Having lent on generous, often lax terms in a market awash with cash since 2008, the banks are now left with loans worth less than the underlying value of the ships.

                             Perfect storm ahead                           

The flood of new ship builds coming onto the market is likely to depress it for at least two more years, especially as China's slowing economy is stifling demand for dry bulkers, leading to a perfect storm. The situation in the oil market is hardly less fraught, as oil producers and their production rig suppliers face huge cutbacks in new developments, closures, bankruptcies and many tens of thousands of job losses, not to mention straightened circumstances for oil-producing nations who now are going to have to impose taxes on their citizens for the first time --- a potential cause for civil unrest.  

On a wider financial front there is little to inspire confidence. The completion of the European Central Bank's comprehensive assessment asset quality review stress test in October 2014 revealed an additional Euro135.9 billion non-performing loans in Euro zone bank balance sheets, bringing the total held by 130 banks examined to Euro879.1 billion, hardly small change. 

The economic global outlook can expect little relief from the hitherto burgeoning BRIC nations. Brazil's tragic comic corruption opera, alas, has left the country a busted flush, an affliction that routinely affects Argentina, the two biggest South American economies. Brazil's economy, according to Goldman Sachs, is sliding into a full blown recession. Events in Russia, another key BRIC nation, are equally disturbing, driven by plunging oil prices, trade sanctions, soaring inflation and private consumer financial delinquency. Matters are so parlous that many citizens are sharing taxis to save money and pay down their credit card debts. The growth rate in overdue credit debt has been a staggering 45% in 2015, and as double digit inflation erodes Russians' disposable income, some are desperate enough to turn to loosely regulated microfinance outfits that charge macro rates up to 880% p.a. In such a climate it is hardly surprising that retail sales have plunged. 

I see global economic growth being much weaker than currently touted by pundits, with some countries slipping into recession. Unemployment in the developed world is likely to rise significantly, when part-time jobs are factored out. There will be more shocks to the financial system as some banks are forced to close or merge. The bloodletting in the shipping and mineral industries will worsen and shipbuilders face dire straits. New York and London's DJ and FTSE indices respectively are likely to end the year significantly lower, i.e. at least 10%. 

On the political front, there is some cause for good news. Putin will strive for a rapprochement with the West to relieve the economic pressures on the nation, leading to defrosting relations. China, on the other hand, will ratchet up the tension over its insouciant behaviour in the South China Sea through creation of military bases on artificially-created islands from reefs in the Spratlys, islands claimed by several other, much nearer nations and in an area where 40% of global trade sails through. Logisticians should take note of that threat accordingly and be prepared.