Heightened global supply chain risks herald gathering storms?

In the logistics firmament it is often said that demand for forklifts is an accurate bellwether for any economy, in that it is usually the first into a recession and the last out but that observation tends to apply to individual economies. For a global take on economic prospects perhaps the best bellwether is shipping, particularly the dry bulk vessels, and the bells from that quarter are not ringing joyously.

As if to highlight the gathering storm, the Chartered Institute of Purchasing and Supply's latest quarterly risk index, backdated to 1995, shows that the risk of disruption to corporate supply chains is running at an almost record high, helped by a drop in commodity prices and a slowdown in China. Admittedly, the risk rise is not universal. In North America and western Europe the supply chain risk fell last year but that does not mean these areas will escape unscathed if current trends in global commodity trade and deflation persist much longer.

What we are seeing in the global supply chain is essentially a financial risk that began with the global financial crisis in 2008. In the Far East, particularly China, the manufacturing sectors are at serious risks of defaulting on state-backed loans, while in South America collapses in soya bean, copper and oil prices are affecting much of that Continent. In Australia the collapse in mineral prices, particularly iron-ore and coal, have left the country with the highest unemployment for 13 years, with apparently worse to come as investment continues to fall. In Japan, once the world's second largest economy, manufacturers are reluctant to spend on machinery upgrades, where the average age of their facilities and equipment is now 15 years, the highest in 30 years, and the antithesis for any efforts to boost economic recovery. Japan's lost decades of stagnation and deflation have prompted companies to restrain investment and now those same fears over deflation threaten the rest of the global economy.

Nowhere, perhaps, is the problem most acute and obvious than in shipping, and by extension the banking industry, which by some estimates has about half a trillion dollars worth of outstanding loans to shipping companies, much of which is at significant risk of default. The current market state for shipping commodities across the world's oceans is dire, which even an expected record of over 100 ship scrappings this year will not improve. Daily earnings for the industry will still tumble, though it must be said that prediction is not the shipping industry's forte. As recently as February this year it forecast that shipping rates would jump but now forecasts are turning bearish as China's imports of coal plunge and its iron-ore imports expand at its lowest pace on record. As the world's second largest economy, China will expand the least in a generation this year, according to estimates compiled by Bloomberg. Despite an expected demolition of 6% of Cape-size vessels, earnings per vessel will still slump about 20% this year, based on a survey of 10 shipping analysts. Freight rates have been pushed to historic lows, thanks to a perfect storm of collapsing commodity shipments, particularly in coal and iron-ore, combining with a market glutted  with vessels ordered as long as a decade ago. Ships competing for spot cargoes today are earning about $4,200 a day this year so far, the worst start since 2000. Cape-size average earnings are now expected to drop to $11,000 a day this year, having been predicted only in February this year to rise to $18,750 a day.

China is the world's top iron-ore and coal consumer, importing almost 60% of the world's sea-borne iron-ore and about a quarter of the global coal shipments. It is worrying, therefore, when China's Iron and Steel Association sees overcapacity for sea-borne iron persisting until at least 2019, as the world's largest suppliers expand production even more. The risk to coal shipments, however, has more permanent forces at work --- pollution. China's biggest coal company, China Shenhua Energy Co, which supplies about 16% of the country's coal, cut its sales 10% last year and forecasts another 10% cut this year. This reflects China's attempts to reduce its energy intensity in coal dependence so as to cut pollution, understandable in a country where air pollution from all sources kills an estimated 1.2 million a year. Part of China's strategy is to develop alternative sources of electricity generation, such as hydro, wind, nuclear, gas, and solar PV. Cuts to China's demand for fossil fuels are so great that its imports will be heavily affected. The sea-borne market in coal cannot expect any comfort elsewhere from fast-developing countries. India's Energy Minister has made it clear that India's thermal coal imports could potentially go to zero within two to three years.

China's imports of copper in February 2015 tumbled the most in four years, while oil and iron-ore imports slowed to the weakest rate in 3 months. China is now already building the world's largest renewable energy system, for which it deserves a bow, and which in 2013 stood at just over one trillion kw/hrs, almost as much as the combined electricity generated by France and Germany. All this bodes ill for the shipping industry and shipyards, where orders for new ships have plunged to about 400,000 dwt a month for this year, according to Clarkson, the world's biggest ship broker, the smallest since the early 1990s, and about 98% below the peak commissioning rate set in 2007, when 23 million dwt were ordered in a single month.

Now is not a good time to be in shipping, without a long purse, and never, perhaps, have global logisticians faced such uncertain times. Let us hope that uncertain times do not mean living through "interesting times" as the old Chinese curse goes.  
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