It is true that the scale and speed of shipping’s downturn has surprised even old hands in shipping. But there are a few of the industry’s elder statesmen who were warning for some time that the status quo could not possibly continue and that a major market correction was imminent. Ship financier Paul Slater was one of them, although his repeated public proclamations went largely unheeded.
This week, he spoke at the Mare Forum gathering in Houston. He told delegates that the warning signs had already been clear to see at last year’s Houston meeting, twelve months ago. At the time, he pointed out, spot crude oil was trading at $95 a barrel, spot VLCCs were making almost $80,000 a day and Capesize bulkers were averaging $120,000, with one-offs fixing at more than $150,000.
“Bullish investors and some investment advisors were still talking of the shipping industry reaching a new paradigm, with China and India continuing to grow their economies at double-digit rates,” he told delegates. The value of the orderbook stood at around $350bn, split 60:40 dry to wet.
What a difference a year makes. VLCCs are now trading at less than $33,000 a day, and Capes have bounced back from seriously loss-making levels to around $30,000 this week. By the fourth quarter of 2008, the orderbook had grown to around $550bn although cancellations and deferrals since then have probably knocked at least $100bn off that figure. More than 1,000 ships are already laid up, Slater reckons, while more than 10% of the VLCC fleet is being used as floating storage.
China’s economic growth, seen previously as virtually unstoppable, has stalled, with 2009 growth now forecast at less than 3%. Some 20m migrant workers have been laid off, Slater says, whilst India’s growth has also slowed dramatically. “The leading developed nations and the US and Europe are all in recession, with unemployment rising and housing markets continuing to decline.”
Where from here, Slater asked. Well, the credit markets have traditionally provided the link between lenders and investors through the issue of bonds or the creation of a range of financial derivatives that can be traded in regular markets as well as over the counter. “Unfortunately this over-the-counter market became a capital casino of enormous proportions,” Slater declared, “in which all kinds of debt securities and their attendant derivatives could be bought and sold with little or no reference to the quality of the underlying security.”
Credit insurance was created, he said, enabling poor quality loans to be upgraded to a level whereby they could be bought and sold by financial institutions such as pension funds and life insurance companies which had a huge and growing appetite for investment. But the problem is that the credit insurance itself also became a gambling chip in the casino, as demand for credit insurance ballooned as banks wrote more and more loans with little regard for risk.
According to The Economist, Slater pointed out, the estimated $200trn traded in derivatives in January 2007 had spiralled to $700trn by June 2008 and was a fundamental cause of the credit crisis. “It is difficult to see how the banks can return to lending without the credit markets returning to normal. This will only happen when these markets become tightly regulated and completely transparent.”
Slater suggested that shipping will not see any recovery until the recession in the developed countries is reversed and the banking and credit markets rebuilt. “This could well take a decade to achieve unless there is close co-operation between nations at both ends of the world trade chain. Meanwhile we will see more attrition as revenue streams and values settle down to new levels driven by the reduced demand for shipping services in all sectors.”