Saturday, August 22, 2009

The shipping industry:The other side of the global financial crisis

While the global economy was booming ,the world trade flows by sea ,were unstoppable ,so it was with the shipping industry including both containers cargo ( 500 million containers were transported in 20008 throughout the world), and ship building ( the cargo capacity increased from 4 millions TEU in the year 2000, to 12,5 today. Source, august 11,2009) ).
All of the sudden ,the world demand for transporting goods by sea has fallen sharply ,and a new story has begun. What are going to be the consequences for global shipping industry?.
Actually, container shipping has declined world wide by 15,7% , the tariff has gone down from U$$27 ,64 to U$$5,32 for container ship per dollar /day , and for every container, shipping firms are losing roughly U$$ 300.At the same time, new ships has been designed to cope with a higher expected demand for container transport. Current ships with 363 feet long, are capable to transport 11400 containers, almost double the current rate of capacity use . Singapore and Hong Kong, have become the place for empty ships which are waiting for the good times to come back soon.
What Onassis would have done with a crisis like this one?.The first approach is to take it like an opportunity, to consolidate market positions specially for big shipping industry player to take control of all of those smaller companies , which are not in the position to make it over .The Chilean shipping company CSAV, was helped by such an arrangement .On this regard, the expected outcome will be a contraction on the level of supply , which means that fewer firms, will take control of all of those smaller ones unable to survive the crisis. Thus ,the future shipping industry structure will be characterized, by a higher level of concentration. Whether it will be within the range of the H-H (Herfindal - Hirschman index) index, considered as moderated concentration or not, is another matter.
As long as this concentration goes on, the implications for long term shipping tariff(beyond the year 2012) might be an increase above previous level ,once the recovery is fully underway ,as the oligopoly forces drive prices up .
Should government step in into this industry, as it did with the banking industry ?.There are substantial differences between this two casualties form the global financial crisis.While the global banking industry was on the edge of collapse , the shipping industry as a whole ,seems to be far form such an outcome. Some firms, specially those with unrealistic expectations about the global economy growth capabilities, which borrowed beyond the reasonable business standard, will be hit hard. However, the business manual suggest that the solution in such a cases goes with cost reductions, productivity increase and , more efficiency which are pretty accessible throughout rationalization process. This is what bigger firm will do in the process of taking over smaller shipping firms. In this scenario , and aside from strategic consideration, (after all Chinese shipping industry will be among the winners) , Government intervention would be negative, as long as it might look like as an arbitrary intervention into the market adjustment to a new equilibrium. In terms of the banking industry, this new equilibrium meant the new great depression 2.0.-

Friday, August 07, 2009

The path of global economy recovery: Some preliminary thoughts

While the economy is moving throughout the second half of 2009, it looks highly probably that sooner than later this year , the NBER will call for the end of the USA economy recession(chart Nº 2. Source ) . Based on recent data (exports recovery, slight decrease in unemployment compensations claims , profit level in some key sectors, revival of the financial sector, prices expected performance ) the USA economy should already be close to the bottom up point .
Given the fact that the recovery is at sight ,there are some question which markets are worry about: The path of the recovery.-
Let try to go deeper into what it might be that path, to foresee its strength and weakness.
a.- It seems that at least in the beginning of the recovery, employment/output elasticity will be low .Thus, although output will start to move to positive territory, in the second half of this year, employment will follow but with some lag . Later on, probably within the first half of the year 2010, employment gains will start to be stronger and sustainable.-
b.- It will not be a consumer driven recovery, therefore it will be a recovery , with a weak start although with a stronger pace in the months after . Investment and firms will take the lead, as long as global economy will demand capital equipment , necessary to sustain the next cycle of global economy expansion. Besides, Banks with higher risk aversion than before , will be more selective to build up theirs portfolio, which will works against consumers considered riskier at this moment .
c.- Foreign demand (chart Nº 3) rather than domestic demand will the engine main of this recovery .This does not mean that domestic demand will stay away for quite a while but , the pace of its own recovery will be slower, manly due to the weak labor market conditions which affect the expectation of the stability of income levels, and the level of private debt which consumer must take care of, before starting again to go shopping .-
d.- The inflationary expectations (chart Nº1)and the Central Bank exit strategy, will have a key role to shape the strength of the recovery. It might be the case that, the next recession although milder than the current one , might be waiting just around the corner. However, the pace of inflation ( ) do not seems to be a threat , therefore there is room for a smooth exit strategy .-
e.- The Developing Asia area (China and India) growing at 5,5% this year and 7% next year ( , July 2009 forecast) , will keep the pace of global economy recovery such as not to lose momentum.-