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.-