Shipping’s globalisation woes

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[Deflation needs to be on our radar screens. "For signs of how tectonic plates of the global economy are shifting, look at the Baltic Dry Index." Likewise, see: Drop in venture capital funding illustrates rising caution. *RON*]

 Gillian Tett, Financial Times, 14 January 2016

This week, the eyes of investors have been fixed on tumbling oil prices. Little wonder: with oil now costing as little as $30 a barrel, 15 per cent down since the start of the year, energy markets are signalling trouble ahead — particularly given the continuing turmoil in China.

For another sign of how the tectonic plates are shifting in the global economy, try looking at the Baltic Dry Index, which measures the cost of shipping raw materials such as coal, metal and fertilisers across the globe.

Normally, this does not attract much public attention; after all, in an era where investors are obsessed with capital flows — or the latest digital gadgets — it seems rather retro to focus on the humdrum details of harbours and containers.

But right now, the behaviour of that Baltic index is almost as dramatic as those oil prices. This week, the index fell below 400 for the first time since records began in 1985, after several weeks of steady declines. Last summer the index was well above 1,000, in 2010 it was around 4,000. So if you are gripped by a desire to dispatch a cargo of coal, cement or oil across the seas, it will currently cost you less than it has for at least 30 years.

Now, it would be nice to think that this is just another sign of our modern technological revolution. But the key reason why shipping prices are falling so fast is that the patterns of modern trade and global growth are not behaving in 2016 as western and emerging market financiers might have expected, or as they did during earlier booms.

Over the past decade, shipping companies everywhere from Greece to China have expanded their dry bulk capacity. They did this partly because it was cheap for them to borrow money. New investors, such as western private equity funds, have also piled in, seeking innovative ways to deploy their cash.

The other reason for the boom was that it was widely assumed that global trade would keep expanding. Until recently, this assumption did not seem unreasonable. In the decade before 2008, global trade rose by an average of 7 per cent a year, faster than global GDP growth, because countries such as China were booming and western businesses were creating a web of cross-border supply chains.

History, however, does not unfold in predictable ways. As the World Bank described in a sobering report last week, global trade growth has slowed down sharply in recent years to around 3 per cent, or roughly the pace of global GDP expansion, and it is slowing further now.

This partly reflects structural shifts: the World Bank, for example, blames the sluggish picture on the failure of governments to implement multilateral trade deals at a speedy pace. It also seems that western businesses are no longer building new cross-border supply chains at such a feverish pace. But the more recent reason for slow trade is a pernicious combination of lower real growth in the emerging markets, coupled with currency volatility and falling commodity prices; inventories are piling up in warehouses.

That leaves the shipping industry — quite literally — stranded. Owners of so-called capesize vessels (the largest type) reckon it costs $8,000 a day to run these ships at sea; however, shipping costs for users are so low that they only receive $5,000 in fees. Unsurprisingly, this makes shipowners increasingly reluctant to put their vessels to work. As a result, the cogs of the trade system are slowing down.

One would hope that these are just temporary phenomena. Shipping has experienced big cyclical swings before. If capacity is removed, via a process of creative destruction, this should eventually help prices to normalise. Indeed, this is already happening. Late last year, for example, Deutsche Bank sent shockwaves through the shipping world by requesting that the Singaporean authorities arrest a large bulk carrier owned by an investment vehicle called Maritime Equity Partners (in which Oaktree Capital and Lion Cao Asset Management have stakes) over unpaid debts. Shipping bankruptcies undoubtedly loom this year.

“Eventually” is the key word here: unless China defies the cynics and produces a new growth spurt, there is every chance that the Baltic Dry Index will keep hitting new lows. Consider it, if you like, as another sign of the damaging excesses that can be created by cheap money; or as a potent indicator that emerging markets growth has stalled. Either way, the elites breezing into Davos for the World Economic Forum next week should take note: the real message from the Baltic Dry Index is that globalisation does not always proceed in a straight line.