TOC 2008 Amsterdam

7/30/2019 TOC 2008 Amsterdam

1/17

Professor H.E. Haralambides

Erasmus University Rotterdam

Terminal Operations Conference, TOC Europe

17-19 June 2008

Rai, Amsterdam, The Netherlands


2/17

Together with defense industries, the real estatemarket has traditionally been the locomotive of theUS Economy.

Over the past 20 years, the US Economy hasdemonstrated a more robust growth, compared toother industrialized economies. This was fueled bybuoyant consumption, encouraged by rising realestate values.

This wealth effect however, in its turn, causedexcessive imports, large current account deficits (7%of GDP; Figure 2) and a low dollar that, since 2001,has depreciated more than 60% against the Euro(Figure 1)

The subprime crisis and its globally cascadingeffects started when real estate values began todecline.

Current Developments in the US EconomyCurrent Developments in the US EconomyCurrent Developments in the US EconomyCurrent Developments in the US Economy


3/17

Figure 1. Source IMF


4/17

Figure 2. Source: IMF


5/17

The Capital Account in the US Balance of Payments

Historically, US Current Account deficits have beenfinanced byautonomous capital inflows.

Due to a low dollar, however, capital is fleeing US stock

exchanges in search of better investment opportunities inother regions (Asia; Europe; Middle East; L. America;Figure 3).

In addition, having learnt their 1970s lessons, oil producingcountries are investing their surpluses not in financial l

Paper or currencies, but in sustainable infrastructure.


6/17

Source: IMF

Figure 3. A low dollar: Capital is fleeing US stock marketsto Asia; Europe; Mddle East; Latin America


7/17

I firmly believe that western economies will not import fromChina as much as they did in the past.

Changing views in Europe on cheap manufacturesconsumerism; rising concerns on standards; and environmentaldegradation will all contribute to this, and these concerns havealready started changing consumer behavior in Europe.

The China Syndrome:A newImperium is being born

The export-led growth and development ofChina is a cause for concern. China buildsup tremendous foreign exchange reservesused to buy oil and commodities. Thispushes prices up (food prices too), crowdingout other countries, causing inflation and

recession to the rest of the world, buthelping Chinas own economy.


8/17

Total throughput2007 407 million tons

2030 800 million tons

Container throughput

2007 11 million TEU

2015 21 million TEU

2020 27 million TEU

8

How likely is, therefore, such a scenario?In my view, highly unlikely


9/17

Sub-prime Mortgages Crisis

The crisis began when US mortgage companies made hundreds of billions ofdollars of unsecured loans to individuals with poor credit records.

These debts were then packaged (securitized) and sold to financial

institutions around the world who in their turn sold them to pension- andhedge funds.

Total losses, conservatively estimated, in the region of one trillion dollars(Figure 4).

Total home foreclosures: 4.5 million houses.

Central banks have intervened to ease liquidity.

The Bush and BrownAdministrations have handed out almost 1/3 of theabove amount, from their fiscal balance sheets (tax rebates, bonds, etc.).

At the time of writing, consumer confidence has been the lowest in 30years.


10/17

Figure 4. Growth of Sub-prime Lending

Source: Center for Responsible Lending; Inside Mortgage Finance


11/17

Prospects of Bulk Shipping

The Baltic Dry Index (BDI) has risen from an already high 8000 points (April 08)to 12000 index points (May 08); i.e. 50% increase (Figures 5 and 6).Capers command spot earnings of 300K/day (iron ore Brazil-China).Chinese iron ore stockpiling rate : 16% p.a. (MEL forecast).Asian coal imports (Korea; India): buoyant demand.As a result, at the time of writing, the bulk carrier orderbook represents 55% ofthe world dry bulk fleet.Gross capital formation (orderbook) of this magnitude is unsustainable andunexplainable by any economic fundaments, particularly in the face of a loomingeconomic downturn. Shipowner investments are, I believe, rather ill-advisedand I expect the market to collapse as of next year.

NB: similar developments in the tanker markets (not discussed here).


12/17

Figure 5. The Baltic Dry Index (BDI): June 2008

Source: Baltic Exchange


13/17

[20 (red) and 200 (green) day exponential average]

Jan 2006

Jan 2005

Jan 2002

Unprecedented in the history of shipping!

Source: InvestmentTools.com


14/17

Prospects of Container Shipping

Despite sluggish demand, excessive orderbook, and high fuel prices, rateshave declined only moderately and 2008-Q1 earnings are acceptable and,

in any case, 15% higher than corresponding earnings of 2007. This resultwas achieved through:

Enhanced profitability of Europe-Asia trades.Better alliances coordination and Vessel Sharing Agreements

(Maersk/MSC/CMA-CGM).Slow-steaming (Asia-Europe).(Adding one vessel to weekly rotations reduces supply by12%, thusmaintaining rates).Successful fuel surcharges in Asia-Europe trades (15%).

MEL forecast: Notwithstanding the above, there is presently a 40%gross capital formation (orderbook) and this market situation willnot last beyond 2008 (Figures 7 and 8).


15/17

15

Figure 7. Top 30 Carriers(roughly half of the fleet is chartered)

Source: MDS Transmodal


16/17

16

Roughly half of operated

tonnage is chartered.

Average orderbook as % of

operated tonnage: 40%

Source: BRS-Alphaliner

Figure 8. Top 10 Container Operators and their Fleet

Composition (x1000 TEU)


17/17

Conclusions MEL Forecasts We are at the doorstep of the onslaught of a severe

economic downturn, caused by the collapse of the US realestate market.

The 5-year period of economic prosperity (2003-2005) hascome to an end.

As a result, I expect an overall slowdown of westernEconomies imports from China.

A declining trade demand is coupled with substantial

excess capacity in shipping. The result of this can only bedepressed freight rates, and a rather long period untilshipping markets return to long-term equilibrium.-

TOC 2008 Amsterdam

Documents

Transcript of TOC 2008 Amsterdam