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China syndrome
Bi-annual Business File Special Survey on Greek shipping This winter [2003/2004] the operators of dry bulk cargo ships thought every day was Christmas. Large modern vessels were fetching hire rates in excess of $100,000 a day. Even much older, much smaller vessels were attracting $35,000 a day. Tanker rates were high and container rates strong. The driving force was China. Since it joined the World Trade Organisation three years ago, it has become the factory of the world with a GDP growth rate last year in excess of 9%. Heavy industry sucked in coal and iron for steel. Manufacturers churned out white and black goods for the retail market. Tankers brought in fuel. Container ships took the goods to market. Greek ship owners were in the forefront of those cashing in on the boom. One managed to fix a new vessel as it was launched at a rate that will pay it down, in less than two years. Others were making clear profits of $25,000 a day on older ships that, in a poor market, they would have sent for scrapping. Owners scrambled to acquire more vessels to cash in on the boom but shipyards were already booked till 2006 and beyond. So great was the demand for operational ships, that second hand vessels were selling at rates higher than new-buildings and ships under construction were being sold at a hefty profit even before they left the slipways. Now the Chinese government has announced that it is taking measures to contain the rate of growth in the economy so that it doesn't overheat. It's not yet clear just how rigorous these will be. But freight rates have already fallen by about a quarter; futures have been being dumped at half their original value and the upward pressure on prices for vessels has ceased. No one is certain whether this is the beginning of a meltdown which will see another deep depression in market rates or whether its just a temporary hiatus. For, even if China slows, other developing economies continue to surge. The Indian economy has been growing at a rate of 6.5% a year; the world average at above 4%. The shipping market is uncertain. Ship owners even more so. Some worry that there has been too much tonnage purchased at too great a price and that there will soon be a glut of available vessels that will further fuel a downturn. Some pessimistic Greeks have squirreled away hundreds of millions of dollars in cash waiting to pounce and renew their fleets once the downturn happens -- if it happens. Such market uncertainties come at a time when world shipping regulators are getting ever tougher about the standards of vessels they will allow in their ports. The EU late last year passed legislation that will ban single-hulled tankers from trading in its waters by 2010. This raises the question of whether, with congestion in the yards and a possible downturn in profitability, there might be a dearth of tankers by the end of the decade that could lead to a shortage of oil delivery capacity. The use of airplanes as terrorist weapons in the 9/11 attacks has made governments take a hard look at ships as the next possible threat. What if terrorists seized and blew up a gas carrier in a densely populated harbour? What if they hi-jacked one of the floating townships which constitute the modern cruise liner and threatened to scuttle it with thousands of passengers on board? The International Maritime Organisation has adopted a new security code for the world's fleet and ports known as the International Ship and Port Facility Code (ISPS) which requires strict measures both for ships at sea and their ports of call. It is supposed to be in place by July 1st but as of mid-May only about 5% of ports and 10% of ships were compliant. The US and the EU have adopted even tougher regulations than the IMO, which could lead to disruption of trade if ships are forced to sail to ports that have failed -- or been unable to afford -- to implement the standards and then try to enter those of developed countries. These and other issues -- including a detailed look at the situation in the troubled Greek coastal ferry sector -- are discussed in China syndrome, No. 52 (June 2004) in the Business File Special Survey.
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