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The global orderbook: fools rushing in?

The global orderbook: fools rushing in?

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To order, or not to order – that is the question. This may be a poor misquote of Shakespeare, but the wrong decision by shipping managements may result in “the slings and arrows of outrageous fortune”.

Having seen 10 years of disaster in the dry bulk segment of shipping, isn’t caution in order? With several false recoveries during that time isn’t the real question: what has changed? Has there really been a change that warrants opening up the orderbook? Or should we be reminded by Alexander Pope, “Fools rush in where angels fear to tread”? Angels here being the wise, the cautious.

As always, the global economy is the driving unknown in the equation. The major economic blocks being China, Japan, the United State of America, and the European Union. Sorry, Prime Minister May, you are pushing the United Kingdom into insignificance. For dry bulk shipping, the issues are China’s One Belt, One Road initiative which affects demand and Western central banks’ interest rates which affect capacity.

The One Belt, One Road initiative promises to create a major economic powerhouse throughout Eurasia. China, through the Asia Infrastructure Investment Bank (AIIB), will provide what is needed to get the economies of the area in high gear. It appears that the countries along the new Silk Road are favourable to the Chinese initiative. The major problem is the US and its allies in the region. This is nothing new. The US has always tried to exert influence in the region. The Obama administration’s Pivot to Asia increased this attempt at dominance. For example, the US tried to dissuade allies from joining the Asia Infrastructure Investment Bank and also pushed the failed Trans-Pacific Partnership in order to exert hegemony in Asia.

The United States, Japan, and the European Union are still plodding along economically. Income inequality keeps increasing. There is growth, but nothing for the majority of middle-income and low-income workers who are the real spenders; hence, the engine of a consumer driven economy.

Although there are some indications of central banks increasing interest rates, they do not appear to be aiming at normal levels within the next couple of years; in fact, rates will not achieve historically average levels in the next few years. National governments still think the solution is providing cheap money to Wall Street, The City, Frankfurt, et cetera as a way to stimulate economies. The conservative governments do not want to spend on massive infrastructure programs which would create real jobs. Unfortunately cheap money hasn’t worked in the last decade. All it has done is provide hedge funds, private equity firms, and foolish managements with low interest money to splurge on new ships. Ships that added to the overcapacity.

Often we hear, “Do the math.” It would be better to forget the mathematics, do the simple arithmetic! If you are reaching for the orderbook, think about two years or so down the line when the new ship is delivered. What if demand has not gone up and the dry bulk index has dropped to the average of the last five years. Can you offset your increased capacity by scrapping at the average scrap price for the last few years? If this little mental exercise doesn’t pan out, close that cheque book and put it back in the desk. Bankruptcy courts are filled with petitioners who were overly optimistic.

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Katherine Harine

Several decades experience in geopolitical analysis related to strategic military systems.

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4 Comments

  1. Richard
    October 5, 2017 at 4:27 am

    Exactly. The same thing is playing out now in containers where, having just started to climb out of one hole by virtue of aggressive consolidation, the remaining operators are furiously digging another by ordering more mega-ships which will again flood the market with overcapacity in a year or two.
    Also, watch out for the same thing in the offshore sector, as clients have responded to the current overcapacity by tightening their requirements. Thus, operators with tonnage in the 10-15 year bracket, which is still perfectly serviceable, are finding it difficult to secure work and the thought of reaching for the order book is becoming more tempting for those who can.

  2. Tony Fordyce
    October 5, 2017 at 9:22 am

    I think it’s a shade early to start condemning owners in the dry cargo market for ordering at the moment. In fact, they should be congratulated for having the courage. The number of orders is, historically speaking, still extremely low. Due to closures and bankruptcies, there are far fewer yards in China, where the greatest problems occurred in the last massive round of ordering, and we are certainly not going to see a recurrence of ‘green field’ yards. The headaches they caused are too fresh in the memory.

  3. Sam Holland
    October 5, 2017 at 1:13 pm

    As long as the publicly traded company buys the ships, with debt, and share sales.
    And then the private management company owned by the CEO collects his guaranteed fees. Then the math works out just fine for the CEO.
    Their shareholders have in some cases lost all their money. The public company has gone bankrupt.
    But the CEO emerges from the ruins in control of the fleet with a deal from the creditors, a pocket full of cash, and a smile on his face.

  4. Tony Fordyce
    October 6, 2017 at 12:58 am

    The companies ordering now are the smart ones. They’re getting the cheapest deals around, and the downside potential is minimal. The problems start occurring when (if) demand escalates, yard prices increase and charter rates aren’t able to support the finance and operational costs. At present, we’re still in a very low phase of newbuilding orders (and prices). Since the start of 2016 almost half of the 353 shipyards followed by Clarksons have not secured an order. Ships on order by Greek ship-owners were, at the end of the 2nd quarter, 74% less in GT terms than in October 2008. I think there is a bit of scare-mongering going on.