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Shipping cycles: something nasty in the woodshed?

Shipping cycles: something nasty in the woodshed?

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Before reading on, do take a look at what I wrote yesterday about shipping cycles.

There are two nasty things in the woodshed. One is the tyranny of what the late Harold MacMillan, prime minister of Great Britain from 1956 to 1963, called “Events, dear boy, events”, such as the Iran/Iraq war, or as Donald Rumsfeld put it, “Reports that say that something hasn’t happened are always interesting to me, because as we know, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns – the ones we don’t know we don’t know. And if one looks throughout the history of our country and other free countries, it is the latter category that tend to be the difficult ones.”

Wiser heads than mine have pointed out that there is a missing category there – the unknown knowns – the things that we have forgotten that we know. That’s the other nasty in the woodshed. We forget what we actually know, or, more often, we refuse to allow it to influence our thinking when we don’t like it.

Let’s just look at the easy bit – the supply of ships. How much shipbuilding capacity does the world actually possess? Back in the 1980s someone calculated that the shipyards of the world were quite able to replace the entire world merchant fleet every five years.

Since then, a lot of shipyards have closed. And the world merchant fleet is more than four times as large as it was then. “Well, that’s good…” But the shipyards that have opened have been on ‘green field’ sites, have been bigger, better equipped and located in the middle of ‘clusters’. They are able to build ships much faster and much cheaper. I have remarked before that, in my lifetime, the man-hours needed to build a handy sized bulk carrier have been reduced by roughly three quarters.

Shipbrokers specialising in the contracting of newbuildings have a nice way of expressing this, by saying that shipyard capacity is price elastic, which of course shipping carrying capacity is not, any more than shipping demand is, and that neatly defines our problem! High freights, generated by price inelastic demand for sea transport, get turned into expensive ships by price elastic shipbuilding. If shipbuilding were not price elastic, we would not see too many ships being contracted during freight booms.

Any good broker will tell you that at any moment, there is, somewhere, the cheapest building berth, offering the best dates, for whatever sort of ship you feel like ordering. It is his business to find that berth for you. There is also the second best building berth and the 100th best building berth. In fact there is no practical constraint on shipbuilding capacity at all.

Modern shipyards can flex their own capacity by sub-contracting fit out, sub-contracting blocks and practically anything else. That’s what ‘clusters’ are for – and, thanks to us in the shipping industry, the clusters do not need to be physical. They can be virtual. The only practical constraint on ship supply is the supply of main engines – the only large component of a modern ship that is hand built by experts.

If you book the ‘best’ newbuilding berth – the cheapest berth with the best delivery date and the best credit terms, you will be ahead of the fellow who books the fourth best berth, but both of you will still be ruined by the chap who books the 100th best berth, because his ship will still compete with yours. The scary bit is that the 100th best berth may look just like the best berth.

You will have no trouble naming the three biggest shipbuilding nations. Can you name the fourth? It’s the Philippines, a nation with no heavy engineering and no steelmaking, but with ‘transplant’ Japanese and Korean shipyards. Please note that these yards can, and do, compete, despite the distances over which they import their inputs. They have virtual clusters. Note it, and be very, very worried.

Twice in the past 100 years it has been advisable to buy yourself an engine and then set out to find a shipyard to build the ship to put your engine into. Once was in the years immediately after WW2, when the shipping industry was recovering from wartime losses, and the other time was 2004-2008. I make this point because there are still people who imagine that ‘because shipping is cyclical’, the super boom of 2004-8 might come back within their working lifetime. It is most unlikely to do so.

Taking the long view, American merchant shipping dominated the oceans of the world from the 1800s to the 1860s, because American shipyards had access to cheap timber, cheap labour and a market that was growing fast. It was no accident that Thomas Hubbard Sumner, a Harvard graduate who had run away to sea as an ordinary seaman in the China trade, was, at the age of 30, in command of a ship, and trying to get a sun sight in the Irish Sea on the 17th December 1837. Going to sea was what Americans did, at that time. Along came the Civil War, and when American shipbuilders and shipowners looked to get their market back, the British had stolen it with new technology – the compound expansion iron steamship and the subsea telegraph cable, which allowed the expensive iron steamships (costing four times as much to build, and three times as much to run, as a wooden sailing ship of the same deadweight) to go to where the cargo was, and thus to earn far more than wooden sailing ships could dream of.

But all these ships were hand built, by skilled labour using either adzes or riveting hammers, and this imposed limits on how fast the shipbuilding business could expand, and on how little a shipyard could charge for a ship. We all know, but forget, that the 2,710 WW2 Liberty ships were welded steamships, because welding is scalable and a steam plant is quicker and cheaper to build than a diesel engine.

A big containership is absurdly cheap – it’s almost all flat plate and sections, almost all automatically welded by double penetration machines, and steel is getting cheaper.

The nasty thing in the woodshed is the horrible fact that as we get better able to crunch the numbers, the numbers themselves become less reliable.

Next: the gods of the copybook headings.

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Andrew Craig-Bennett

Andrew Craig-Bennett works for a well known Asian shipowner. Previous employers include Wallem, China Navigation, Charles Taylor Consulting and Swire Pacific Offshore. Andrew was also a columnist for Lloyd's List for a decade.

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3 Comments

  1. Ed Enos
    August 3, 2016 at 6:51 pm

    More great perspective Andrew. Enjoying this mini-series of pieces you are putting out. And how timely. It seems abundantly clear that our friends in the global maritime transportation industry need some historical perspective of ourselves, where we came from, and most of all, where the heck are we headed??

    Please keep up the great work!

    1. Alexander Schepers
      August 4, 2016 at 12:09 pm

      Hello Ed Enos – I like the tense you chose “where the heck are we headed”.
      For me it is a mystery why in times of internet and the possibilities it offers to communicate and the potential to “viral” the most stupid things, it would not be possible to steer shipping markets better. Competition and mistrust might be a plausible answer.
      The question better asked: Who is heading us?
      Greed eats mind (I must say the German expression “Gier frisst Hirn” reads more appropriately gross) paired by too much available money to be spent and too little interest offered by the banks on savings…??
      Big data has to be seen in context of insights such as technical knowledge, flexibility and market expertise of the field you are working in.
      Are scaled companies (driven by consolidiation) who get finance offered only because of size, able to offer just that?
      I doubt they can beat some of the smaller market participant’s “balls”.

      1. Andrew Craig-Bennett
        August 5, 2016 at 8:21 am

        Alexander – I like “Gier frisst Hirn” – but there’s another part of the mechanism.

        We all know that we don’t get rich by knowing and acting on what everyone knows – to use a broker’s elegant expression, “we make our money on the discontinuities in information in the market”. If we know more than the market and more than our counterparty does (both conditions are necessary!) and we are in a position to act, we may benefit. Danger arises when we convince ourselves that we know more than the market and our counterpart, and we are in a position to act, but in truth our knowledge is either faulty or not useful. It is at this point that greed eats the mind.

        Scaled companies will typically make bigger mistakes and make them slower (Chevron’s 24 VLCCs at MHI, for example ) but they may still be able to recover better.

        I’d suggest that a company’s speed of response depends on the extent to which it is dominated by one charismatic leader. If he or she owns all the shares, that is a good substitute for charisma, of course! We’ve seen examples of banks, which “ought” to always move slowly and carefully,. moving very fast when dominated by a single charismatic leader, and we’ve seen the same in shipping (Malcolm MacLean’s Ecoships at US Lines).

        Equally there are family businesses, around for decades, which typically react very slowly and cautiously although they have funds in place and they have good knowledge.

        As to “Who is heading us?” it is always very possible that we are being headed by a leader running towards a cliff…