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Strategy versus tactics

Strategy versus tactics

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Recently various approaches to deal with the prolonged downturn in the dry bulk sector of shipping are being tried. For example, pooling is being adopted by several firms. The d’Amico Group plans to improve returns using pooling to take advantage of “the commercial structure and expertise to operate the vessels on the spot market” as stated by Cesare d’Amico. Other operators have ordered new more efficient ships as a tactic to reduce costs. If the strategy of depressing overall capacity growth in the dry bulk sector takes hold, these tactics of improving operations and reducing costs will succeed; however, if the sector’s strategy of using cheap money to fill up order books returns, the tactics will only reduce losses a bit.

If these schemes neglect the strategy of maintaining a proper ratio of capacity to demand while pursuing these tactics, ship owners may simply extend the high capacity that has plagued dry bulk shipping for a half a decade. Tactics that end up increasing fleet size by filling order books will only ensure that disaster will continue. One current assumption is that trade of goods will increase by 4-5% and the fleet will increase by 6-7% in 2015 and 2016, but that then fleet growth will slow below demand growth. What is the risk that the growth numbers don’t pan out? And what is the sensitivity of the health of the dry bulk sector to variations in these parameters? At large positive excursions from the breakeven point, tactical operations that improve profits are a small contributor compared to high spot or time charter rates. And at rates well below breakeven, bankruptcy is only delayed. Economists at international organizations such as the International Monetary Fund have had to reduce global growth estimates several times during the last few years. Unfortunately, orders had been placed with shipyards before the downward revisions were made in growth.

The key point is to keep the eye on the ball; ensuring that excess capacity is eliminated, not allowed to persist or increase. The imperative strategy at this point in time is to decrease capacity. Not just because fleet size is now above demand, but because projected demand may be too optimistic. There is a common belief that the overcapacity problem during the last several years is due entirely to over-ordering. In fact the other major contributing factor has been the inadequacy of the recovery from the financial collapse 2008. The reality is that the medicine administered was even contributory to the problems experienced in dry bulk shipping. This medicine was the maintenance of extremely low interest rates by central banks in lieu of investment in infrastructure by governments to create jobs. The low interest rates resulted in a massive increase in shipping capacity by providing easy money to finance new builds by some ship owners, as well as by hedge funds or private equity firms trying to make a quick profit on expected asset appreciation. At the same time the low rates never trickled down to the workers; hence, consumer spending has remained lackluster. Much of the cheap capital simply found its way into speculation, not job creation.

For more than five years lower wage positions and part time jobs have been created in the United States, not solid careers. While in Europe countries such as Italy, Spain, and Greece continue to experience very high unemployment. These two huge markets for Chinese exports have affected its growth just at the time when China began transforming its economy from a predominately export one to one based on consumer demand. The consequence is that anticipated strong exports have not provided a cushion for China’s transformation. This difficult transition for China should ultimately succeed and its success will help turn around the problems in other developing economies, save perhaps India, which needs to address its massive population before it can have stable economic progress. But in the meantime China’s lower growth has impacted dry bulk shipping negatively.

When will recovery commence? As for Europe, Germany’s insistence on austerity has kept the lid on any recovery. It is difficult to see how that situation will change until something catastrophic occurs. For example, the southern countries of the Eurozone could break off and adopt a second common currency that could be devalued against the German dominated euro thereby improving exports.

Both US and European central banks should have begun to raise interest rates years ago and told their national governments that the responsibility to create jobs for a sound economy was not the responsibility of the central banks. But an almost religious belief in conservative policies has prevented any such spending policies in the Eurozone. In the United States, the election of Barack Obama occurred because the electorate was hungry for change, in particular change that would result in economic prosperity for working classes. Unfortunately in his desire for a legacy in history as a consensus leader, President Obama delivered on very few of his election promises. Hence his party suffered the worst congressional representation since the election of 1928. Clearly austerity policies by the Republican party will prevail for years. It will be difficult for any Democratic candidates for President or Congress to convince young voters, who feel like lovers scorned, to come out in droves as they did in 2008. Consequently, current policies will remain and growth in the United States may remain tepid, as in Europe, for a long time.

Hence, the dry bulk shipping sector cannot depend on robust growth and perhaps cannot plan on sustained moderate growth. Executives should be very wary of growth projections by economists if they do appear. The only sound policy is for shippers to hold capacity down with a fervor.

In order to survive and thrive in this era of limited growth it is imperative that market share and growth take a back seat to sound profits based on reining in capacity. Tactics may help improve an individual company’s earnings somewhat but only a strategy of restrained growth throughout the sector will reverse the continued dire situation.

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Katherine Harine

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

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2 Comments

  1. Andrew Craig-Bennett
    April 29, 2015 at 10:18 am

    A properly run pool increases the actual supply of tonnage, by allocating that tonnage more efficiently.

  2. Sam Chambers
    Sam Chambers
    April 30, 2015 at 7:15 am

    But do pools work so well when rates pick up? Pools always strike me as a defensive tactic