31 August 2005

The Web

Halycon days are back

According to the Economist last year saw an upsurge in shipping activity such that the world's fleets carried around 90 per cent of total global exports worth USD8.9 trillion. This is a record achievement. All this activity could not go unnoticed and as expected investors are eying shipping firms as never before. To quote one example Seaspan, a container-ship firm spun out of Canada's Washington Marine, became the biggest of many shipping initial public offerings (IPOs) this year with a USD600m listing of its shares on the New York Stock Exchange.
Reliable sources state that more than 90 per cent of world trade, in tonnage terms, goes by ship. Despite the technical innovations that have transformed transport in the last two centuries, ships remain the most economical means of moving large quantities of goods from one place to another. They are cheaper to build and run than other forms of transport, such as road and railways, and they can carry huge amounts of cargo. It is encouraging to read that shipping firms made a total profit of USD80 billion last year, an all-time high, according to Martin Stopford, managing director of Clarksons, a leading shipbroker. Another reason for the continuing popularity of ships is that the producers of raw materials are often located far away from the main consumers and they are often separated by sea. The main oil-producing region of the world is located in the Middle East. Yet demand is greatest in North America, Europe and Japan, all situated many thousands of miles away. Similarly the biggest grain-producing region of the world is North America.
So let us see who took advantage of the improving situation in the freight trade. A number of countries who have invested heavily in ship registration and ship building took immediate advantage of the rising tide. However, one cannot but mention the Greek shippers that took advantage of an increase in the oil-tanker trade to amass large fortunes and further increase the size of their fleets. Just to take a short walk back in history we find that the Greek shipping industry doubled in size in the 1960s.
As a result of this factor we noticed that by the end of the 1960’s the Greek’s fleet of tankers and commercial vessels it was the biggest in the world. One cannot but recall the shipping magnates by the names of Onassis and Niarchos who invested heavily in huge numbers of ships and as a result accumulated tremendous personal fortunes. Commentators may ponder about the phenomenon of a recent upsurge in demand for shipping at a time when the European economies are going through of period of stagflation. The simple answer is that the boom is being driven by surging demand for oil and other commodities in fast-growing economies such as China and India. That demand coupled with a short supply of sturdier, less polluting vessels has propelled oil-tanker rates to their highest level since the oil crisis of the 1970s.
Naturally Greek owners have been the first to gain from the glad tidings. We note that investors have taken a closer look into the shares of Greek companies. These trends have in turn bid up the shares of tanker companies, a business in which Greeks control close to one-third of the world's tonnage. The paradox is further complicated when considering the dry-bulk segment of the industry. This covers dry cargo such as essential products namely grains, coal and iron ore which is also controlled by Greeks, and is booming. But the shipping industry is so volatile that many risk investors have stayed away in the past. There is lingering doubts that halcyon days are only back for a short while and that dark clouds will soon loom ominously over the horizon. Many still remember the junk-bond mania of the late 1990’s on which starry eyed investors burned many fingers. There are those who fear that unforeseen nose dive in shipping rates could signal an end to the two-year-old, China-fuelled boom. But those who analyse industry trends say that with China's economy is forecast to roar ahead at a 9.6% growth rate this year and India growing at 6.9%. There is also a strong underlying growth in demand for tanker and dry-bulk.
We can be sure that the sharp rise in shipping rates particularly those concerning very large crude carriers will continue during this winter. This is confirmed in an article written in the latest edition of the Economist. It reaffirms that the cost of shipping dry cargo hit a peak in 2004 while container shipping and other cargo registered a hefty increase. This is partly attributed to China massive expansion in trade and its unstoppable demand for basic raw materials. It comes as no surprise that its exports are also accelerating. China's economic boom during the past few years has cut down on the number of available shipping containers in the world and shipping companies who are constantly trying to book more scare containers are up in arms. A lack of containers means higher rates, which partly reflects the added cost of moving them to where they are needed. Naturally a scarcity of containers will push up the cost of their replacement and has hiked up prices. Other factors that have exacerbated the demand for shipping in China are the acute shortage of usable containers. At the end of 2003 there was already a cumulative effect of the Chinese government plans to incentivise more raw material exports by exempting certain export tariffs. This extenuated the drought for container boxes and compounded the problem by lacking of shipping space. The obvious result was a quick decline in space on ships, which soon translated into a nearly 40% rise in shipping rates.
As if that's not enough, the rising price of iron - in part due to insatiable Chinese demand as the Asian giant enjoys a real-estate boom. Indirectly this has made it even more costly to construct new containers. The boom is the result of fast-growing world trade. According to Lloyd’s Register last year saw the rate of growth of global trade in goods ferried by sea increase by 9 per cent. This compares with 5% in 2003 and 3.5% in 2002. During the three years prior to dot-com crash there was only a 6m deadweight tonnes (dwt ) in capacity. By sheer comparison last year this grew by 39m dwt. At the end of 2004 the world cargo fleet, with 889m dwt, was 14% bigger than at the end of 2000. Naturally the explosion in dwt is directly correlated to the increase in orders for new and larger ships. Last year orders surpassed the previous three years slump and reached a record high of 207m dwt of new ships. This translates to around 23% of the current fleet. With all this activity one ponders why did our ship building and repairs facilities not pick up a share of the action. Perhaps it will in the coming months. One cannot but laud the indefatigable attempts by Dr Gonzi’s attempts to restructure the shipyards. This industry was once hailed as the aristocracy of the workers as it combined a large concentration of varied skills in what was once the chief private employer in Malta. Union strength was at fever pitch when annual wage demands were to be negotiated and many times although the yards were haemorrhaging in cash losses government ceded to their demands amid promises of renewed pledges for higher productivity.
The state-owned Malta Drydocks and Malta Shipbuilding have long been in the news given the politicised component of their workforce and naturally a prime foreign currency earner. During the British colonial period, the dockyard was the cradle of industrialisation in Malta, employing a large proportion of highly skilled workers.
However, during the recent slump in worldwide shipping , it has not been viable and accumulated a debt of Lm 310 million (EUR 713 million).Now that the tide is turning and the world shipping index is at its peak can we look forward to regain some of the losses that the nation subsidised in the past?
Cautious optimism may prevail at the yards given that a zero-based approach is being taken by management and unions to rebuild from scratch the work practices in order to optimise added value.
With a bit of luck and dollops of common sense we may welcome the return of halcyon days at the shipyards riding on the crest of the undulating shipping wave.

The author is a partner in PKFMALTA ,an audit and business advisory firm

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